Despite the "heavy lifting" that the Bangko Sentral ng Pilipinas (BSP) is undertaking by slashing interest rates to support economic growth, lingering structural challenges in the economy like the lack of infrastructure and prevalent corruption continue to dampen near-term Philippine prospects, according to two think tanks.
"We believe that the government's fiscal consolidation plan and infrastructure project delays (slow right-of-way acquisitions, procurement delays, etc.) would hinder the Philippines from achieving its growth targets in the next few years," Deutsche Bank economist Junjie Huang said in a Sept. 28 report.
Deutsche Bank Research forecasted the Philippines' gross domestic product (GDP) to grow by 5.8 percent this year, below the government's six- to seven-percent goal.
It projected GDP growth to slow to 5.6 percent next year, also below the targeted 6.5- to 7.5-percent for 2025, before rising to six percent in 2026, although still beneath the more ambitious 6.5- to eight-percent target.
"The government could eventually have to decide on a trade-off between slowing its fiscal consolidation plan further so that it can push for more infrastructure spending to boost growth, or vice versa. While ongoing reforms to enable easier inflows of foreign funds could lessen the fiscal burden, these are still in deliberation with no concrete approval timeline we could sense, albeit with some policymakers penciling-in an approval by year-end," said Huang, who visited the Philippines in September.
Huang was referring to the Marcos Jr. administration's plan to narrow the yawning budget deficit, which had been inflated by pandemic-induced borrowings and expenditures to fight the socioeconomic crises inflicted by Covid-19.
While medium-term public infrastructure disbursements had been programmed to increase yearly in nominal terms, infra spending as a percentage of GDP will be mostly flat — at 5.6 percent this year, 5.4 percent both in 2025 and 2026, 5.6 percent in 2027, and 5.8 percent in 2028.
The fiscal deficit, meanwhile, shall be reduced from 6.2 percent of GDP last year to 5.6 percent in 2024, 5.3 percent in 2025, 4.7 percent in 2026, 4.1 percent in 2027, and 3.7 percent in 2028 when President Ferdinand Marcos Jr. steps down from office.
Deutsche Bank's estimates showed the budget deficit narrowing to 5.4 percent of GDP this year and 5.3 percent next year.
As for the think tank Capital Economics, the Philippines' young population is a boon to sustained economic expansion despite persisting challenges that have been a bane to realizing the country's full potential.
"The Philippines has entered a demographic sweet spot that could provide a big boost to economic growth. But this will only happen if enough new jobs can be created for the wave of young people that will enter the workforce over the coming decade," Capital Economics deputy chief emerging markets economist Shilan Shah, senior Asia economist Gareth Leather and China economist Leah Fahy said in an Oct. 1 report.
"The key to achieving this will be to nurture a competitive manufacturing sector. Unfortunately there is little sign of this happening — manufacturing has been falling as a share of GDP" in the country, Capital Economics lamented.
"And recent [administrations] have made no progress on lifting the constraints which have held back manufacturing. In particular, corruption is still rife, political instability is a headwind and infrastructure remains among the worst in the region," Capital Economics added.
For Deutsche Bank Research, it helps that the BSP is expected to "embark on faster and deeper rate cuts" of 150 basis points (bps) during the current easing cycle that started in August, citing that "monetary policy does the heavy lifting to expedite the closing of Philippines' negative output gap."
"The larger cuts are motivated by the BSP's assessment of the negative output gap only closing by the second half of 2026, coupled with downside risks to inflation. In terms of timing, we expect the central bank to ease by 25 bps each for the next five consecutive meetings from October to mid-2025 (in effect, two more cuts in 2024 and three more by mid-2025)," Huang said.
Still, Huang said that "we would not discount the case where the BSP cuts by 50 bps or more in one meeting, but that would likely depend on prevailing market conditions at the time, key among them being FX [foreign exchange] volatility post the Fed's easing and the upcoming US elections."
"Our assumption that the government follows through with its fiscal consolidation plan implies that public demand-driven growth is likely to fade, with monetary policy having to do more to pick up the slack," Huang added, citing the BSP's reduction in banks' reserve requirement ratio (RRR) taking effect this month.
Deutsche Bank lowered its inflation projections for the Philippines to 3.5 percent this year (from 3.6 percent previously) and 3 percent next year (from 3.5 percent) "as food inflation falls off from lower tariffs coupled with high-base effects from both food and transport prices next year."
"The BSP estimates that the lower rice tariffs should shave 0.2 percentage point (ppt) off 2024 headline inflation and have a bigger -0.5 ppt impact in 2025. The central bank reiterated that current inflation dynamics were purely supply-driven and should be tackled with broader government policies alongside monetary policy," Huang noted.
Huang shared that during his visit to the country last month, "rice inflation still dominated our conversations with local investors, with the impact being felt across the population, especially the lower- and middle-income."