Government planners trim 2008 growth targets

Economic planners are downgrading their economic growth projections for this year but inflation targets will not be touched despite adjustments in projections due to rising oil and food prices.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said yesterday that the 6.3- to seven-percent growth target for this year was subject to “downward revision” in the order of about 0.03 to 0.05 percentage points.

According to Guinigundo, the Development Budget Coordinating Committee (DBCC) was scheduled to meet in May to firm up the revisions in its macro-economic projections.

“The inflation target is still three to five percent, plus and minus one percentage point,” Guinigundo said. “Again this is a target announced two years ago.”

Because there have been radical changes in the assumptions used when the targets were made, Guinigundo said there would be an impact on the inflation forecast in 2008.

“We are not targeting the exchange rate the way Singapore is doing it as an anchor of monetary policy, we are looking at direct inflation targeting,” he said. “If we are to look at the way inflation targeting is practiced at the Bangko Sentral ng Pilipinas (BSP), you cannot ask for more customization than the BSP is doing at this point.”

According to Guinigundo, the BSP realized that inflation was already nearing 6.4 to 6.5 percent for March of 2008 but did not respond with a high interest rate policy.

“We kept our policy rate because we recognize that the shocks are coming from the supply side,” he said. “Even as the outlook for 2008 seems to be fraught with risks in terms of breaching the inflation target this year, we expect a good outcome in terms of achieving the inflation target of 2.5 to 4.5 percent in 2009.”

According to Guinigundo, food and oil prices were the most significant factors that would be considered but said the outcome was not as easily predictable as they would seem.

Guinigundo said that rice prices, for example, have been going up significantly, but the pressure was not uniform throughout the country. In the rural areas, he said supply pressures were not so glaring.

“Rice accounts for 9.3 percent of the total basket of commodities,” he said. “There are supply pressures in the urban areas but outside the capital, it’s a different story.”

The 2008 budget was based on the assumption that oil prices would range at only $60 to $70 per barrel. Economic planners, according to the source, were already making projections based on an assumed oil price of $92 per barrel.

If the DBCC were to make this adjustment official, all projections would also be adjusted, including the expected revenues and the actual fiscal balance at the end of the year.

For the BSP, such an adjustment would change its projected inflation rate for 2008 and 2008, especially when wage and transport adjustments were factored in.

Guinigundo admitted that there would be adjustments in the projections but he did stress that there would be no changes in the official targets regardless of how far off the projections could end up to be.

Over the medium term, however, Guinigundo said the central bank expects inflation to normalize, especially as supply-related shocks also settle down, ironically as a result of this year’s supply problems.

“Over time, what I hope will happen, is that production will go up because prices have firmed up,” Guinigundo said.