Philippines can withstand external shocks – IMF

MANILA, Philippines – The International Monetary Fund (IMF) believes the Philippines would be able to survive external shocks brought about by the slackening global economy on the back of monetary and fiscal reforms being undertaken by the government.

The IMF executive board has concluded its annual Article IV consultation with the Philippines for 2015 last Aug. 26 and noted the prudent macroeconomic management of Philippine authorities has delivered strong outcome and has set the stage for favorable growth prospects despite external headwinds.

“Looking ahead, directors encouraged continued vigilance in managing risks, and supported the authorities’ focus on infrastructure investment, structural reforms, and on improving living conditions and achieving more inclusive growth,” the IMF said in a statement.

The agency cited the medium term fiscal deficit target of two percent of gross domestic product (GDP) on the back of higher infrastructure investment and social spending.

According to the IMF, the planned increase in public expenditure in 2015 is appropriate from both cyclical and development perspectives, given the current low inflation, large infrastructure and social needs, and low and declining public debt.

Likewise, the IMF believes the current monetary policy stance set by the Bangko Sentral ng Pilipinas (BSP) is appropriate in view of the low inflation, moderating and more balanced credit growth, and moderating but still robust economic activity.

It added that monetary authorities should remain vigilant particularly if inflation or credit growth were to accelerate with signs of potential overheating.

Inflation eased to a new record low of 0.6 percent in August from 0.8 percent in July on the back of stable food prices as well as cheaper power brought about by the continued decline in oil prices.

Based on BSP’s latest projection, inflation is set to average 1.9 percent, slightly below the central bank target of between two and four percent this year. The IMF sees inflation averaging 2.1 percent this year.

“Lower fuel prices, partly offset by somewhat higher food prices due to assumed moderate El Niño conditions, should help keep inflation in the bottom half of the BSP’s target band,” it said.

The IMF is also supporting the BSP’s plan to implement an interest rate corridor to improve monetary policy transmission as well as the passage of the central bank charter that would authorize the issuance of central bank bills and increase minimum capital.

BSP Deputy Governor Diwa Guinigundo earlier said the central bank is set to adopt the interest rate corridor next year.

The lending agency emphasized the continued exchange rate flexibility wherein the BSP limits its participation in the market to smoothen excessive volatility amid the continued weakening of regional currencies against the dollar.

The IMF took note of the use of targeted prudential policies to limit financial excesses and strengthen resilience and at the same time noted that more stringent prudential regulations may be needed should any systemic risks become apparent.

The IMF in its July World Economic Outlook (WEO) revised downwards the GDP growth for the Philippines to 6.2 percent instead of 6.7 percent this year.

“The outlook for the Philippine economy remains favorable despite uneven and generally weaker global growth prospects. Real GDP is projected to grow by 6.2 percent in 2015, as lower commodity prices lift household consumption and improved budget execution raises public spending,” it said.