Painful side effects of BBB infra plan temporary, says think tank

The Duterte administration’s ambitious infrastructure program has accompanying “painful side effects” that are expected to be temporary, said London-based Capital Economics.

In a news report titled “Philippines infrastructure drive: too much, too fast?” the economic research firm said the country should plow through the Build Build Build (BBB) program as its infrastructure backbone is already in dire need of improvement.

“The big push to update the Philippines’s infrastructure has led to a number of painful side effects, including a worsening external position, a falling currency and an increase in inflation,” the firm said in the report.

“However, these problems should prove temporary and improving the nation’s woeful infrastructure is desperately needed. In terms of the country’s long-term prospects, a much bigger concern is the deteriorating political situation,” it added.

Under the BBB program, the government wants to increase public spending for infrastructure by as much as seven percent of gross domestic product (GDP) until 2022. This entails expenditure of up to P9 trillion, a jolt to the economy that is seen to boost economic output to seven to eight percent within the current administration.

The government’s huge building program has been contributing to the widening of the country’s trade deficit through greater importation of capital goods. This, in turn puts pressure on the peso which is already one of Asia’s worst performing currencies.

As imports become more expensive, inflationary pressures are intensified. The imposition of higher excise taxes under the first package of the tax reform program further stokes inflation.

Capital Economics, however, expects inflation to fall back to the four percent range beginning 2019 as oil and food prices fall in the succeeding months.

The firm said the country’s current account level, which is still not alarming, is expected to return to a balance as improvements in infrastructure boost growth prospects in manufacturing and exports sectors.