The International Monetary Fund (IMF) is expecting the Philippine economy to remain strong at 6.75 percent this year and easing to about 6 percent in 2014.
In its latest assessment, IMF noted that brisk economic activity continued into 2013, underpinned by dynamic private and public demand.
After growing 6.8 percent in 2012, the economy accelerated further in the first half of 2013 to 7.6 percent on robust consumption and investment, while external demand was subdued.
“As in other emerging markets following the announcement of prospective tapering of asset purchases by the U.S. Federal Reserve in late May, Philippine assets saw selling pressure that caused the peso to weaken and market interest rates to rise,” said IMF.
“Recent delay in the commencement of tapering led to some reversal of previous market developments. When tapering does eventually begin, the Philippines’ strong fundamentals—including strong current account receipts, its net creditor status, steady reductions in public debt, and low foreign participation in government securities markets—position the economy to adjust smoothly to the accompanying capital flow reversal and slow down in regional growth.”
“Liquidity released through the more restricted access to the Bangko Sentral ng Pilipinas’(BSP) special deposit account (SDA) will also provide some cushion to growth.”
IMF also noted that recent peso depreciation and sustained demand pressures are expected to raise inflation gradually from below the target band to the middle of the band.
“The current account—and the overall balance of payments—are expected to remain in small surplus, supported by remittances and receipts from business process outsourcing.”
“The fiscal deficit will come in within the 2 percent of GDP budget target in 2013, despite a 10 percent real increase in primary spending in the first half of the year that was offset by higher revenue collections,” said IMF.
“Risks to growth continue to lie more on the upside. Absorbing the ample liquidity into productive sectors may prove challenging. Part of the liquidity could finance credit that is used to fuel demand for real estate, potentially with a strong procyclical effect on the economy but with some attendant financial stability risks.”
IMF said the BSP’s generally proactive approach to oversight of the banking sector particularly expanding the coverage of banks’ real estate exposure is welcome.
“Rapid growth of nonbank financial intermediation also calls for the Financial Sector Forum (FSF) to continue to fill data and regulatory oversight gaps.”
IMF has recommended amending the BSP’s charter to enhance its financial stability mandate and allow the issuance of its own securities.
“Looking ahead, benefitting from the opportunities of deeper integration within the Association of Southeast Asian Nations (ASEAN) requires significant, broad-based improvements to the investment climate,” said IMF.
“To build on the good progress on macroeconomic outcomes and public financial management, further efforts are needed to enhance revenues through tax administration reforms and parallel efforts to broaden the tax base, particularly the rationalization of tax incentives. This would help level the playing field, and finance regional connectivity and infrastructure.”
IMF stressed that allowing more foreign ownership in economic sectors, executing public private partnerships in a timely and transparent manner, and removing regulatory bottlenecks would promote foreign direct investment, expand competition, and catalyze private investment in productive sectors.