The Philippine economy is expected to strengthen further with easing inflation and a less restrictive monetary policy, according to the ASEAN+3 Macroeconomic Research Office (AMRO).
"GDP (gross domestic product) growth is expected to reach 5.8 percent in 2024 and accelerate to 6.3 percent in 2025, supported by strong domestic demand and a pickup in external demand. Headline CPI (consumer price index) inflation is projected to fall to 3.2 percent in 2024 from 6.0 percent in 2023, and maintain at 3.2 percent in 2025," AMRO said in a statement.
Its assessments are highlighted in the 2024 Annual Consultation Report on the Philippines published on Monday AMRO, which is based on its Annual Consultation Visit to the Philippines from Aug. 27 to Sept. 6, 2024, and data and information available up to Nov. 7, 2024.
In the first three quarters of 2024, the Philippine economy grew steadily at 5.8 percent, bolstered by a recovery in public consumption and construction investment, as well as export recovery. The strong labor market helped boost domestic consumption, despite the elevated underemployment rate. Inflation continued its declining trend from 2023, mainly driven by lower global commodity prices, the government’s inflation-containing measures, and tight monetary policy.
On the external front, the current account improved with a narrowing merchandise trade deficit. The net financial account inflows increased, and international reserve remained sufficient. As inflationary pressure eased, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) delivered the first rate cut on Aug. 15, signalling a calibrated shift to a less restrictive monetary policy stance. This was followed by another 25-basis-point rate reduction on Oct. 16.
"The BSP also announced further reductions in the reserve requirement ratio in late October as part of its efforts to reduce distortions in the financial system. The banking system has been resilient with ample liquidity, robust profitability, and high capital buffers," AMRO said.
"The fiscal position has continued to improve in 2024, supported by a significant increase in revenue despite higher fiscal expenditure," it added.
Risks and vulnerabilities
However. the growth prospects of the Philippines could be subject to a few risk factors. Higher inflation could dampen consumption, while a potential sharp slowdown in major trading partners could pose risks to growth. Heightened geopolitical risks could increase the likelihood of global supply disruptions and lead to a resurgence of inflationary pressure. The country’s long-term potential growth could be challenged by insufficient infrastructure investment, vulnerabilities to climate change, and the prolonged scarring effects from the pandemic.
POLICY RECOMMENDATIONS
The current fiscal-monetary policy mix is appropriate and can be adjusted further to support economic growth while rebuilding policy buffers. If inflation continues to ease within the BSP target band, there is room to adopt a less restrictive monetary policy stance. A whole-of-government approach should be taken to address inflationary pressures if supply-side risks emerge.
While the need for strategic adjustments in the medium-term fiscal policy to support the economy is justifiable, the pace of fiscal consolidation should be accelerated when conditions allow. Further revenue mobilization, efficiency improvement in expenditure, and long-term fiscal reforms should continue to be carried out.
"The country’s overall financial stability remains sound. Should financial stability risks arise, a more active use of macroprudential toolkits could be considered. There are signs of vulnerabilities in certain areas, such as household and property sectors, which warrant close monitoring," AMRO said.
"The authorities should also continue to strengthen the institutional framework to safeguard financial stability and deepen the bond and repo markets," it added.
