DBCC growth target cut should be in play, ex-Finance secretary says

THE Development Budget Coordination Committee (DBCC) should consider cutting its growth targets as inflation and the weaker peso could curb the economy’s expansion, a former Finance secretary said.

“There may be a need to revise the economic growth projection for 2024 downwards within 5.8% to 6.3% due to inflation and the depreciation of the peso,” former Finance Secretary Margarito B. Teves told BusinessWorld via Viber. 

In April, economic managers lowered their gross domestic product (GDP) growth target for 2024 to 6-7% from 6.5-7.5% previously.

For 2025, the DBCC expects GDP growth to average 6.5-7.5%, with the range widening to 6.5-8% beyond that, until 2028.

The committee is due to update its fiscal targets on Thursday.

Inflation, which is near the top end of the central bank’s 2-4% target for this year, is expected to curb spending and weaken growth in the coming months, Mr. Teves said.

“While average inflation for 2024 remains within the Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4%, it has been accelerating since the year started.”

Year to date, the consumer price index was up 3.5%, the Philippine Statistics Authority reported.

Headline inflation accelerated to 3.9% in May led by transport and utility costs. It was the fourth straight month of stronger inflation readings.

“If this upward trend continues, we can expect consumption to further slowdown, which would dampen growth,” Mr. Teves said.

However, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said the government should wait for second quarter GDP growth data before considering new targets.

“It’s too early to say we will miss the growth target with only one quarter of data. Many of our leading indicators point to more than 6% growth for the second quarter of 2024 so maybe economic managers can wait before they revise,” he said via Viber.

The economy fell short of the government’s growth target in the first quarter, expanding by only 5.7%.

Addressing supply side pressures to inflation though private sector investment in agricultural inputs, technology, warehouses, cold storage facilities, and processing plants will help make up for the limited fiscal space, Mr. Teves said. 

“Lower inflation would boost consumption which would increase government revenue from consumption-based taxes such as VAT (value-added tax),” he noted. “Moreover, lower inflation would also reduce the risk of more interest rate increases which can dampen economic growth.”

The Monetary Board is expected to maintain its key policy rate at a 17-year high of 6.5% on Thursday amid sticky inflation.

Cooler inflation would boost consumer confidence, which has been dampened by two straight years of soaring prices, Mr. Neri said. Consumption accounts for a quarter of GDP growth.

The weaker peso may also dampen growth in the Philippines due to its heavy dependence on imports, Mr. Teves said.

“The weakening of the peso puts an upward pressure on prices, and thus also dampens growth,” Mr. Teves said.

On the other hand, Mr. Neri said the weaker peso would boost incomes of exporters, overseas Filipino worker families, and the business process outsourcing sector. — Beatriz Marie D. Cruz