By Manuel Mogato and Karen Lema
MANILA, July 28 (Reuters) - The biggest political crisis that Philippine President Benigno Aquino has faced in four years in power could damage his image as a crusader against corruption and undermine his ability to deliver on reforms to sustain strong economic growth.
The Supreme Court this month declared partly illegal a 145 billion pesos ($3.34 billion) economic stimulus fund that Aquino created in 2011 from budget savings, sparking a storm of controversy that has distracted the government from its work.
Economists are also concerned the controversy is slowing public spending because officials are more wary about accusations of recklessness and are subjecting decisions to more scrutiny, putting at risk big infrastructure projects.
"If this leads to a slowdown in spending, the risk to growth is on the downside," Shanaka Jayanath Peiris, International Monetary Fund resident representative in the Philippines, said on Friday.
The IMF on Friday cut its Philippine growth forecast to 6.2 percent from 6.5 percent set in March, partly because of slower spending after the stimulus scandal broke. The government has set a target of 6.5 to 7.5 percent gross domestic product growth this year, after 7.2 percent last year.
First quarter GDP growth was at its slowest in two years, in part because of weaker state spending which grew an annual 2 percent in the period against 10 percent growth a year earlier.
Henry Schumacher, vice president at the European Chamber of Commerce of the Philippines, said any more delays to much-needed infrastructure would be a "disaster".
"There is an over-carefulness in a number of government offices not to move before they are absolutely sure that every angle where integrity could be compromised has been looked at," Schumacher said.
Jose Rene Almendras, secretary to the cabinet, told a local television station last week the Supreme Court ruling on the stimulus fund had "a chilling effect on everyone".
Under the stimulus facility, Aquino spent funds saved from cancelled projects on housing and relocation of slum residents, radars for the weather bureau and infusing capital to the central bank to help it with its market intervention, among other activities.
A portion of the funds was distributed to senators to use on projects of their choice.
The Supreme Court said aspects of the stimulus were unconstitutional. It did not call any actions criminal, though lawyers say the ruling could open the way for complaints alleging wrongdoing.
Critics said the allocation of funds to senators for their projects cast doubt on Aquino's commitment to stamp out corruption. And the controversy is having an impact on how officials proceed.
"Everyone who has to sign a document now has to be doubly sure," Almendras said in the television interview.
Aquino is the only son of highly respected parents: an assassinated opponent of dictatorship and a democracy hero who became the country's first woman president.
He won the presidency in 2010 on a promise of good governance and fighting graft but has struggled to rid the country of its image as one of the most corrupt in Asia.
On Monday, he will deliver his next-to-last State of the Nation Address at a joint session of Congress. Two impeachment complaints related to the stimulus funds have been filed against Aquino in recent weeks, accusing him of betraying public trust and violating the constitution following the court's ruling.
But there is little danger Aquino will be ousted because his allies dominate both houses of Congress. Aquino also enjoys the support of the army.
Still, his approval ratings plunged to a record low in June and they may fall again after the Supreme Court decision.
While he is likely to survive the scandal, it could have implications on his party's candidate in the presidential election due in 2016. Aquino cannot be a candidate as the constitution says a president can be elected for only one six-year term.
"The current controversies ... are definitely a blow to President Aquino's image as the poster boy of good governance," Eugenia Victorino, economist at ANZ in Singapore, said. (Reporting by Manuel Mogato and Karen Lema; Editing by Rosemarie Francisco, Robert Birsel and Richard Borsuk)
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