AMRO’s mission team and the Philippine authorities at the wrap up meeting of the Annual Consultation to the Philippines 2018

SINGAPORE, October 30, 2018 – The Philippine economy is expected to continue to grow robustly in 2018, supported by strong government spending and investment. However, stability should be prioritized amid strong inflationary pressures, high credit growth and rising external headwinds. This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its Annual Consultation Visit to the Philippines from October 15 to 24, 2018.

The mission was led by Lead Economist Dr Siu Fung Yiu, and Chief Economist Dr Hoe Ee Khor participated in several policy meetings. Discussions centered on prospects of the economy, challenges ahead and policy responses.

“The Philippine economy is expected to continue its robust growth, expanding by 6.5 percent in 2018 and 6.4 percent in 2019, broadly in line with its potential,” said Dr Yiu. “However, the economy is facing challenges from rising inflation, wider , tightening global financial conditions, and an escalation of the ongoing global trade tensions. Thus, the authorities should strive to maintain the overall policy direction, while recalibrating the policy mix to maintain stability and guard against risks.”

Philippines’ economic growth moderated to 6.3 percent in the first half of 2018 but is expected to pick up in the second half and to continue to expand robustly in 2019, driven by both consumption and an ambitious investment program to close the massive social and physical infrastructure gaps. Meanwhile, inflation has accelerated and is still above the upper bound of the target range, mainly due to supply side shocks amid robust domestic demand. Going forward, inflation is expected to peak in the last quarter of 2018 and trend downward toward the middle of the target range in 2019.

Amid the strong prospects for economic growth, near term challenges need to be properly addressed. The major challenges include uncertainty surrounding inflation such as rising inflation expectations, a higher-than-expected minimum wage increase; and a volatile external environment including the spillovers from the ongoing US-China trade conflict and higher interest rates in major economies.

To sustain high and stable growth over the long term, monetary policy should be appropriately tight to anchor inflation expectations and curb second round effects. The Bangko Sentral ng Pilipinas’ (BSP) policy rate hikes since the beginning of this year and its strong commitment to address the threat of high inflation are commendable. To further mitigate the impact of supply-side factors on inflation, non-monetary measures such as rice tariffication, also needs to be implemented in a timely manner.

Given the volatile external environment, the BSP’s efforts to strengthen hedging functions in the foreign exchange market are welcome, but the operation should be carefully implemented and clearly communicated. Market participation should be limited to avoiding disorderly fluctuations in the exchange rate.

The authorities’ ongoing efforts to strengthen its macrofinancial surveillance and to develop various macroprudential toolkits are welcome. The introduction of the countercyclical capital buffer as a pre-emptive move to safeguard the economy’s financial stability and collective efforts across agencies to collect information on corporate and household borrowers are very important and necessary for effective surveillance.

The enormous efforts taken by the government to push infrastructure investment and social spending will serve the country’s long-term development objectives well. Nonetheless, fiscal policy should be calibrated to help contain inflation pressure and support the external position, through a reprioritization of expenditure. The government could streamline current expenditures and continue to improve the implementation capacity and spending efficiency for infrastructure projects and adjust the pace of implementation so that it is more in line with the absorptive capacity of the economy.

On structural reforms, the government should strengthen the reform agenda to continue enhancing the growth potential of the economy. The timely implementation of the Doing Business Law will improve the country’s ease of doing business and help attract more private investment and FDI inflows. The implementation of the Inclusive Innovation Industrial Strategy (i³S) will enhance productivity growth and support economic diversification.

The mission would like to express its appreciation to the Philippine authorities and other counterparts for their assistance and warm hospitality. The consultation visit has deepened AMRO’s understanding of the country’s current macroeconomic and financial situations as well as ongoing efforts to address the risks, vulnerabilities and challenges confronting the economy.

About AMRO:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization, established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO fulfills its mandate by conducting regional macroeconomic surveillance, supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.