Fitch Solutions, a unit of Fitch Group, expects the Philippine economy to grow 5.9 percent this year, slower than 7.6 percent in 2022 because of elevated inflation and rising interest rates.
Fitch Solutions said in a report Friday the slowdown in the economy would be a key source of fiscal pressure in 2023.
“We forecast real GDP growth to slow from 7.6 percent in 2022 to 5.9 percent in 2023, which is a touch below the official projected range of 6.0 percent to 8.0 percent,” it said.
“High domestic inflation, weak external demand and aggressive monetary tightening undertaken by the BSP [Bangko Sentral ng Pilipinas] will constrain economic growth and inevitably weigh on the public coffers,” it said.
Inflation in the first quarter averaged 8.3 percent, above the target range of 2 percent to 4 percent.
Fitch Solutions also said the Philippines would remain on the path of fiscal consolidation over the medium term, but at a more gradual pace.
“Expenditure looks set to remain elevated due to continued emphasis on infrastructure projects. Meanwhile, a combination of slowing economic growth and lower income tax will weigh on revenue growth,” it said.
“These have led us to be less optimistic in regard to Philippines’ fiscal position, and we now expect the shortfall to come in at 6.4 percent of GDP in 2023 which is wider than official projections of 6.1 percent [similar to our previous forecast],” it said.
It said the recent income tax revamp would also have some repercussions on revenue growth. The government introduced a slew of changes to its income tax system which came into effect at the start of 2023.
Individuals earning up to P250,000 will remain exempt from paying personal income tax, while those earning from P251,000 to P8 million will have lower tax rates ranging from 15.0 percent to 30.0 percent.
To compensate for the decrease in tax revenue at the lower-middle income range, those earning over P8 million will remain subject to a 35-percent tax rate.
“Overall, we expect revenue growth to slow considerably from 18 percent year-on-year in 2022 to just 4 percent in 2023,” Fitch Solutions said.