SINGAPORE, February 18, 2019 – In 2018, despite growing macroeconomic imbalance amid intensified external shocks, the Philippine economy managed to register robust growth. In 2019, economic growth is projected to stay resilient, supported by robust domestic demand. This is according to the 2018 Annual Consultation Report on the Philippines published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country in October 2018 and data availability as of January 25, 2019.

The Philippines economic growth slowed to 6.2 percent in 2018, due to weaker external demand and private consumption. The economy is projected to recover to grow by 6.4 percent in 2019. The government’s “Build, Build, Build” infrastructure program will continue to provide impetus to the economy. Private consumption is also expected to recover as inflation pressure eases and consumer confidence is restored. Nonetheless, exports will remain tepid. Headline inflation is expected to continue its downward trend started in late 2018 into the 2-4-percent target range in 2019, on the back of lower oil prices and continuing rollout of government’s measures to dampen inflationary pressures, such as the passage of rice tariffication bill.

The Philippine external position has weakened due to a wider current account deficit and larger non foreign direct investment (FDI) capital outflows. As a result, international reserves declined, but have remained more than adequate in terms of imports coverage and short-term external debt repayment capacity. Due to high demand for imports of capital goods and raw materials for infrastructure investment projects, the current account will remain in deficit this year. Non-FDI outflows are expected to ease following the sharp price corrections in domestic assets, and as repayments of foreign debt by domestic residents would have run its course. However, FDI inflows are also likely to moderate on the back of fewer approvals of new projects and higher cross border borrowing costs.

The major risks facing the Philippine economy are mostly short-term. Externally, escalating global trade tensions and a sharp tightening of global financial conditions remain the major risks. Domestically, higher-than-expected inflation and pockets of financial vulnerabilities are the key concerns. While domestic risks have started showing signs of easing, external risks have remained heightened. Policymakers need to remain vigilant on the development of short-term risks and get ready to recalibrate their policy mix to sustain macroeconomic stability.

Fiscal policy should be calibrated to help contain inflation pressure and support the external position through reprioritizing expenditure. The government could streamline current expenditures and continue to improve implementation capacity and spending efficiency of infrastructure projects, and adjust the pace of implementation so that it is in line with the absorptive capacity of the economy. Tax reforms should proceed with careful design and implementation to minimize potential negative impacts on investment and employment during the transition period.

Monetary policy should be kept appropriately tight to anchor inflation expectations and curb second-round effects. The Bangko Sentral ng Pilipinas (BSP) vigilance and commitment to safeguard price stability and financial stability is commendable. Although inflation has started to trend downward, it would be prudent to keep monetary policy on hold for now until inflation is firmly within the official inflation target band. While the BSP should intervene judiciously in the foreign exchange market to smooth short-term fluctuations, the exchange rate should continue to be determined by market forces.

The BSP’s ongoing efforts to strengthen macro-financial surveillance and develop various macroprudential toolkits should continue. The introduction of the countercyclical capital buffer to safeguard the economy’s financial stability and collective efforts across agencies to collect information on corporate and household borrowers are very important for effective financial surveillance.

The government should strengthen the reform agenda to continue enhancing the growth potential. Besides physical infrastructure, social infrastructure also needs to be enhanced. The authorities’ continued efforts on improving the ease of doing business are commendable. The achievement of the comprehensive and complex development objectives require not only a strong push from the central government, but also close cooperation from the local governments.

About AMRO and Annual Consultation Report:

ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute to securing 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 fulfils its mandate by conducting regional economic surveillance, supporting the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.

The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and provides policy recommendations to mitigate such risks.