THE Asian Development Bank (ADB) raised its inflation forecast for the country due to the spike in the country’s inflation in June and the government’s tax-reform program.
In its Asian Development Outlook Supplement (ADOS), the ADB said it now projects inflation to reach an average of 4.3 percent by year-end instead of the earlier forecast of 4 percent.
The adjustment was due to the increase in inflation, which reached 5.2 percent in June 2018 because of higher fuel prices and “sporadic shortages of key food items,” and the impact of Tax Reform for Acceleration and Inclusion (TRAIN) on commodity prices.
“This outcome combines with expectedly high global oil prices, peso depreciation and strong domestic de mand to prompt this Supplement to revise the inflation forecast for 2018 to 4.3 percent, from the ADOS 2018 forecast of 4 percent,” the ADB said.
“Higher excise taxes on fuel and some commodities as part of the Tax Reform for Acceleration and Inclusion Act, which took effect in January 2018, are contributing factors,” it added.
No impact on 2019
However, the ADB said the impact of the TRAIN will not extend to 2019. This is why the ADB maintained its inflation forecast for 2019 at 3.9 percent in the ADOS. The ADB said the recent decision of the Central Bank to hike key rates will also stem the increase in inflation. The Bangko Sentral ng Pilipinas (BSP) raised its policy rates in May and June by 50 basis points, bringing the overnight reverse repurchase rate to 3.5 percent.
The BSP decision is also seen to help stabilize economic growth rate this year and next year. The ADB has maintained its growth forecast for the Philippines this year and next year.
Based on the ADOS, the country is still on track to post a growth of 6.8 percent and 6.9 percent in 2018 and 2019.
“Recent trends align with expectations of strengthening investment and domestic consumption,” the ADB said.
The massive infrastructure program counts among the factors that will keep the country on track to post growths of over 6 percent this year and next year.
The ADB also highlighted higher investments in human capital through lower taxes, as well as higher social service spending. The report said public construction grew by 25.1 percent and government consumption increased by 13.6 percent.
The ADB said data showing unemployment slowed to 5.5 percent in April 2018, from 5.7 percent in April 2017, will boost household consumption.
“Public spending on social services and infrastructure will be supported by better budget execution and higher revenue mobilization,” the ADB said.
“As part of the ongoing tax reform, a reduction in personal income tax for most of the work force will boost disposable income and consumption,” it added. The President’s economic team hopes the country’s GDP growth in the second quarter will reach 7 percent on account of the “Build, Build, Build” (BBB) and rice tariffication.
In a recent briefing, Socioeconomic Planning Secretary Ernesto M. Pernia told reporters the BBB will boost employment and incomes while the lifting of the country’s quantitative restriction (QR) on rice will give households some reprieve when it comes to food prices.
Higher incomes and less expenses, particularly food expenses, will both boost household spending. This is crucial for a consumption-driven economy like that of the Philippines.
Other growth drivers on the demand side include the completion of the government’s cash transfers, particularly the unconditional cash-transfers and the Pantawid Pasada, which are directed toward workers and drivers affected by the TRAIN.