The Philippine economy slowed markedly in the first half of 2019 and has rebounded since Q3 2019, reflecting the swing in government spending. Despite the rebound, GDP growth declined from 6.2 percent in 2018 to 5.9 percent in 2019. Led by an acceleration in government expenditure, the economy is expected to grow at 6.4 percent in 2020.

The main short-term risks facing the Philippine economy stem from external sources. Global policy uncertainties remain elevated while business sentiments remain depressed and continue to weigh on investment spending. On the upside, the moderation of global oil prices and easing of global financial conditions provide a respite for emerging markets central banks. Domestically, policy restrictions on the Philippine Offshore Gaming Operators (POGOs) and a ban on the establishment of new economic zones in the National Capital Region could place downward pressure on the property market.

The government’s effort to make up for the fiscal underspending in the first half of 2019 and to avoid any budget delay in 2020 is welcome. Given the subdued inflationary environment, monetary policy should be on an easing bias to support the economy in case growth turns out to be weaker than expected. Macro-financial surveillance should be strengthened and potential risks from a downward adjustment in the property market should be closely monitored. The current wave of reconfiguration of global supply chains has opened a window of opportunities. The Philippine authorities should continue to push forward key reforms and ensure effective implementation of ongoing reforms to lay a good foundation for long-term sustainable development.

Besides elaborating on the economic outlook, risks and vulnerabilities, as well as policy recommendations for the Philippines, this report also delves into (1) the benefits of developing the local currency bond market, (2) ongoing reforms to attract foreign direct investment, and (3) how the economy has managed the macro-financial effects of capital flows.