THE PHILIPPINES “continues to enjoy favorable macroeconomic prospects”, but risks ranging from weak state capacity to ramp up implementation of infrastructure projects to prospects for overheating could keep overall economic growth from hitting the government’s 7-8% annual target for much of President Rodrigo R. Duterte’s term, regional think tank ASEAN+3 Macroeconomic Research Office (AMRO) said in a report released on Friday.

The report was based on findings of AMRO’s annual consultation visit to the Philippines in September 2017 and data available as of Feb. 15. Such data include full-year 2017 and January 2018 inflation, as well as full-year factory output, international merchandise trade and gross domestic product (GDP), among others.

AMRO’s 2017 Annual Consultation Report on the Philippines kept a 6.8% GDP growth projection for 2018 that was first penciled in October last year, down from an 7.0% forecast disclosed in the group’s maiden report in May 2017.

That will come from 2017’s 6.7% and a 6.3% average in 2010-2016 during the term of former president Benigno S.C. Aquino III.

AMRO also expects GDP in 2019-2022, when Mr. Duterte ends his six-year term, to average 6.9%, with only the final year in that period posting seven percent, the floor of the government’s 7-8% annual target in 2018-2022.

“The Philippine economy is forecast to grow by 6.8% in 2018, as exports are expected to remain buoyant, while hurdles to budget execution are gradually being overcome,” the report read.

The Duterte administration has made increased infrastructure spending — totaling some P6.79-8 trillion until 2022 — a linchpin for faster GDP growth that, in turn, should slash the country’s unemployment rate to 3-5% in the last year of this government from 5.5% in 2016 and overall poverty incidence to 13-15% also by 2022 from 21.6% in 2015.

Budget Secretary Benjamin E. Diokno told reporters at the start of this month that the government spent P568.8 billion for infrastructure last year, 15.4% more than the P493 billion disbursed in 2016 and topping a P549.4 billion program under the 2017 budget. Mr. Diokno said this placed infrastructure investments for the year at roughly 5.6% of GDP, higher than the planned 5.4% share and 2016’s 5.1%. By 2022, the ratio is projected to reach 6.1% under an updated projection released in February to 7.45% under the original projection.

ARMO noted that Philippine public investment in infrastructure has averaged around 2.7% of GDP in the past 15 years, compared to Thailand’s 6.3% and Malaysia’s 10.5% for the same period. Total Philippine public and private investment in infrastructure averaged 20% in that period, compared to 22-23% for Brunei and Malaysia, 25% for Thailand, 26% for Singapore and Laos, as well as 28-29% for Indonesia and Vietnam.

Headline inflation is expected to be generally supportive of economic growth despite a recent pickup.

Using the old 2006 price base, inflation is expected to peak at 4.3% this year from 3.2% in 2017, 1.8% in 2016, 1.4% in 2015 and 4.1% in 2014, before easing to 3.3% in 2019, 3.1% in 2020, 3.2% in 2021 and 3.0% in the last year of the Duterte administration.

Using 2012 prices as a new base starting February, headline inflation sped to 3.7% in this year’s first two months as tax reform’s higher rates took effect for several items from 2.9% in 2017, 1.3% in 2016, 0.7% in 2015, 3.6% in 2014 and 2.6% in 2013.

AMRO cited the price impact of higher excise tax rates for fuel and tobacco products, the additional levy on sugar-sweetened drinks, higher global energy prices and the peso’s continued weakness for its expectation of inflation’s pickup in the near term.

Its projections compare to the government’s own 2-4% target range, which the Bangko Sentral ng Pilipinas (BSP) said will be maintained despite the change in base year for the consumer price index (CPI). The BSP expects inflation to average 3.4% in 2018, using the old CPI base, before easing to 3.2% in 2019.

“… [A]s the impact of the excise tax increases diminishes, inflation is expected to ease back to within the target range in 2019,” the report read.

At the same time, “the inflation outlook faces additional upside risks from higher disposable incomes arising from the reduction in personal income tax rates [also under tax reform] which could lead to higher food consumption, as well as the pending petitions for electricity rate adjustments,” it added, while noting that the planned deregulation of rice imports that will cut down prices of this staple and “dampened global economic recovery” as sources of downside pressures.

This and other “risk pockets”, AMRO said, “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,” it explained.

“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 widen.”

Outside the country’s borders, US protectionist policies place remittances from Filipinos abroad and business process outsourcing (BPO) — two of the country’s key economic growth drivers — at risk. Already, approved BPO investment commitments dropped by 30.9% in 2017 from a year ago, contributing to the 51.8% decline in total approved FDI pledges in the same period. Cash remittances, however, increased by five percent to a record-high $26.9 billion last year.

“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,” AMRO said.

The BSP has managed to keep monetary policy steady since a hike in policy rates in September 2014, save for operational rate tweaks as it shifted to an interest rate corridor system in June 2016 and a one-percentage-point cut in big banks’ reserve requirement ratio to 19% in mid-February which the central bank said should not be taken as changes in policy stance. The central bank’s policy-making monetary board is scheduled to meet next on March 22 amid mounting expectations that it will be forced to hike rates for the first time in three and a half years amid quickening inflation.

ARMO also called for reforms to stimulate private investment and address the labor market mismatch that is seen as a hurdle to the government’s ambitious infrastructure development drive.

AMRO — initially formed as a company in April 2011 and transformed into an international organization in February 2016 — conducts macroeconomic surveillance and supports the implementation of the Chiang Mai Initiative Multilateralization currency swap arrangement which members of the ASEAN+3 adopted as one mechanism to help avert any brewing financial crunch.