AMRO cuts Philippine growth outlook

Philippine economic growth may fall short of the government’s target this year amid a slower-than-expected rise in consumption and investment, the ASEAN+3 Macroeconomic Research Office (AMRO) said.

In its latest Annual Consultation Report, AMRO cut its gross domestic product (GDP) growth projection for the Philippines to 5.8% this year from its 6.1% estimate in October.

This would fall below the government’s revised 6-6.5% growth target for 2024.

AMRO said household spending and private investment were weaker than expected this year due to elevated inflation and high interest rates.

“Household consumption, underpinned by a strong labor market and robust remittances, continued to expand, but at a slower pace due to the lagged impact of high inflation.”

“Private investment is gradually rebounding but has yet to reach pre-pandemic levels, partly due to weak investment sentiment amid high interest rates,” it added.

Latest data from the Philippine Statistics Authority (PSA) showed that Philippine GDP growth averaged 5.8% in the first nine months of the year.

For 2025, AMRO retained its growth forecast of 6.3% for 2025.

“The pickup in growth is driven by higher government spending as well as an upturn in external demand and strengthening domestic demand,” it said.

The think tank also expects domestic demand to improve moving forward, which would support growth.

“Private consumption is anticipated to grow faster in the rest of the year, supported by strong labor market conditions, lower inflation and robust overseas remittances.”

“With the start of the monetary policy easing cycle, private investment sentiments are expected to improve,” it added.

However, AMRO said the growth outlook faces “heightened geopolitical risks” that may increase the likelihood of supply disruptions and further global economic fragmentation.

The Philippine economy’s growth momentum could also be “derailed by a sharp slowdown in major trading partners in the near term,” it added.

“Over the long term, the country’s potential growth could be constrained by insufficient infrastructure investment, vulnerabilities to climate change, and prolonged scarring effects caused by the coronavirus disease 2019 (COVID-19) pandemic.”

Consumption growth may still be hampered by elevated inflation, it added.

“Philippine growth prospects, particularly private consumption, are clouded by the risk of high food inflation… Higher costs of basic needs would further reduce households’ ability to afford discretionary items and hence constrain household consumption.”

However, AMRO projects headline inflation to average 3.2% this year and the next.

“Inflation is expected to stay broadly within the target range in the second half of 2024 through 2025, benefiting from the continued easing of global commodity prices and government measures,” it said.

The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 3.1% this year and 3.2% in 2025.

“While upside risks such as wage increases and local food supply shocks remain, the decline in headline inflation is expected to continue in the second half of 2024 due to lower commodity prices of fuel and food, and tariff cuts on imported rice,” AMRO said.

“Meanwhile, inflationary pressure will likely remain moderate due to a positive output gap and second-round effects, following increases in minimum wages and persistently high inflation expectations.”

With inflation expected to remain within target, AMRO said that there is room for the BSP to continue its rate-cutting cycle.

“As inflation will continue to ease within the target band, there is room to adopt a less restrictive monetary policy stance if current growth trends continue,” it said.

“However, if supply-side risks emerge, a whole-of-government approach should be taken to address inflationary pressures.”

Since August, the central bank has lowered borrowing costs by 50 basis points (bps), bringing the key rate to 6%.

The Monetary Board is set to have its last policy review for the year on Dec. 19.

“As year-to-date inflation has returned to the upper half of the target range, the BSP has room to gradually adjust the policy rate to a moderately restrictive stance,” AMRO said.

“This will lend some support to private investment and allow the BSP to rebuild space for renewed policy rate hikes if inflationary risks were to reemerge.”

Meanwhile, AMRO said that the Philippine government’s fiscal consolidation efforts can still be enhanced.

“The current fiscal-monetary policy mix is appropriate and can be adjusted further to support economic growth while rebuilding policy buffers.”

AMRO expects the fiscal stance from this year to 2025 to be “neutral.”

It projects the fiscal deficit settling at 5.7% of GDP this year and 5.6% of GDP in 2025, driven by “robust revenue collection despite higher expenditure.”

“Moving forward, the fiscal balance is expected to gradually decline to 4.2% of GDP by 2028,” it added.

The latest data from the Treasury showed the budget deficit narrowed to P963.9 billion in the January-October period.

The government has set a deficit ceiling of P1.52 trillion this year, equivalent to 5.7% of economic output. It expects to lower the budget gap to 3.7% of GDP by 2028.

RISING DEBT

Meanwhile, AMRO expects the National Government’s (NG) outstanding debt to rise slightly before easing further.

“Public debt is projected to increase slightly from 60.1% of GDP in 2023 to 60.7% in 2024, due to the government’s sustained funding needs and higher debt servicing costs.”

“However, it is expected to gradually decrease to 57.6% of GDP in 2028, on account of improved fiscal positions and robust economic growth.”

The NG’s debt-to-GDP ratio stood at 61.3% at the end of September, still above the 60% threshold deemed by multilateral lenders as manageable for developing economies.

The government seeks to bring the ratio down to 60.6% by the end of 2024, and below 60% by 2028.

“While the need for strategic adjustments in medium-term fiscal policy to support the economy is recognized, fiscal consolidation should be accelerated when conditions allow,” AMRO said.

“The government is likely to continue its medium-term fiscal consolidation plan at a slower pace to better support economic growth. However, it would be prudent to quicken the pace of fiscal consolidation if conditions allow, as restoring fiscal space remains critical to build greater resilience to external shocks amid elevated uncertainty.”

AMRO recommended efforts to expedite revenue mobilization and increase efficiency, as well as long-term fiscal reforms for fiscal sustainability.

“Overall financial stability remains sound; at the same time, a more active use of macroprudential toolkits could be considered to mitigate the financial stability risks,” it said.

“Some signs of vulnerabilities have emerged in certain areas, such as the household and property sectors, which warrant close monitoring. Meanwhile, the authorities should strengthen the institutional framework to safeguard financial stability and deepen the bond and repo markets.”

Source: Business World

Addressing High Inflation in the Philippines – the Role of Policy Mix

The Philippine economy has witnessed a robust performance over the past few years. However, such performance was accompanied by high inflation which became the main issue of concern. Despite some moderation from its peak of 8.7 percent in January 2023, headline inflation was 6.0 percent for the full year of 2023 while core inflation recorded a notable increase from 3.9 percent in 2022 to 6.6 percent in 2023.

What is driving inflation in the Philippines and how can the authorities utilize the “all-of-government” approach to combat inflation?

Key drivers of inflation in the Philippines

In general, inflationary pressures arise from a combination of demand-side (such as strong economic activities) and supply-side factors (such as increases in wages and commodity prices). A 2023 study conducted by the ASEAN+3 Macroeconomic Research Office on the drivers of Philippine consumer price index (CPI) inflation found that Philippine inflation was mainly driven by supply factors in 2022. However, thanks to the positive output gap, demand factors have become the main driver in 2023 (Table 1).

The rise in headline inflation in 2022 was largely driven by external supply factors such as surges in international commodity prices due to global supply chain disruptions and depreciation of the local currency. However, the persistence of high inflation in 2023 was mainly due to domestic demand factors, including a positive output gap thanks to robust growth performance and second-round effects induced by minimum wage hikes and expectations of persistently high inflation. At the same time, local supply shocks, such as typhoons, animal diseases, and other natural disasters, also contributed to the high inflation (Figure 1).

Meanwhile, both demand and supply-side factors continued to influence prices in the Philippines over the past two years, leading to high and persistent core inflation which excludes selected volatile food and energy components.

“All-of-government” policy mix

Having an in-depth understanding of the country’s inflation dynamics and the underlying drivers is vital to the setting of policies for the Philippine economy. In particular, the empirical results support the Philippine authorities’ “all-of-government” approach, which comprises both monetary and non-monetary measures, as it was timely and appropriate to curb with persistently high inflation, which were driven by buoyant demand and supply shocks, in 2022-2023. Aided by a moderation in international commodity prices, monthly headline inflation has declined from its peak of 8.7 percent (year on year) in January 2023 to 2.8 percent in January 2024.

Our findings showed that demand-side factors dominated in driving inflation in mid 2022 through 2023, which implies that the use of demand management policy – tightening stance of monetary and fiscal policy – was warranted. Between May 2022 and end-2023, the Bangko Sentral ng Pilipinas (BSP) tightened monetary policy aggressively by raising the policy rate ten times, from a historic low of 2.0 percent to 6.5 percent, which was deemed timely and appropriate.

As growth is projected to remain strong in 2024, the BSP should maintain a hawkish bias and stand ready to tighten the policy rate further if inflation becomes more persistent than expected. The ongoing fiscal consolidation also complements the tightening monetary policy stance in curbing high inflation.

Meanwhile, the contribution from supply-side factors to the high inflation rates was far from negligible. Most notably, prices of key food items, such as rice, onions, sugar, eggs, and pork, have surged to unprecedented levels due to a shortage of domestic supply. The surge certainly would call for the use of appropriate supply-side (or non-monetary) measures to help ease supply constraints.

In the short term, import restrictions should be relaxed by lowering import tariffs, speeding up the administrative processes required for importation, and  allowing for more imports of food through  market. These relaxations should remain in place subject to developments in domestic supply and prices.

In the medium to long term, the country should promote a stronger agricultural sector and a more resilient domestic food supply chain to reduce fluctuations in food prices and enhance food security. Specifically, it would be beneficial to introduce institutional reforms, such as land consolidation, enhancement of farmers’ access to financing, introduction of modern farming and innovation through the use of technology, and improvement in supply chain.

Amid the battle against high inflation, the government can help ease the pain of those most affected through targeted subsidies to the vulnerable groups. Compared to broad-based subsidies, the existing subsidies targeted for the lower-income groups are more appropriate as such targeted subsidies can help mitigate the adverse impact of inflation on the vulnerable groups without undermining fiscal sustainability.

Thanks to the use of policy mix, the Philippine authorities have taken a balanced approach in their attempts to tackle high inflation in recent years. However, the battle is not over yet as there are likely to be more shocks ahead. Supply side factors will continue to play a part as important determinants of Philippines’ inflation dynamics going forward. The authorities should remain vigilant and continue to address challenges which may arise from heightened uncertainty in the global economy, geopolitical conflicts and climate change.

Source: AMRO

PH likely to hit growth targets but risks cloud outlook – AMRO

Philippine economic growth will likely rebound this year and further accelerate in 2025, the Asean+3 Macroeconomic Research Office (AMRO) said in their report.

"The Philippines will benefit from the upswing in terms of the external demand and also the recovery in tourism," AMRO chief economist Hoe Ee Khor told a briefing.

Gross domestic product growth moderated to 5.6 percent last year, missing the government's 6.0- to 7.0-percent target.

AMRO maintained its 2024 growth forecast at 6.3 percent, saying that a strong recovery in domestic consumption would be one of the key drivers.

For next year, economic growth is expected to pick up to 6.5 percent.

Both projections fall within the government's recently-revised targets of 6.0-7.0 percent for 2024 and 6.5-7.5 percent for the following year.

Within the Association of Southeast Asian Nations, AMRO said the Asean-6 economies of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam would continue to anchor regional growth by expanding 4.9 percent and also contributing an average of 10 percent to global growth.

"These economies are thus poised to account for a larger share of the regional and world economy by the end of the next decade," it said.

A rebound in merchandise exports as well as firm domestic demand are expected to continue driving Asean growth.

"Growth is forecast to be maintained in 2025 as global economic prospects improve and economies converge toward potential growth," it added.

As for the Philippines, AMRO warned that the outlook was clouded by various risks and challenges.

"In the near term, growth prospects are relatively robust, but high inflation is a risk, especially as a result of local supply shocks in the food sector and the impacts of geopolitical conflicts on international energy prices," it noted.

These will put pressure on inflation, dampening domestic demand.

There is also the risk of an economic downturn among key trading partners and fluctuations in global financial markets.

"Looking at the longer term, growth potential will largely hinge on the economic scarring effects of the pandemic, the pace of infrastructure development, and heightened geopolitical tensions between China and the United States," AMRO said.

The country could also suffer from increasing social and economic costs due to global climate change, which requires an "urgent need for a comprehensive strategy to foster resilient, sustainable, and inclusive long-term growth."

As for inflation, AMRO still expects it to fall within target at 3.6 percent this year and 2.9 percent next year.

"I think there's a slight risk this year because of the synchronized upswing in the global economy," Khor said.

Consumer price growth rose to 3.7 percent last month, from 3.4 percent in February, but still fell within the 2.0- to 4.0-percent target of the Bangko Sentral ng Pilipinas.

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Source: Manila Times