By Lee Chipongian, July 26 2018; Manila Bulletin
Image Credit to International Monetary Fund
The International Monetary Fund (IMF) expects a 6.7-percent growth for the Philippine economy this year and in 2019 on a generally favorable mid-term outlook. But it cautioned against risks of rising inflation and uncertain global environment.
IMF Mission Head Luis E. Breuer, in concluding the latest Article IV assessment of the Philippines, said the 2019 growth is slightly lower than previously estimated but the adjustment only comes from the impact of external factors such as rising US interest rates and global trade tensions. “Growth for next year is probably unchanged and the adjustment is minor – a margin of error – and reflects what’s happening outside of the Philippines (such as) higher interest rates in the US that is draining liquidity from other countries including emerging markets, and the uncertainty associated with trade tensions,” said Breuer.
The current government’s strong consumption and investment, however, will ensure growth momentum of seven percent over the medium term, he added, but the government has to “strike the right balance between growth and macroeconomic stability” and adopted policies should be “adjusted to reduce inflationary pressures, while structural reforms should continue to support inclusive growth.”
The IMF official said they support the Bangko Sentral ng Pilipinas (BSP) in efforts to manage inflation and based on their assessment, inflation rate could have already peaked in June at 5.2 percent or July which will be announced on August 7.
Breuer, however, called for the delay in the BSP’s move of reducing banks’ reserve requirement ratio (RRR) from the current 18 percent, at least not cut the ratio further while inflation is moving up.
Breuer said they understand what the BSP wants to do given that the country’s RRR is one of the highest in the region. “The question is when to do it and by how much,” said Breuer. The BSP has slashed RRR twice this year by two percentage points.
Breuer said there was no significant monetary impact of the cut since the BSP has offsetting facilities, however, the reduction in RRR in the midst of rising inflation have led to “communication challenges” with regards to the BSP’s monetary policy stance.
“We support BSP on what has been done already but (they should) pause RRR reduction until inflation is on the downward path,” said Breuer.
For this year, Breuer said they estimate inflation to average at 4.8 percent and 3.8 percent in 2019. Both are higher estimates compared to the BSP’s 4.5 percent (as of June 20 forecasts) for 2018 and 3.3 percent next year.
To manage inflation outlook, the IMF said this would require “further tightening monetary policy to anchor inflation expectations, conditional on domestic and external developments.” They also think BSP’s 50 basis points’ rate hike so far were appropriate and that the central bank’s “readiness to take further action to safeguard price stability and continued progress in modernizing monetary operations and reforming the capital markets” is likewise strongly supported.
“The BSP has been very clear and we support the BSP’s position. They are facing the inflation challenge very seriously and will take measures to address that so that the inflation outcome will gradually go back to what the official range is for next year (of two-four percent),” said Breuer.