MANILA -- The Philippines on Tuesday slashed its growth target for 2018 in response to global economic uncertainty and rising commodity prices, which are lifting the country's inflation rate and dragging down household spending.
In an attempt to keep inflation in check and prop up consumer spending, the government has suspended a scheduled increase in the fuel excise tax for next year. This puts President Rodrigo Duterte and his economic team in a bind as they try to fund the government's 2019 spending plans.
In a meeting on Tuesday, Duterte's economic managers decided to cut the administration's growth target for this year to a range of 6.5% to 6.9%. The original range was 7% to 8%, announced in 2016. Macroeconomic assumptions for merchandise exports, inflation and foreign exchange rates were also revised.
"We remain optimistic, but we have tempered our optimism with prudence and good judgment in terms of reality," Socioeconomic Planning Secretary Ernesto Pernia said.
Economic growth in the first half eased to 6.3% as rising consumer prices tamped down household spending.
Pernia said rising prices likely also subdued household spending in the third quarter. "[Consumer spending] will be a bit softer," he said.
Inflation last month rose to its highest level in nearly a decade.
Duterte's economic managers, however, have kept their ambitious 7% to 8% growth targets for next year and through 2022. In this regard, they are banking on key reforms to prop up growth. These measures include a proposed "tariffication" of rice imports and planned corporate income tax cuts.
Finance Secretary Carlos Dominguez said the revised assumptions consider the heightened uncertainty amid the U.S.-China trade skirmish and rising crude oil prices.
A series of rate hikes by the U.S. Federal Reserve is also affecting investor sentiment and deepening a stock sell-off in the Philippines and other emerging markets.
"We have to all realize that we are living in a very different world now. Our estimates and projections just reflect these things," Dominguez said. "We are confident that the Philippine economy will weather these storms ... but we are not complacent."
The trend in global oil prices helped convince the finance department to suspend the implementation of a further increase in fuel excise tax.
The Philippines stands to lose 41 billion pesos ($759.6 million) in revenue next year due to the suspension. Duterte's tax reform law requires the suspension of the increase when average Dubai crude oil prices hit $80 per barrel three months before the scheduled increase.
Now that the government will have to do without this revenue, it has formed a task force to identify "non-infrastructure" expenses that it can cut. Personnel benefits and unspent funds earmarked for government positions likely will be affected.
The government plans to spend 3.757 trillion pesos next year, up from the 3.318 trillion pesos it budgeted for 2018. It is maintaining its fiscal deficit-to-GDP target of 3.2% for next year.
The growth targets are still in line with Duterte's aim to reduce the percentage of Filipinos living below the poverty line. When he steps down in 2022, Duterte wants the figure to be 14%. For 2015, the year before he took office, the figure was 21.6%.