The Philippine economy will be Southeast Asia’s growth leader this year on the back of more aggressive government spending, according to the International Monetary Fund (IMF).
Consumption is also expected to stay strong, thanks to cheap fuel, which leaves more cash in people’s pockets that can be used to pay for other items.
At the conclusion of its annual “Article IV” country review, the multilateral lender said the Philippine economy’s strength has led to higher income levels and lower unemployment in the past year.
“Real gross domestic product (GDP) continued to grow briskly and unemployment fell in 2014,” the IMF said in a statement. Last year’s 6.1 percent growth in Philippine GDP was one of the fastest in the region, led by a strong contribution of household consumption, fixed capital formation and net exports.
This year, the IMF expects the Philippine economy to expand by 6.7 percent. This is better than the IMF’s previous forecast of a 6.3-percent growth for 2015.
The multilateral lender said inflation was projected to remain in the lower end of the central bank’s target range of 2 to 4 percent, reflecting lower commodity prices.
Likewise, the current account surplus is expected to strengthen due mainly to lower oil prices and strong inflows from business process outsourcing, tourism and remittances.
Meanwhile, risks were also cited, with the main one being “disruptive asset price shifts in financial markets” due to diverging monetary policies in advanced economies.
External demand, which drives the local exports sector, could also be weaker if risks of deflation and lower potential growth in advanced economies and key emerging markets were to materialize.
To ensure the country stays on its current track, the IMF said the government should focus on structural reforms that lead to higher tax revenues. This would allow the state to raise spending on infrastructure, education, healthcare and other key areas, which would in turn encourage private sector investments.
The IMF said the Philippines should pursue a comprehensive overhaul of its tax regime to plug holes and make the system more equitable. This includes the rationalization of fiscal incentives to ensure tax perks are not used to prevent the entry of new players.
“Continued efforts at enhancing revenue mobilization will be critical to address the large spending needs, including enacting measures to offset any revenue eroding policy change and preferably through a comprehensive tax reform,” IMF said.