Jul. 27-- The government will observe fiscal and monetary prudence next year despite the scheduled nation elections, Citibank said.

In its report, the US financial giant said the Philippines has sketched a rough outline of its exit strategy, consisting of a return to a modest fiscal budget next year with expenditure growth of 5 percent. That strategy also includes pursuing liquidity streamlining before hiking overnight interest rates.

"Such policy signals are meant to assure the markets and investors that there is a definite end to stimulus measures that in our view the economy can ill afford to bear," June Trinidad, Citibank analyst said.

He said the government may not be in a position to finance another year of large fiscal deficits as it has large debt levels and ratios. The country's fiscal gap is set at 2.5 percent of gross domestic product (GDP) next year, down from 3.2 percent this year.

An indicator of economic performance, GDP is the amount of final goods and services produced in the country, while the deficit-to-GDP ratio is a key measure of how long a government can sustain revenue shortfalls.

Trinidad said the sequencing of monetary actions would be important when policymakers withdraw accommodation.

The BSP started building up its dollar swap position as early as May, when $4.2 billion of transactions were registered.

Also, the central bank has intervened heavily by buying dollars over the previous weeks to preserve the peso's trading range above P48 against the greenback.

Banks' special deposit accounts (SDA) with the BSP also widened to P600 billion.

"Despite rising dollar swaps and SDA, we don't sense BSP has started [to] implement extraordinary measures this early to initiate withdrawal of monetary accommodation," Trinidad said.

The BSP has reduced its key policy rates by 200 basis points since December last year, bringing the overnight borrowing and lending rates to 4 percent and 6 percent, respectively.

He said the source of liquidity creation came from the purchase of US dollars and increased fiscal spending. Domestic liquidity grew 15 percent in May while lending grew by 10 percent.

"BSP will count on these measures to drain liquidity when the macroeconomic environment calls for it," Trinidad said.

Besides election spending, economic growth next year is expected to be supported by export recovery and private spending.

A central bank official earlier said the BSP will to cut its reserve requirements for banks as the economy has an absorptive capacity for additional liquidity.

Reserve requirements stood at 19 percent. The cut was aimed at releasing additional liquidity in the system and encourage banks to lend more.

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