The International Monetary Fund (IMF) expects the country’s gross domestic product (GDP) will grow by five percent this year and six percent in 2024 following the central bank’s monetary policy tightening to temper high inflation.
IMF Resident Representative to the Philippines, Ragnar Gudmundsson, said in an email that they did not change the 2023 GDP projection – first announced last Sept. 26, 2022 -- due to lingering global challenges to both growth and inflation.
Meanwhile, he pegged next year’s growth at six percent against an earlier announcement of about 6.3 percent but this was a medium-term economic growth forecast and not specific to 2024.
The IMF growth projections are lower compared to the Marcos government’s six to seven percent target for 2023, and 6.5 percent to eight percent for 2024 until 2028.
The IMF released its January 2023 World Economic Outlook (WEO) update on Tuesday, Jan. 31, and highlighted a peaking global inflation while maintaining a low growth outlook.
Gudmundsson in an email to Manila Bulletin said: “The Philippine economy is on the mend after a deep economic downturn, and at 7.6 percent, 2022 GDP growth was impressive, reflecting solid growth momentum and pent-up demand. (But) our projections, which pre-date the release of the Q4 (fourth quarter) 2022 GDP estimates, point to growth slowing down to 5 percent in 2023 due to a tighter policy stance and the confluence of global shocks, including spillovers from the war in Ukraine and tighter global financial conditions.”
However, Gudmundsson said that the five percent growth projection is still higher than the 4.3 percent growth forecast for ASEAN-5 as per the latest WEO.
“Growth is also projected to rebound to 6 percent in 2024 as the global economy bottoms out and the Philippines accelerates structural reforms, including infrastructure and agricultural development. Potential growth could be boosted by further efforts to raise productivity, reduce infrastructure and education gaps, strengthening existing social protection schemes, and harnessing benefits from the digital economy,” he said.
As for the IMF’s inflation projection for 2023, Gudmundsson said they expect it at 4.7 percent, a modest decline from 5.8 percent average in 2022. The forecast is above the government target of two percent to four percent.
“We project inflation to decline modestly to 4.7 percent in 2023, supported by some moderation in commodity prices and the tighter monetary policy stance, and to converge to the mid-point of the BSP’s target band in 2024,” he said.
The IMF official also noted that more Bangko Sentral ng Pilipinas (BSP) interest rate tightening may be in order this year.
“In the near-term, continued tightening of monetary policy is appropriate to keep inflation expectations anchored and reduce headline inflation securely within the 2-4 percent range,” he said.
As forward guidance, BSP Governor Felipe M. Medalla has already communicated to the market their plan to increase the benchmark rate on Feb. 16 and on March 23. The BSP key rate is currently at 5.5 percent. The central bank is expected to bring the policy rate to six percent or as much as 6.25 percent by the end of the first quarter.
Since September last year and again in December, the IMF has been saying that they support BSP’s prompt action to control inflation such as raising the overnight lending rate by a combined 350 basis points (bps) in 2022.
With an accommodative policy stance, the IMF said the BSP should bring the policy rate close to the neutral real rate “to securely bring inflation within the target range.”
“In the case of the Philippines, we estimate that the neutral real rate, which is the net of inflation interest rate where monetary policy is neither contractionary nor expansionary, stands between 1 and 2 percent,” according to Gudmundsson.
Based on the latest WEO report, the IMF expects global growth of 2.9 percent this year from an estimated 3.4 percent in 2022. For 2024, the forecast growth is 3.1 percent.
The 2.9 percent global growth projection is higher compared to the October WEO forecast of 2.7 percent growth for 2023. It is however still below the historical average of 3.8 percent, said the IMF.
Meanwhile, growth in the ASEAN-5 countries – the Philippines, Indonesia, Malaysia, Singapore and Thailand -- is projected to slow to 4.3 percent in 2023 but will improve to 4.7 percent in 2024. The emerging 2022 growth for the trade bloc is 5.2 percent.
“The rise in central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity (while) the rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery,” said the IMF.
The IMF forecasts global inflation to improve this year at 6.6 percent versus 8.8 percent in 2022. By next year, global inflation is seen to further drop to 4.3 percent but still above the pre-pandemic average of 3.5 percent.