PH growth forecast for 2018 raised to 6.8%

The Asean+3 Macroeconomic Research Office (Amro) raised back to 6.8 percent its 2018 growth forecast for the Philippines with the massive “Build, Build, Build” program expected to boost economic expansion.

“After expanding by 6.7 percent in 2017, the Philippine economy is expected to grow by 6.8 percent in 2018 and 6.9 percent in 2019 as exports remain buoyant while budget execution gradually improves,” the regional macroeconomic surveillance organization said in a statement Friday.

In January, Amro slightly cut to 6.7 percent from 6.8 percent previously its gross domestic product growth forecast for the Philippines, citing “the softening of private sector demand from the third-quarter 2017 GDP release.”

Below target

Amro’s updated projection nonetheless remained below the government’s yearly 7-8 percent growth target from 2018 to 2022.

“Amid the softening in private sector demand last year, an ambitious ‘Build, Build, Build’ program in public sector infrastructure is expected to lift growth momentum in the near term,” Amro said.

Under “Build, Build, Build,” the government plans to roll out 75 flagship, “game-changing” projects, with about half targeted to be finished within President Duterte’s term, alongside spending a total of over P8 trillion on hard and modern infrastructure until 2022 to usher in “the golden age of infrastructure” after years of neglect.

Train

“The first package of the proposed comprehensive tax reform program recently passed by the government is expected to help finance the ‘Build, Build, Build’ initiative while containing the budget deficit within the ceiling of 3 percent of GDP,” Amro said, referring to the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

Signed by President Duterte in December, the TRAIN Law under Republic Act No. 10963 starting Jan. 1 this year jacked up or slapped new excise taxes on oil, cigarettes, sugary drinks and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.

Risk pockets

However, Amro warned that despite the infrastructure buildup, “risk pockets continue to warrant close monitoring.”

“The progress of the infrastructure program may be constrained by the weak implementation capacity of the government and private sector participants,” Amro said.

“Notwithstanding these structural impediments, a strong pick-up in public infrastructure spending, accompanied by a crowding-in of private investment, cannot be ruled out, and this could cause the economy to overheat and the external imbalance to wide,” Amro added.

Concern

Amro also pointed to rising inflation as a near-term concern.

“Headline inflation rose to 4 percent at the start of 2018 and is expected to rise to slightly above the upper end of the band in 2018 on the back of the excise tax increases in the recently approved tax reform, higher crude oil prices, and the modest pass-through from the sustained depreciation of the peso. But as the impact of the excise tax increases diminishes, inflation is expected to ease back to within the target range in 2019,” Amro said.

For Amro, “against these risks, monetary policy should be on guard against an intensification of demand‑induced pressures with core inflation having trended upwards in recent months.”

Credit growth

“The rapid growth of credit may also require continued enhancements in the Bangko Sentral ng Pilipinas’s financial surveillance framework to safeguard against the build-up of financial imbalances. Although the peso has depreciated recently, largely reflecting the deterioration of the current account balance, a flexible exchange rate policy should be maintained—with the BSP intervening to smooth excessive volatilities in the peso—to preserve external buffers,” Amro said.

“Reforms to stimulate private investment and address the labor market mismatch would complement initiatives to support the infrastructure drive, and pave the way for an improvement in the economy’s productive capacity,” Amro added.