Philippines to grow below target in next 2 years – BSP

MANILA, Philippines — The Philippine economy could grow below the government’s target for the next two years as high global oil prices and elevated interest rates dampen domestic demand, the Bangko Sentral ng Pilipinas (BSP) said.

In its latest Monetary Policy Report, the BSP said the economy is projected to operate slightly below potential, which would lead to gross domestic product (GDP) growth falling below the government’s targets of six to seven percent for this year and 6.5 to 7.5 percent for 2025.

“The projected impact of the BSP’s policy rate adjustments is likely to peak in the second half of 2024,” the central bank said. “Higher global crude oil prices and positive real interest rates could also temper domestic demand.”

On the other hand, the growth may pick up in 2025 due to stronger exports amid a better global growth outlook, the BSP said.

Based on the latest data from the Philippine Statistics Authority, the economy expanded by 5.7 percent in the first quarter, slightly faster than the 5.5 percent in the previous quarter but failing to meet the government’s six to seven percent target range.

To tame inflation, the BSP’s Monetary Board tightened borrowing costs by 450 basis points from May 2022 to October 2023. This has brought the key interest rate to 6.50 percent, the highest in 17 years.

BSP Governor Eli Remolona Jr. earlier said the central bank could cut rates by 25 to 50 basis points in the second half of the year, or as early as August, to support economic growth.

“Meanwhile, the latest estimates of the output gap point to the economy operating slightly below potential, thus suggesting possible deflationary pressures going forward,” the BSP said.

Based on estimates from the BSP’s Policy Analysis Model for the Philippines (PAMPh), the output gap may turn slightly negative in 2024 before narrowing in the latter part of 2025.

“Domestic economic activity could ease as the effects of previous policy interest rate adjustments and declining real incomes, along with the possibility of tepid global growth, temper aggregate demand,” the BSP said.

However, continued improvements in the country’s labor market conditions, further investment growth as well as stable infrastructure spending may drive productivity and potential output in the next two years.

The PAMPh is a monetary policy model for a small open economy such as the Philippines. It is a semi-structural gap model that assesses the dynamic path of key macroeconomic variables in a theoretically consistent manner.

The BSP is currently undergoing a multi-year technical assistance mission with the International Monetary Fund’s Institute for Capacity Development to further improve the structural features and forecasting performance of the PAMPh to serve as the BSP’s workhorse model for medium-term forecasting and policy analysis.