The International Monetary Fund has revised upwards its growth projections for the Philippines this year and next year due to strong domestic output in the first half of 2016 brought largely by robust expansion in consumption and investments.
In a statement issued after the conclusion of the lender’s Article IV consultation with the Philippines, IMF hiked to 6.4 percent its 2016 growth projection for the country while the 2017 figure was upped to 6.7 percent.
These were previously at six percent for 2016 and 6.2 percent for next year.
The lender said its outlook on the economy “remains favorable despite external headwinds.”
In the first half this year, the domestic economy grew, as measured by gross domestic product (GDP), by 6.9 percent, driven by strong investment and consumption, which countered the weak demand from its trading partners.
Inflation remained benign, with the average in the first eight months this year at 1.5 percent, below the government’s two to four percent target for 2015-18, due mainly to lower oil and food prices.
IMF also noted the drop in unemployment rate to 6.3 percent of GDP in 2015 and to six percent in the first of this year.
It said the country’s external position remained robust last year, resulting in a current account surplus equivalent to about 2.9 percent of GDP and foreign exchange reserves hitting USD 80.67 billion, which has a cover of 10.3 months’ worth of imports of goods and payments of services and income.
”Risks to the outlook are titled to the downside,” it said, citing its expectations for the current government to be able to respond to challenges “with suitable policies” because of the country’s strong fundamentals and amply policy space.
The lender lauded the government for sustaining the strong macroeconomic management but noted that “favorable macroeconomic performance had not led to corresponding improvements in poverty reduction, inequality, and unemployment.”
It said the Duterte administration “has an opportunity to put the economy on a higher and more equitable growth path.”
”Directors encouraged efforts to increase investments in infrastructure and human capital, improve target of social spending, enhance competitiveness and foreign direct investment, and making the financial system deeper and more inclusive,” it said.
The current government’s plan to increase the government deficit target to three percent of domestic output starting in 2017 compared to the two percent in the past administration got the support of the IMF, which cited that this will hinge on the stable public debt to GDP ratio.
IMF said the higher deficit will fund additional infrastructure and social spending and is not seen to erode fiscal stability.
”Directors highlighted the need for additional revenue to finance further infrastructure and social spending and welcomed authorities’ plans to implement a comprehensive tax reform that would be revenue positive, more equitable, and efficient,” it said.
The lender also called on the government to establish a medium-term public infrastructure plan “with clear project prioritization and appropriate choices between budget and PPP (public-private partnership) spending, with due consideration of contingent liabilities.”
A well-targeted infrastructure and social spending is needed along with opening of the economy to more foreign investments, it said.
In terms of monetary policy, the IMF is of the view that the Bangko Sentral ng Pilipinas’ (BSP) stance is still appropriate on back of the low inflation environment and near zero output gap.
It, on the other hand, raised the need for “continued vigilance, particularly in light of the fiscal stimulus.”
It also encourage domestic monetary officials “to stand ready to take measures” if credit growth shows signs of overheating.
Implementation of the Interest Rate Corridor (IRC) since last June was cited along with its goal of improving monetary policy transmission and development of domestic capital markets.
The IMF said legislative measures that would give the central bank authority to issue bills and increase its capitalization were encouraged.
”Directors also welcomed the focus on financial deepening and inclusion as essential elements of the authorities’ inclusive growth strategy. They emphasized the importance of strengthening the AML (anti-money laundering) framework, including to make tax evasion a predicate crime,” it added.