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SINGAPORE, September 10, 2024 – The Philippine economy continued to grow steadily at 6.0 percent in the first half of 2024, driven by strong domestic demand and export recovery. The labor market remained strong which helped boost domestic consumption. Inflation continued its declining trend from 2023, reflecting a moderation in international commodity prices, the government’s inflation-containing measures, as well as tight monetary policy. The current policy mix is appropriate but can be adjusted further to support economic growth while rebuilding policy buffers. This preliminary assessment was made by the ASEAN+3 Macroeconomic Research Office (AMRO) during its Annual Consultation Visit to the Philippines from August 27 to September 6, 2024.
The AMRO team was led by Principal Economist Runchana Pongsaparn. AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor participated in the policy meetings. They also met with Department of Finance Undersecretary Joven Z. Balbosa and Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila, Jr. The discussions focused on the risks and challenges facing the Philippines, and policy options to sustain the growth momentum, anchor inflation expectations, restore fiscal buffer and address long-term structural issues.
Economic developments and outlook
“The Philippine economy is expected to grow by 6.1 percent in 2024 and 6.3 percent in 2025, driven by higher government spending as well as an upturn in external demand, and strengthening domestic demand,” said Dr. Pongsaparn. “Private consumption is anticipated to grow faster for the rest of the year, supported by strong labor market conditions, lower inflation, and robust overseas remittances. With the start of monetary policy easing cycle, we expect private investment sentiments to improve.”
Headline Consumer Price Index (CPI) inflation is projected to decline to 3.3 percent in 2024 from 6.0 percent in 2023, and ease further to 3.1 percent in 2025. While upside risks such as wage increases and local food supply shocks remain, the slowdown of headline inflation is expected to continue in the second half of 2024 due to lower international prices of fuel and food, and tariff cuts on imported rice.
On the external front, current account deficits narrowed, and net direct investment inflows increased, while external debt remained low. The banking system has stayed resilient, with ample liquidity, robust profitability, and high capital buffers. The fiscal position has continued to improve in 2024, supported by a significant increase in revenue despite higher fiscal expenditure.
Risk and vulnerabilities
In the near term, the growth prospects of the Philippines could be subject to several risks. Higher inflation, especially from food prices, could dampen consumption. At the same time, the economy could be challenged by a potentially sharp slowdown in major trading partners, such as the U.S., Euro Area, and China. Heightened geopolitical risks could increase the likelihood of global supply disruptions and further global economic fragmentation.
The country’s long-term potential growth could be constrained by insufficient infrastructure investment, vulnerabilities to climate change, and the prolonged scarring effects caused by the COVID-19 pandemic.
Policy recommendations
The current fiscal-monetary policy mix is appropriate. As inflation continued to ease but remained elevated, the Monetary Board maintained the policy rate at 6.50 percent in the first half of 2024 and delivered the first rate cut only in August with indication that inflation will continue to ease within the target band. There is room to adopt a less restrictive monetary policy stance if current macroeconomic trends continue. However, if supply-side risks emerge, the whole-of-government approach should be taken to address inflationary pressures.
The fiscal stance in 2024 and in 2025 are expected to be neutral with a continued improvement in the fiscal deficit. The government is likely to continue its medium-term fiscal consolidation plan at a slower pace to better support economic growth. However, it will be prudent to accelerate the pace of fiscal consolidation if conditions allow.
In the medium term, restoring fiscal space remains critical to build greater resilience to external shocks amid elevated uncertainty. With regard to the financial system, the authorities should consider a more active use of macroprudential toolkits, strengthen the institutional framework to safeguard financial stability, and deepen the bond and repo markets.
On structural issues, the government should implement measures on labor upskilling and reskilling to raise labor productivity. More efforts should be made to attract foreign direct investments and to encourage technology transfer. Furthermore, a comprehensive strategy for enhancing the country’s competitiveness, including raising infrastructure investment, continuing digitalization and developing a sustainable economy, is crucial to bolster the Philippines’ economic growth potential.
On behalf of AMRO, the mission team would like to express their sincere appreciation to the Philippine authorities and other counterparts for their kind cooperation, insightful discussions as well as warm hospitality.
About AMRO
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.
AMRO Director Kouqing Li, Chief Economist Hoe Ee Khor, and the AMRO team met with the Philippine Department of Finance Undersecretary Joven Z. Balbosa
AMRO Chief Economist Hoe Ee Khor and the AMRO team held the wrap-up meeting with officials from the Philippine Department of Finance and the Bangko Sentral ng Pilipinas