The International Monetary Fund cut its growth forecast for the Philippines this year to 6.5 percent from the earlier estimate of 6.7 percent made in July amid the slower-than-expected expansion of 6.3 percent in the first half.
The fund, however, kept its growth projection of 6.7 percent in 2019. The latest GDP forecasts were contained in its report on the conclusion of its Article IV Consultation with the Philippines on Sept. 17, 2018.
IMF resident representative to the Philippines Yongzheng Yang said in briefing at the Bangko Sentral on Friday there was nothing “dramatic” in the reduction in the 2018 growth projection. “It is just that the second-quarter growth was slower-than-expected… But we expect the 2019 growth to pick up.”
“We expect a rebound in the rest of the year… Maybe third quarter is around 6.6 percent and fourth quarter maybe higher at 6.9 percent…,” Yang said.
He said the second-semester expansion might be driven mainly by investments and spending, especially household which is expected to remain robust.
Yang, however, said domestic as well as external risks might pose threat to the economic expansion. These include policy normalization in advanced economies as well as higher oil prices in the global markets. On the internal front, he cited the higher inflation environment and the increased risk of overheating of the economy.
“The economy continues to perform well but is facing new challenges. Real GDP growth is projected to grow strongly in 2018 and 2019, supported by domestic demand,” the report said.
But it said poverty and inequality challenges remained, inflation had risen, and external uncertainty increased.
“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,” it said.
IMF expects inflation to settle above the 4-percent upper target bound in 2018 and stay in the upper half of the target band (3−4 percent) during 2019–2020.
Inflation in the first eight months averaged 4.7 percent, well over the target range of 2 percent to 4 percent in 2018. The inflation in August reached a nine-year high of 6.4 percent, faster than 5.7 percent a month ago, driven mainly by faster increases in the prices of rice, fish, vegetables, and meat.
IMF saw the current account deficit to remain manageable, financed largely by foreign direct investment.
It said downside risks stemmed mainly from rising inflation, continued rapid credit growth, higher US interest rates, and US dollar, volatile capital flows and trade tensions.
IMF executive directors commended the authorities for the strong economic performance due to sound macroeconomic management and reforms to promote inclusive growth.
They noted that short-term risks had increased from rising inflation and a less favorable external environment, and underscored the need to adjust the policy mix to address these risks.
“Nonetheless, the medium-term economic outlook remains favorable, placing the Philippines in a good position to tackle still-elevated poverty and inequality,” they said.
Directors broadly urged the authorities to consider adjusting the fiscal stance over 2018-2019 to continue to support pro-growth infrastructure investment and social spending while containing non-priority spending, in order to avoid overburdening monetary policy.
They stressed the importance of careful selection and management of infrastructure projects to maximize their impact on growth.
Directors supported the authorities’ reforms to make tax incentives more effective in achieving national policy goals and improve economy-wide productivity. Enhancing the VAT refund system and strengthening the international taxation framework will also step in the right direction. Directors suggested complementing these reforms with enhanced social protection.
Directors also welcomed recent decisions of the Bangko Sentral ng Pilipinas to increase the policy rate and its announced readiness to take further actions to safeguard price stability. In this context, they recommended carefully monitoring both supply-and demand-side pressures.