After the global financial crisis, economic growth of the Philippines has increased. However, renewed shocks to global growth and financial markets would affect Philippine exports and remittances. The Bangko Sentral ng Pilipinas (BSP) appropriately has started to unwind its liquidity support measures since early 2010. Traditional toolkits are available for managing external inflows. The planned gradual withdrawal of fiscal stimulus and the focus on medium-term consolidation are welcomed. Public–private partnership programs can play an important role, and a medium-term Philippine development plan could also be prepared.
The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.
Economic activity remains robust. GDP growth in 2010 was 7.3 percent (year/year), compared with a staff forecast of 7 percent. Growth rose to 7.1 percent in the 4th quarter, from 6.3 percent in the 3rd quarter, mainly driven by private domestic demand. Private consumption was fueled by strong remittances and fixed investment by high business confidence. Public consumption moderated, reflecting the government’s efforts to keep the fiscal deficit within budget targets.
The balance of payments has remained strong. Export growth rose significantly to over 25 percent (year/year) in December, portfolio inflows moderated from their spike in November but remained high, and sovereign bond issuance proceeds and foreign investment income increased. International reserves rose to $62.4 billion in December and $63.6 billion in January (equivalent to 10½ months of imports and 11 times and 5½ times short-term external debt based on original and residual maturity, respectively). The exchange rate has remained roughly unchanged against the U.S. dollar since December. Broad money growth picked up to 10.6 percent in December from 7.5 percent in November.
Inflation rose in January. The authorities view the inflation picture as manageable but signaled a readiness to act in response to inflation risks. CPI inflation rose to 3.5 percent (year/year) and 0.8 percent (month/month) in January from 3 percent and 0.5 percent, respectively, in December. The increase was driven mainly by food and energy prices. Food prices were affected by domestic weather disruptions and energy prices by higher global prices and domestic distribution costs. Core inflation slowed slightly on a year/year basis, owing to base effects, but on a sequential basis it rose to 0.4 percent (month/month) in January from 0.3 percent in December. At its February 10 meeting, the Monetary Board left policy rates unchanged but observed that the balance of risks to the inflation outlook has tilted further to the upside. Risks were seen as arising from food and oil prices, electricity rates, and demand-side price pressures as output continues to expand faster than its historical trend. The board signaled its readiness to take action to arrest a potential buildup in inflation expectations and contain second-round effects of supply shocks.