- The Philippine economy continues to grow strongly, with real GDP projected to expand 6.7 percent in 2018 and 2019. The medium-term economic outlook also remains favorable.
- However, near-term risks have increased, stemming from rising inflation and a changing external environment that poses great uncertainty.
- To strike the right balance between growth and macroeconomic stability, policies need to be adjusted to reduce inflationary pressures, while structural reforms should continue to support inclusive growth.
An International Monetary Fund (IMF) staff team led by Luis E. Breuer visited Manila and Bohol from July 11−25, 2018. At the conclusion of the visit, Mr. Breuer issued the following statement:
“The Philippine economy is performing well. Real GDP grew 6.7 percent in 2017 and the team projects that this rate will be sustained in 2018 and 2019, underpinned by strong consumption and investment, including public investment.
“Rising international oil prices, external pressures on the peso, one-off effects of higher excise taxes, and domestic demand pressures have led to a rapid increase in inflation, to 5.2 percent in June 2018 with year-to-date inflation averaging 4.3 percent. The current account deficit is expected to rise to 1.5 percent of GDP by end-2018, reflecting increased imports of capital goods and raw materials. Foreign direct investment, which reached a record level of US$10 billion in 2017, is expected to moderate somewhat this year. The peso has depreciated by about 7 percent against the U.S. dollar since the beginning of 2018 and gross international reserves, at US$77.7 billion at end-June, remain more than adequate.
“The medium-term economic outlook remains favorable, but short-term risks have risen. Real GDP growth is projected at just under 7 percent over the medium term. Inflation is projected to gradually fall to under 4 percent in 2019 and move toward 3 percent over time. The current account deficit is projected to remain manageable, financed largely by foreign direct investment. Downside risks stem mainly from rising inflation, continued rapid credit growth, higher U.S. interest rates and U.S. dollar, volatile capital flows, and trade tensions.
“Against the backdrop of a shifting economic environment, our discussions focused on the need to support growth while safeguarding macroeconomic stability by adjusting policies and maintaining a healthy external position. This would require:
- Maintaining a broadly unchanged fiscal deficit in 2018 and 2019—at around 2.4 percent of GDP—to support efforts to contain inflationary pressures. Rising tax revenues, including from tax reform, and the reallocation of spending from nonpriority programs can support expanding public investment at a pace that protects stability while sustaining strong growth.
- Further tightening monetary policy to anchor inflation expectations, conditional on domestic and external developments. The BSP’s recent decisions to increase the policy rate twice were appropriate. The team welcomes the BSP’s announced readiness to take further action to safeguard price stability and continued progress in modernizing monetary operations and reforming the capital markets.
- Maintaining exchange rate flexibility to support the economy’s ability to adapt to external shocks.
- Pursuing measures to safeguard financial stability amid continued rapid credit growth and rising corporate debt. The team welcomes recent progress on risk management and supports the authorities’ plans to introduce countercyclical capital buffers for banks. Efforts to close data gaps on nonbank financial institutions and conglomerates should continue.
- Sustaining and even deepening the authorities’ reform program, including amendments to the BSP Charter, streamlining tax incentives, opening new sectors of the economy to private investment, further improving the business environment, including through better infrastructure, and modernizing the legal framework on bank secrecy and anti-money laundering and financing of terrorism.
“The Philippines has been one of the region’s strong economic performers over the past years, reaping the fruits of prudent policies and critical reforms. The team welcomes the authorities’ strategy of maintaining policy continuity, while adapting to emerging challenges, and taking advantage of the strong economy to implement reforms to improve inclusive growth and job creation. This strategy has served the Philippines well.”
The team would like to thank the authorities in Manila and Bohol for the fruitful discussions and their strong support and gracious hospitality.
