By means of Luisa Maria Jacinta C. Jocson, Reporter
Economic growth in the Philippines will continue to accelerate at a modest pace in the short and medium term amid downside risks from price volatility, supply shocks and geopolitical conflict, the International Monetary Fund (IMF) said.
“Growth is expected to pick up modestly in 2024-2025 and inflation to remain within the BSP target range,” the IMF said in its latest Staff Report for the Article IV consultation released on Friday.
The IMF maintained its gross domestic product (GDP) growth forecasts for the Philippines at 5.8% this year and 6.1% in 2025.
The government is targeting growth of 6 to 6.5% in 2024 and 6 to 8% next year.
Economic growth will be supported by “gradual easing of monetary policy, amid a small negative output gap,” the IMF said.
“Consumption growth will be boosted by lower food prices and the upcoming midterm elections, while investment growth is expected to pick up thanks to a continued boost in public investment and gradually declining borrowing costs,” it added.
However, the multilateral institution flagged risks to the country’s growth trajectory.
“The risks to the short-term growth prospects are mainly on the downside. The economy could face headwinds from returning commodity price volatility and new supply shocks, which could require tighter monetary policy to anchor inflation expectations,” the IMF said.
Geopolitical tensions or regional conflicts could also “disrupt trade, remittances, foreign direct investment (FDI) and financial flows.”
“Risks could also arise from a slowdown in major economies, with negative spillovers through trade and financial channels,” the IMF added.
Extreme weather events could hamper economic activity and lead to higher budget expenditures, the report said. According to the latest edition of the World Risk Index, the Philippines has been the riskiest country in the world for sixteen years in a row.
Domestic demand could also be dampened if key reforms stall or disbursements are lower than expected, the IMF said.
“A comparison between the Philippines and peer countries along structural areas critical to supporting higher growth can provide the basis for reform efforts to support higher growth.”
“Growth could also be weaker than expected if monetary policy in advanced economies proves to be too tight for longer, triggering capital outflows and tighter financial conditions,” the report said.
Meanwhile, the IMF expects GDP growth to pick up to 6.3% in 2026, within the government’s projection of 6-8%.
“In the medium term, investments are expected to be supported by an acceleration in the implementation of public-private partnership (PPP) projects and foreign direct investment, following recent legal reforms, while potential growth will reach 6.0-6.3%. ”
INFLATION CONCERNS
The IMF expects headline inflation to be within the central bank’s target range of 2-4% over the three-year forecast horizon, adding that risks to the outlook “have diminished, but remain tilted to the upside.”
The IMF expects inflation to stabilize at 3.2% this year, in line with the Bangko Sentral ng Pilipinas (BSP)’s own forecast for 2024.
It said the consumer price index could fall to 2.8% in 2025. The BSP expects inflation to average 3.3% next year.
“Prices of non-food commodities were more favorable than expected, and the impact of El Niño on food and electricity prices was not as great as feared. While food prices continue to pose risks (e.g. due to La Niña), measures to contain food prices have contributed to lower inflation risks.”
“However, rising geopolitical tensions, extreme climate events and recurring commodity price volatility continue to pose upside risks to inflation,” it added.
With inflation appearing to remain under control, the IMF said the central bank may continue to gradually cut interest rates.
“The BSP has room to gradually reduce the policy rate and move towards a neutral position. Monetary policy has become appropriately more restrictive since mid-2023, based on alternative measures of real ex-ante neutral interest rates,” the report said.
“As inflation and inflation expectations return to target and a negative output gap emerges, a measured cut in the policy rate will be appropriate given the upside risks to inflation.”
The BSP on Thursday cut its target reverse repurchase rate by 25 basis points (bps) for the third time in a row, bringing the policy rate to 5.75% from 6%. Since the start of the easing cycle in August, the country has cut rates by a total of 75 basis points this year.
The Monetary Board had tightened its policy stance by implementing cumulative hikes worth 450 basis points between May 2022 and October 2023 to take the policy rate to a 17-year high of 6.50%, in an effort to stem high inflation while monetary stimulus measures were phased out. post-pandemic.
On Friday, BSP Governor Eli M. Remolona Jr. told Bloomberg that the Monetary Council could cut rates again at their first policy meeting next year, noting that they are “neither more forgiving nor less accommodative.”
“A data-dependent approach and careful communication around policy settings will be important to manage expectations amid uncertainty around inflation and the US monetary policy path,” the IMF added.
“During the declining interest rate path, the BSP must ensure that its position remains firmly anchored on inflation and inflation expectations within the target range.”
The US Federal Reserve this week announced fewer interest rate cuts for the coming year due to ongoing concerns about inflation.
The BSP should remain vigilant against supply shocks and possible second-round effects as inflation risks are still tilted to the upside, the IMF said.
“At the same time, downside risks to growth, including those from a weaker-than-expected recovery in domestic demand, could justify a more rapid policy rate cut,” the report said. “Amid prevailing uncertainties, effective monetary policy communication will be important to manage expectations and provide greater clarity on the BSP’s response function.”