To ensure that the Philippine macroeconomic fundamentals will still be supportive of sustainable and balanced growth, the Bangko Sentral ng Pilipinas (BSP) is urging a close coordination between fiscal and monetary policies.
In the Report on Economic and Financial Developments, the central bank said that persistent downside risks will continue to weigh on the overall world economic outlook.
The BSP mentioned external risks could hamper the country’s growth. It mentioned that euro area and fiscal consolidation in the United States could continue to dampen international trade flows, weaken market sentiment and raise volatility in financial markets.
Other risks were Japan’s monetary policy easing, which have important global trade dynamics implications, and the improving US economy that could lead to possible capital flow reversals from emerging economies.
“The biggest challenge for policymakers, especially those in emerging economies, is to provide sufficient buffers against adverse external developments while moderating the build-up of domestic imbalances,” it stated.
The central bank added that in particular, the challenge of managing large capital flows is likely to lead to continuing exchange rate pressures in many emerging economies.
“For the Philippines, keeping the economy on a steady growth course would require policies largely aimed at nurturing domestic sources of growth to help compensate for any weaknesses in external demand,” it said.
The BSP said that the favorable fiscal position of the government provides sufficient policy space to support projects that will continue to stimulate aggregate demand.
It added that growth could further accelerate once the various infrastructure projects move forward as well as the continued social spending programs for health, education, housing, employment, conditional cash transfers and initiatives for financial inclusion and consumer protection.
For its part, the BSP said that it remains committed to its mandate of safeguarding price stability, and ensuring a macroeconomic environment conducive to growth.
“With a broadly benign inflation outlook, the BSP deems its policy stance appropriate.
Latest baseline forecasts indicate that the future inflation path remains in line with the target for 2013 to 2014, supported by firmly anchored inflation expectations,” it said.
Dealing with forex issues
However, the central bank cited that the surge in capital inflows to the country is a particular challenge, since it has pushed up the peso further against the US dollar.
“In addition, the recent credit-rating upgrades given by Fitch Ratings and Standard and Poor’s as well as market expectations of a further credit-rating upgrades by other credit-rating agencies for the Philippines could attract further foreign capital, posing risks to inflation and financial stability,” it stated.
With this, the central bank assured the public that it stands ready to employ measures that will help ensure that the benefits of capital flows are maximized, while warding off the potential destabilizing impact of volatile capital flows on price and financial stability.
It added that it will also continue to maintain a market determined exchange rate, while guarding against speculative flows that could contribute to the peso’s volatility and undermine the inflation target.
“Amid downside risks to global economic prospects on the horizon, contingency measures are in place to ensure adequate liquidity in the financial system should capital flows reverse course,” it stated.
The BSP also said that it will maintain a comfortable level of international reserves to serve as added insurance against external shocks.