The International Monetary Fund on Wednesday kept its 2018 growth forecast for the Philippines at 6.7 percent but warned that rising inflation and external developments such as the trade tension between bigger economies may threaten sustained expansion.
“The Philippine economy is performing well. Real GDP [gross domestic product] 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,” IMF mission chief Luis Breuer said in a briefing at the Bangko Sentral ng Pilipinas.
An IMF staff team led by Breuer visited Manila and Bohol from July 11 to 25.
“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,” Breuer said.
Breuer said the country’s GDP was expected to expand 6.7 percent next year. The projection of 6.7 percent for 2019 represented a slight downward revision from the 6.8-percent estimate announced in a report in April.
“Growth for next year is probably unchanged. The adjustment is very minor [and] within the margin of error and it reflects what’s happening outside the Philippines,” Breuer said.
Breuer said the current account was projected to remain manageable, financed largely by foreign direct investment. He said downside risks stemmed mainly from rising inflation, continued rapid
credit growth, higher US interest rates, stronger US dollar, volatile capital flows and trade tensions.
He said the IMF’s discussions focused on the need to support growth while safeguarding macroeconomic stability by adjusting policies and maintaining a healthy external position.
Breuer said the government should maintain a broadly unchanged fiscal deficit in 2018 and 2019″•at around 2.4 percent of GDP”•to support efforts to contain inflationary pressures.
He said rising tax revenues, including tax reform and the reallocation of spending from non-priority programs, could support expanding public investment at a pace that protects stability while sustaining strong growth.
Breuer also supported the further tightening of monetary policy to anchor inflation expectations, conditional on domestic and external developments. He said 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,” Breuer said.
Breuer also said the exchange rate flexibility should be maintained to support the economy’s ability to adapt to external shocks.
He said the rising international oil prices, external pressures on the peso, one-off effects of higher excise taxes and domestic demand pressures led to a rapid increase in inflation to 5.2 percent in June 2018 with year-to-date inflation averaging 4.3 percent, above the upper limit of the government’s target range of 2 percent to 4 percent for the year.
He said the current account deficit was expected to rise to 1.5 percent of GDP by end-2018, reflecting increased imports of capital goods and raw materials. Foreign direct investments, which reached a record $10 billion in 2017, were expected to moderate this year.
“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,” Breuer said.
Breuer said the government’s plan to shift to federalism could be good but also had risks. “It can be a good opportunity to improve public services because local government officials are likely to understand better the needs of the local population and to adopt public services to those needs,” he said.
“It is important to the extent that transfers from the national government to the LGUs increase that this comes along with a devolution of responsibilities in the management of schools, hospitals, infrastructures by local government to avoid incorporating a deficit bias in the public finances of the country,” Breuer said.