By Luisa Maria Jacinta C. Jocson, Reporter
PHILIPPINE economic growth will continue to accelerate at a modest pace over the near and medium term amid downside risks posed by price volatility, supply shocks, and geopolitical conflicts, the International Monetary Fund (IMF) said.
“Growth is expected to pick up modestly in 2024-25, and inflation to remain within the BSP’s target band,” the IMF said in its latest Staff Report for the Article IV Consultation released on Friday.
The IMF kept its gross domestic product (GDP) growth forecasts for the Philippines at 5.8% this year and 6.1% in 2025.
The government is targeting 6-6.5% growth in 2024 and 6-8% next year.
Economic growth will be supported by “gradual monetary policy easing, amid a small negative output gap,” the IMF said.
“Consumption growth will be buoyed by lower food prices and the upcoming midterm elections, while investment growth is expected to pick up on the back of a sustained public investment push, and gradually declining borrowing costs,” it added.
However, the multilateral institution flagged risks to the country’s growth trajectory.
“Risks to the near-term growth outlook are tilted to the downside. The economy could face headwinds from recurrent commodity price volatility, and new supply shocks, which may necessitate tighter monetary policy to anchor inflation expectations,” the IMF said.
Geopolitical tensions or regional conflicts could likewise “disrupt trade, remittances, FDI (foreign direct investments), and financial flows.”
“Risks could also come from a slowdown in major economies, with adverse spillovers through trade and financial channels,” the IMF added.
Extreme weather events could hinder economic activity and lead to higher fiscal expenditures, it said. The Philippines has been the most at-risk country globally for 16 straight years, according to the latest edition of the World Risk Index.
Domestic demand could also be dampened if key reforms stall or payoffs are lower than expected, the IMF said.
“A comparison between the Philippines and peer countries along structural areas key to supporting higher growth can inform reform efforts to support higher growth.”
“Growth could also be weaker than expected if the monetary policy stance in advanced economies turns out to be too tight for longer, causing capital outflows, and tighter financial conditions,” it said.
Meanwhile, the IMF expects GDP growth to pick up to 6.3% in 2026, within the government’s 6-8% projection.
“Over the medium term, investment is expected to be supported by an acceleration in the implementation of public-private partnership (PPP) projects and foreign direct investment, following recent legislative reforms, while potential growth will reach 6.0-6.3%.”
INFLATION CONCERNS
The IMF expects headline inflation settling within the central bank’s 2-4% target range over its three-year forecast horizon, adding that risks to the outlook “have receded but remain to the upside.”
The IMF expects inflation to settle at 3.2% this year, in line with the Bangko Sentral ng Pilipinas’ (BSP) own forecast for 2024.
It said the consumer price index could ease to 2.8% in 2025. The BSP expects inflation to average 3.3% next year.
“Non-food commodity prices were more benign than expected, and the impact of El Niño on food and electricity prices was not as high as feared. While food prices continue to pose risks (e.g., due to La Niña), the measures to contain food prices have contributed to lower inflationary risks.”
“However, rising geopolitical tensions, extreme climate events, and recurrent commodity price volatility continue to pose upside risks to inflation,” it added.
With inflation seen to remain under control, the IMF said the central bank can continue gradually cutting benchmark interest rates.
“The BSP has room to gradually reduce the policy rate and move toward a neutral stance. The monetary policy stance has become appropriately more restrictive since mid-2023 based on alternative measures of the real ex-ante neutral rate,” it said.
“With inflation and inflation expectations returning to the target, and the opening of a negative output gap, a measured reduction of the policy rate will be appropriate, given upside risks to inflation.”
The BSP reduced the target reverse repurchase rate by 25 basis points (bps) for a third straight meeting on Thursday, bringing the key rate to 5.75% from 6%. It has now slashed rates by a total of 75 bps this year since it began its easing cycle in August.
The Monetary Board had tightened its policy stance by implementing cumulative hikes worth 450 bps between May 2022 and October 2023 to bring its key rate to a 17-year high of 6.50% as it sought to rein in elevated inflation while it unwound its monetary stimulus measures post-pandemic.
On Friday, BSP Governor Eli M. Remolona, Jr. told Bloomberg that the Monetary Board could deliver another rate cut at their first policy meeting next year, noting that they are “neither more dovish nor less dovish.”
“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.
“Along the declining rate path, the BSP must ensure that its stance continues to anchor inflation and inflation expectations firmly within the target band.”
The US Federal Reserve this week signaled fewer rate cuts in the year ahead due to persistent inflation concerns.
The BSP must remain vigilant about supply shocks and potential second-round effects as inflation risks are still tilted to the upside, the IMF said.
“At the same time, downside risks to growth, including from a weaker-than-expected recovery in domestic demand, could warrant a swifter policy rate reduction,” it said. “Amidst prevailing uncertainties, effective monetary policy communication will be important to manage expectations and provide more clarity on the BSP’s reaction function.”