Fragile global economic recovery and foreseen weather disturbances in the remainder of the year remain the top challenges to domestic economic growth this year, a Bangko Sentral ng Pilipinas (BSP) report said.
In a recently published quarterly report on local economic and financial developments, the Central Bank said that while the country’s progress toward a high-trajectory growth appears to be on track, several external and domestic developments pose potential risks and challenges to the economic outlook.
The Central Bank particularly cited the uncertain global growth path and protectionist policies of some advanced economies as major threats to the local growth story.
“The global economic recovery in the near-term remains fragile, with elevated policy uncertainty, including the Brexit process and inward-looking agenda in some advanced economies,” the BSP said in a report.
“A possible shift toward protectionist policies could be disruptive to trade and financial flows, as well as migration. These policies could have important implications for Philippine remittances, offshoring or outsourcing industry, and trade,” it added.
The International Monetary Fund (IMF) expects global economic growth to accelerate from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. This projected pickup in global growth is said to come from stronger activity in emerging-market economies.
Forex pressures
The BSP also said the continued normalization in US interest rates could influence investment strategies and lead to portfolio rebalancing, resulting in capital outflows from emerging economies, such as the Philippines, and exchange-rate pressures.
In the last week of June, when favorable sentiment hounded Asian markets due to the US Federal Reserve’s openness to raise interest rates further, the local currency began to slump back to the 50-to-a-dollar territory, hitting fresh 11-year-lows weekly.
Aside from developments in the US, closer to home, Asian economic powerhouse China is also seen to pose risks to the local economy’s growth.
“The rebalancing of growth sources in China has continued but vulnerabilities in the financial system remain due to the rapid expansion of its credit. Adverse developments in China have the potential to generate negative spillovers for the Philippines, given the increasing bilateral relations between the two economies in recent years,” the BSP said.
While most threats to local economic growth remain outside the country’s borders, the BSP said in the domestic sphere, the impact of severe weather disturbances remains as one of the key challenges to the economy.
The absence of severe weather disturbances allowed the agriculture, hunting, forestry and fishing (AHFF) sector to contribute 0.4 percentage point to the 6.4-percent GDP growth in the first three months of the year. Notably, this is the highest contribution made by the AHFF sector in the past eight consecutive quarters, or since the first quarter of 2015.
Defensive moves
Meanwhile, per its assessment, the BSP said local institutions have enough room to maneuver policies to lessen the impact of these potential threats to the local economy.
“Amid the uncertainties engulfing the global environment, the government remains focused on strengthening anchors and building defenses to protect the economy from negative surprises and buoy its sustainable growth momentum,” the Central Bank said in its report.
The BSP stressed that there is enough “elbow room” for fiscal authorities to further boost public spending.
“The narrowing debt-to-GDP ratio affords the government to increase the fiscal deficit-to-GDP ratio target to 3 percent for 2017 to 2022. The national government is keen on implementing its tax-reform agenda by pushing for the passage of the Tax Reform for Acceleration and Inclusion Act,” the BSP said.
“This allows greater flexibility to accelerate infrastructure spending and investments in human capital, and pursue much needed structural reform agenda, steering a stronger and more inclusive Philippine economy.”
Additionally, the BSP said there is enough space on its end to adjust or to leave policy settings unchanged, as what the global and local developments would necessitate.
“There is enough legroom for monetary policy to support economic activity while ensuring price stability. Future monetary-policy decisions will remain data-dependent.
The BSP continues to be vigilant against any risks to the inflation outlook and will adjust policy settings as needed to ensure future inflation remains consistent with the target, while being supportive of sustainable growth,” the BSP said in the report.
The BSP will be having its next monetary-policy setting meeting on August 10. This would be the first Monetary Board meeting of BSP Governor Nestor A. Espenilla Jr. as central bank chief.