Financial think tank ASEAN+3 Macroeconomic Research Office (AMRO) predicted the Philippine economy would grow by 6.1% in 2024 and 6.3% in 2025, driven by higher government spending, an upturn in external demand and a strengthening domestic market.
AMRO's Annual Consultation Visit to the Philippines from August 27 to September 6, 2024, noted that the local economy continued to grow at 6.0% in the first half of 2024, driven by strong domestic demand and export recovery.
"The labor market remained strong, which helped boost domestic consumption. Inflation continued declining from 2023, reflecting a moderation in international commodity prices, the government's inflation-containing measures, and tight monetary policy. The current policy mix is appropriate but can be adjusted further to support economic growth while rebuilding policy buffers," AMRO said.
Principal Economist Runchana Pongsaparn led the AMRO team. AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor participated in the policy meetings. They also met with Department of Finance Undersecretary Joven Z. Balbosa and Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila, Jr.
The discussions focused on the risks and challenges facing the Philippines and policy options to sustain growth momentum, anchor inflation expectations, restore the fiscal buffer, and address long-term structural issues.
Economic developments and outlook
"Private consumption is anticipated to grow faster for 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, we expect private investment sentiments to improve," Dr. Pongsaparn said.
Headline Consumer Price Index (CPI) inflation is projected to decline to 3.3% in 2024 from 6.0% in 2023 and increase to 3.1% in 2025. While upside risks such as wage increases and local food supply shocks remain, the slowdown of headline inflation is expected to continue in the second half of 2024 due to lower international fuel and food prices and tariff cuts on imported rice.
On the external front, current account deficits narrowed, and net direct investment inflows increased while external debt remained low. The banking system has stayed resilient, with ample liquidity, robust profitability, and high capital buffers.
The fiscal position has continued to improve in 2024, supported by a significant increase in revenue despite higher fiscal expenditure.
Risk and vulnerabilities
In the near term, the Philippines' growth prospects could be subject to several risks. Higher inflation, especially from food prices, could dampen consumption. At the same time, a potentially sharp slowdown in major trading partners, such as the U.S., Euro Area, and China, could challenge the economy.
Heightened geopolitical risks could increase the likelihood of global supply disruptions and further global economic fragmentation.
The country's long-term potential growth could be constrained by insufficient infrastructure investment, vulnerabilities to climate change, and the prolonged scarring effects caused by the COVID-19 pandemic.
Policy recommendations
The current fiscal-monetary policy mix is appropriate. As inflation continued to ease but remained elevated, the Monetary Board maintained the policy rate at 6.50% in the first half of 2024. It delivered the first rate cut only in August, indicating that inflation will continue to ease within the target band.
If current macroeconomic trends continue, there is room to adopt a less restrictive monetary policy stance. However, if supply-side risks emerge, the whole-of-government approach should be used to address inflationary pressures.
The fiscal stance in 2024 and 2025 is expected to be neutral, with a continued improvement in the budgetary deficit. The government will likely continue its medium-term fiscal consolidation plan at a slower pace to better support economic growth. However, it will be prudent to accelerate the pace of budgetary consolidation if conditions allow.
In the medium term, restoring fiscal space remains critical to building greater resilience to external shocks amid elevated uncertainty. Regarding the financial system, the authorities should consider a more active use of macroprudential toolkits, strengthen the institutional framework to safeguard financial stability and deepen the bond and repo markets.
Regarding structural issues, the government should implement measures to upskill and reskill labor to increase labor productivity. More efforts should be made to attract foreign direct investments and to encourage technology transfer. Furthermore, a comprehensive strategy for enhancing the country's competitiveness, including raising infrastructure investment, continuing digitalization and developing a sustainable economy, is crucial to bolster the Philippines' economic growth potential.
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