SINGAPORE, February 25, 2020 – The Philippine economy slowed down in 2019 reflecting mainly a prolonged budget delay and strong external headwinds. Looking ahead, growth is projected to continue to recover as the government ramps up fiscal spending and domestic demand is boosted by easier monetary conditions. This is according to the 2019 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 2019 and data availability as of February 3, 2020.

The Philippine economy slowed markedly in the first half of 2019 and then rebounded sequentially since Q3 2019, reflecting the swing in government spending amid weakening external demand. Despite the rebound, GDP growth declined from 6.2 percent in 2018 to 5.9 percent in 2019. Going forward, the economy is expected to continue to recover, led by an acceleration in government expenditure, with growth projected at 6.4 percent in 2020. Inflation, which declined sharply from 5.2 percent in 2018 to 2.5 percent in 2019, is expected to stay within the 2-4 percent target range for 2020, as global oil prices and domestic food prices are likely to be contained and demand pressure to remain subdued.

The Philippine external position strengthened in 2019 on account of a smaller current account deficit and strong portfolio inflows. Despite an anticipated pick-up in investment and growth in the second half of the year and next year, the current account deficit is expected to be smaller at 1 percent of GDP in 2019, and to remain contained at 2.4 percent in 2020.The easing bias of major central banks globally will help sustain capital inflows. The banking system remains sound with adequate capital and liquidity buffers. The government’s commitment to prudent fiscal discipline will help contain debt increase, while fiscal reforms will continue to improve revenue mobilization capacity.

The main short-term risks facing the Philippine economy stem from external sources. Notwithstanding the recent easing of the U.S.-China trade tensions, global policy uncertainties remain elevated while business sentiments remain depressed and continue to weigh on investment spending. These uncertainties could exacerbate the current slowdown of the world economy and increase global market volatilities. On the upside, global oil prices have moderated and global financial conditions have eased following the dovish pivot by major central banks at the beginning of 2019, providing a respite for emerging markets central banks. Domestically, policy restrictions on Philippine Offshore Gaming Operators (POGOs) and a ban on the establishment of new economic zones in the National Capital Region may lead to downward pressures on the property markets.

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. The government’s decision on extending the validity of the FY 2019 appropriation into 2020 was appropriate and pragmatic. The swift passage of Budget 2020 will allow for timely disbursement and better support the economy in 2020.

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. The reduction of 75 basis points in policy rate and the staggered 400 basis points cuts in reserve requirements since May 2019 have led to a substantial easing in monetary conditions, providing support for the recovery in economic activities.

Macro-financial surveillance should be strengthened and potential risks from a downward adjustment in the property market should be closely monitored. The authorities should continue to enhance the comprehensiveness, coverage and timeliness of financial surveillance database, particularly those of large conglomerates.

Despite the challenging external environment, 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. The authorities’ continued efforts to improve the “doing business” environment are also welcome.

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 fulfills 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 accordance with AMRO’s macroeconomic surveillance function. 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 assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.