The International Monetary Fund (IMF) remains bullish on the Philippine economy this year due to lower commodity prices, strong private construction and export growth but it also urged the government to improve spending, particularly on infrastructure and human capital.
In a statement at the conclusion of its staff mission to the Philippines, the IMF said it now expects GDP growth of 6.7 percent for 2015 from 6.6 percent earlier “due to lower commodity prices, higher public spending, and continued strong private construction and export growth.”
This latest forecast, however, still falls below the government’s growth target of 7 to 8 percent for 2015 following growth of 6.1 percent in 2014.
Headline inflation is projected to remain at the lower end of the central bank’s 2 percent to 4 percent target range because of lower commodity prices. Headline inflation for the first two months of 2015 averaged at 2.4 percent.
The IMF said the government’s fiscal stance should provide a stimulus to the economy as budget execution picks up in 2015 to 2016 toward the 2 percent of GDP deficit target, while monetary and macro prudential policies continue to anchor inflation and financial stability.
Over the medium term, it noted that structural policy issues center around increasing investment, particularly in infrastructure and human capital.
“In this regard, continued efforts at enhancing revenue mobilization will be critical to address the large spending needs, including enacting measures to offset any revenue eroding policy change and preferably through a comprehensive tax reform,” it said.
Meanwhile, the current account, a major component of the country’s balance of payments (BOP), is expected to remain in surplus and stronger due mainly to lower oil prices and strong inflows from business process outsourcing, tourism and remittances, it added.
The current account, which measures the net transfer of real resources between the domestic economy and the rest of the world, reached a record surplus of $12.6 billion in full-year 2014.
Risks to growth
Despite the rosy projections, the IMF said there were risks to its baseline outlook from both external and domestic sources.
It said that disruptive asset price shifts in financial markets because of asynchronous monetary policies in advanced economies remain a risk, although it noted that the Philippines’ strong fundamentals provide a cushion.
“External demand could be weaker if risks of deflation and lower potential growth in advanced economies and key emerging markets were to materialize,” it said.
On the domestic front, the IMF said preemptive policy moves of the Bangko Sentral ng Pilipinas (BSP) in 2014 have resulted in more moderate liquidity and credit growth, reducing financial stability risks.
Last year, the central bank opted to use a mix of monetary policy tools to counter risks mainly from external side.
These tools included increases in reserve requirements on bank deposits, upward adjustments in policy interest rates, and a strategic presence in the foreign exchange market.