The International Monetary Fund (IMF) projects the Philippine economy to grow at 6.6% in percent in 2017 and 6.8 percent in the medium term, supported by robust domestic demand and recovery in exports.
“The economic performance of the Philippines continues to be very strong, featuring robust growth combined with low inflation,” says Luis E. Breuer, head of the IMF’s 2017 Article IV Mission to the Philippines.
Growth reached 6.9 percent in 2016, led by strong domestic demand that more than offset the drag from net exports, and the unemployment rate fell from 6.3 percent in 2015 to 5.5 percent in 2016. Consumption, and particularly investment, grew rapidly. Growth slowed to 6.4 percent in the first quarter of 2017, but this was partly due to a temporary deceleration in public spending and strong base effects following the election last year.
Headline inflation has moved to within the target band since September 2016, as commodity prices have recovered. The current account surplus fell to near zero in 2016, due to a rise in imports of capital goods for investment and slower growth of exports and remittances.
Capital outflows also slowed, and foreign reserves remained stable at a robust level of US$81 billion or 8.7 months of projected imports of goods and services. The real exchange rate has remained broadly stable over the last few years.
Inflation is projected at the center of the target band in 2017-18 reflecting stable commodity prices and a near zero output gap. The current account balance is projected to turn negative from 2017 and gradually widen due to higher imports driven by investment, but the external sector remains strong and international reserves ample.
Risks mainly from external sources
“Risks are tilted to the downside and stem mainly from external sources,” says Breuer, noting that external risks include spillovers from lower growth in China, U.S. monetary policy tightening, and rising concerns about globalization in some advance economies.
Meanwhile, the combination of rapid credit growth, buoyant private investment, and fiscal expansion could lead to overheating, according to the IMF. Other domestic risks include natural disasters and security-related events in some parts of the country.
On the upside, the approval of the first tax reform package could lead to higher infrastructure investment which raises potential growth. The flexible exchange rate regime and strong fundamentals should help continue to cushion the economy from external shocks.
IMF supports the government’s plans to raise infrastructure and social spending– to expand the productive capacity of the economy–while anchoring fiscal policy at the deficit cap of 3 percent of GDP over the medium term.
The fiscal stance was expansionary in 2016, with the national government overall balance widening to 2.4 percent of GDP. The fiscal stance is expected to remain expansionary in 2017 consistent with the authorities’ commitment to higher infrastructure and social spending, resulting in a fiscal deficit of about 3 percent of GDP.
IMF also welcomes the 2018 national government budget submitted to Congress, which implies a return to a broadly neutral fiscal stance and is consistent with the medium-term fiscal framework which targets an overall deficit of 3 percent of GDP and a declining debt ratio.
“Passing the first package of the comprehensive tax reform proposal is critical to sustain the rise in expenditures while maintaining the strong investor confidence and low borrowing costs. Passage of the budget reform and rightsizing bill will also help further improve spending efficiency and quality, helping to achieve the inclusive growth agenda,” says Breuer.
Monetary stance remains appropriate
“The current monetary stance remains appropriate, and the BSP should continue to stand ready to adjust to changing market conditions or if inflation pressures build. Monetary policy remains supportive of growth and low inflation while the introduction of the interest rate corridor (IRC) system has improved monetary transmission.
As part of the transition towards more market-oriented monetary policy implementation, the planned gradual unwinding of the high reserve requirements on banks should be carefully calibrated and timed over the medium term.
The IMF also noted that financial sector indicators suggest that the banking sector is sound, while credit growth has accelerated.
“Regulatory reforms to reduce the costs of doing business should promote competition and openness to foreign investment, including revision of the foreign investment negative list and in public services.”