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IMF says PH economy strong but needs tough measures vs inflation

Bangko Sentral urged to further tighten monetary policy
By: - Reporter / @daxinq
/ 05:30 AM July 26, 2018

The Philippine economy is expected to continue growing strongly this year and over the medium term, but faces rising near-term risks especially from rising domestic prices and uncertainties in the external environment, the International Monetary Fund warned yesterday.

To address this, the 189-nation multilateral agency urged the Bangko Sentral ng Pilipinas to take decisive action against inflation which, at 5.2 percent in June, was the fastest pace of price increases in at least five years—and was expected to peak by the fourth quarter.

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In his statement, IMF mission chief Luis Breuer said that supporting growth while safeguarding macroeconomic stability “would require further tightening of monetary policy to anchor inflation expectations, conditional on domestic and external developments.”

“The BSP’s recent decisions to increase the policy rate twice were appropriate,” he said after the agency’s annual assessment of the Philippine economy. “The team welcomes the BSP’s announced readiness to take further action to safeguard price stability and continued progress in modernizing monetary operations and reforming the capital markets.”

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The agency said inflation was caused by rising international oil prices, external pressures on the peso, one-off effects of higher excise taxes and domestic demand pressures.

The central bank raised interest rates by 25 basis points twice in May and June and BSP Governor Nestor Espenillla Jr. said the policymakers were poised to undertake another “strong” response to the stubbornly high inflation rate when the Monetary Board convenes on Aug. 9.

Despite these risks, the IMF said it expected the Philippine economy to expand 6.7 percent in 2018 and 2019, while the medium-term outlook remains “favorable.”

“The Philippine economy is performing well,” it said. “Real gross domestic product grew 6.7 percent in 2017 and the team projects that this rate would be sustained in 2018 and 2019, underpinned by strong consumption and investment, including public investment.”

“Downside risks stem mainly from rising inflation, continued rapid credit growth, higher US interest rates and US dollar, volatile capital flows and trade tensions,” it added.

The IMF predicted that the country’s current account deficit will rise to 1.5 percent of GDP by yearend, reflecting increased imports of capital goods and raw materials.

“Foreign direct investments, which reached a record level of $10 billion in 2017, are expected to moderate somewhat this year,” it said, adding that the peso—which has depreciated by about 7 percent against the US dollar since the beginning of 2018—and gross international reserves, at $77.7 billion as of the end of June, “remain more than adequate.”

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It said that maintaining a broadly unchanged fiscal deficit in 2018 and 2019—at around 2.4 percent of GDP—would support efforts to contain inflationary pressures.

“Rising tax revenues, including those from the tax reform, and the reallocation of spending from nonpriority programs can support expanding public investment at a pace that protects stability while sustaining strong growth,” it said.

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TAGS: Bangko Sentral ng Pilipinas, Inflation, International Monetary Fund, Luis Breuer, Philippine economy
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