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The Philippine economy continued to perform strongly, due in part to robust public investment, with growth projected at 6.5 percent for 2018, and 6.7 percent in 2019, the IMF said in its latest annual economic assessment.
In 2018, the country faced lots of challenges from tighter global financial conditions, rising inflation, as well as persistent poverty and inequality. To ensure that growth benefits everyone, the government struck the right balance between maintaining a stable and robust economy in an uncertain global environment, while continuing to prioritize effective reforms that raised the living standards, such as targeted social spending and investing in infrastructure, the IMF report said.
The Philippines economy has been one of Asia’s strong performers over the years. Sound policies and a favourable global economic environment have delivered robust growth, low inflation, and a sustainable debt path, placing the Philippines in an excellent position to tackle still elevated poverty and inequality. Sustainably improving people’s living standards requires deepening ongoing reforms—for instance, by increasing social spending—along with timely adjustments of macroeconomic policies to evolving domestic and external conditions.
The headline inflation, which captures the prices of all services and commodities, rose to 6.4 percent in August (year on year) from 3.4 percent in January 2018. Higher excise taxes, the weaker peso, rising global energy prices, and challenges in managing rice supply are driving inflation. To contain inflation and preserve market confidence, the Bangko Sentral ng Pilipinas, the country’s central bank, increased the policy rate three times this year and stands ready to tighten monetary policy further (by raising interest rates) to anchor inflation expectations and temper further second-round effects.
While fast credit growth might be excellent for the Philippine economy—as it supports more consumption and investment—bank credit is currently outpacing economic growth. As the credit-to-GDP gap—which is the difference between the credit-to-GDP ratio and its long-run trend—widens and approaches early warning levels, the risks to the financial system increase. In this regard, the central bank has come up with some policies to enhance surveillance and enact macroprudential policies to stem excessive credit growth in specific sectors to address the buildup of risks to financial stability.
With well-capitalized banks, the financial system appears sound, but more timely data for nonfinancial corporates and non-bank financial institutions are needed to monitor risks better.
The quick approval of these proposed amendments to the charter of the Bangko Sentral ng Pilipinas is also a priority. By introducing the planned countercyclical buffer for banks would also help manage financial stability risks from sustained rapid credit growth.
The policymakers should create more jobs by continuing to prioritize reforms that open new sectors of the economy to foreign investment and further improve competition and the business environment. Replacing the rice import quota system with one based on tariffs would benefit consumers by reducing domestic rice prices, but this action should be accompanied by protection of affected small farmers. Also, there is the need to gradually expand social protection programs to reduce poverty, such as the conditional cash transfer program.
To close the infrastructure gap to the level of peer countries and improve the state of infrastructure, the government plans to scale up investment. Reallocating spending from nonpriority programs and raising revenues can support the continued expansion of public investment and social spending and keeping a neutral fiscal stance for 2018-19 would avoid overburdening monetary policy.
If public investment is well managed and targeted, it can help boost overall productivity, stimulate private investment, and reduce poverty by creating jobs. Public investment management, at the same time, should aim to maximize the return from large infrastructure projects, including through a more rigorous appraisal of projects and by fostering effective competition in procurement.
Given the prospering business process outsourcing industry in the Philippines and the growing young population, emerging digital technologies create both opportunities and challenges to the economy.
Improving training and education to better equip today’s job seekers, as well as investing more in digital infrastructure, like broadband technology, can help the Philippines elevate the standing of the country’s outsourcing industry and fully reap the digital dividend in the global economy.
Cybersecurity also needs to be strengthened to minimize the risk of cyber threats. The government’s digital strategy, and the National Broadband Plan and planned introduction of a third telecom player, is appropriately aligned with these priorities.