The ASEAN+3 Macroeconomic Research Office (AMRO), ASEAN's research and economic forecasting arm, has downgraded its gross domestic product (GDP) growth projection for the Philippines to 5.9 percent for 2023 from its previous 6.2 percent forecast, but still called it a “robust recovery amid high inflation and structural challenges.”

AMRO’s latest growth assessment updated its earlier July 2023 review. The current GDP outlook was based on its Aug. 29 to Sept. 8 Annual Consultation Visit to the Philippines.

AMRO Principal Economist Runchana Pongsaparn said Tuesday, Sept. 12, that while they expect a more moderate 5.9 percent GDP growth for this year, below the government’s six percent to seven percent target for 2023 and largely due to high base effects and weaker external demand, the international organization was more hopeful for 2024 with a higher 6.5 percent growth forecast. 

Pongsaparn said domestic demand should “remain robust supported by continued improvement in labor market conditions, lower inflation, robust overseas remittances, and higher government infrastructure spending.”

Generally, AMRO sees inflationary pressure will continue but will ease in 2024.

AMRO projects the country’s headline inflation to slow down to 5.5 percent in 2023 from 5.8 percent in 2022, and slow further to 3.8 percent next year. “Despite some moderation, inflationary pressure will likely remain elevated as reflected in the high level of core inflation, due to a positive output gap and the second-round effects induced by increases in the minimum wages and expectations of persistently high inflation,” it said.

Meanwhile, on the external front, AMRO also warns of a widening current account deficit but will be partly offset by net capital inflows. However, it noted that the country’s external debt remained low while gross international reserves remained adequate.

It also noted that the Philippine banking sector has remained stable with “improved profitability, ample liquidity, and sufficient capital buffer.”

The fiscal position, on the other hand, is also expected to improve this year due to higher revenue collection on the back of “moderate” spending.

AMRO pointed to several risk and vulnerabilities that would challenge the country’s growth outlook.

“In the short term, the economy could be adversely affected by high inflation, especially due to local supply shocks in the food sector. An economic slowdown in major trading partners and volatility in the global financial market, along with tighter financial conditions, also pose risks. The long-term growth potential is largely affected by the scarring effects of the pandemic, the pace of infrastructure development, geopolitical risks, and the economic losses from natural disasters, which are being exacerbated by climate change,” it said.

As for policy recommendations, which was expected from AMRO’s latest review, it first noted the higher central bank policy rates at 6.25 percent after a year-long tightening bias and a 425 basis points cumulative rate increase. This was primarily to contain rising inflation.

Meanwhile, AMRO said the 2024 budget should continue to reduce the fiscal deficit but the “fiscal stance (will be) assessed to be countercyclical under a positive output gap.”

“At the current juncture, tightened monetary policy and contractionary fiscal stance is an appropriate policy mix amid a positive output gap and persistent inflationary pressure. The ‘all-of-government approach’ against inflation is welcomed as it addresses the supply side problems. Macroprudential tools can be used actively to address potential financial stability issues,” said AMRO.

It added that in the medium to long term, fiscal policy “should balance between restoring fiscal buffer and supporting sustainable growth and development.”

“Fiscal consolidation is supported by strong commitment and well-defined targets and measures, anchored by fiscal rules and discipline. On the financial system side, close coordination between regulators is crucial in identifying, monitoring and mitigating financial stability risks that might arise from non-financial corporates. Meanwhile, the authorities should continue to improve the liquidity management framework, develop the bond and repo markets, and continue to expand financial inclusion, to enhance the system’s resilience to shocks and promote market activities,” said AMRO.

AMRO, after its latest review of the economy, also recommended a comprehensive strategy to boost the country’s medium- to long-term economic growth potential.

“Overcoming the scarring effects of the pandemic mandates a sustained focus on upgrading and upskilling the workforce to embrace a more technology-driven economy. The implementation of policies and measures to attract investments, particularly foreign investments, and promote exports of both goods and services are the underpinnings of long-term economic development. Furthermore, the government can enhance the country’s competitiveness through infrastructure investment, digitalization, and developing a green economy,” it said.

So far, AMRO said the local economy has a growth momentum supported by domestic demand and recovery in the labor market despite weaker external demand. In the second quarter, GDP only grew by 4.7 percent compared to 6.4 percent in the first three months of the year and 7.5 percent a year ago. For the first six months, GDP expanded by 5.3 percent, below the government’s 2023 target of six percent to seven percent.

The AMRO team was led by Pongsaparn. AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor also participated in the policy meetings with Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, BSP Deputy Governor Francisco G. Dakila Jr., and Department of Finance Undersecretary Maria Edita Z. Tan.

The discussions focused on the risks and challenges facing the Philippines, and policy options to sustain the growth momentum, manage elevated inflationary pressures, restore fiscal buffer, and address long-term structural issues, said AMRO.

ASEAN+3 includes Japan, Korea and China. In its assessment and review of the region, AMRO said it contributes to "securing the macroeconomic and financial resilience" as well as stability of its 14-member economies.