THE Philippine economy could miss its growth targets this year due to its weak performance in the second quarter, the global slowdown and high oil prices, according to the Bangko Sentral ng Pilipinas (BSP).
Another major consideration is the impact of the monetary tightening of the BSP. In August, however, the Monetary Board made a “hawkish pause” with key policy rates being kept at 6.25 percent. (Full story here: https://businessmirror.com.ph/2023/08/17/bsp-keeps-rates-after-q2-growth-slowdown/)
BSP said the peak of the impact of the 425-basis-point increase in policy rates will be felt next year. The BSP started raising interest rates in May 2022 and has been the most aggressive in the region in terms of monetary policy tightening. (https://businessmirror.com.ph/2022/09/15/bsp-most-aggressive-in-hiking-policy-rates/)
“The growth forecasts indicate continued economic expansion, albeit at a slower pace, with projected impact of the BSP’s policy rate adjustments peaking in 2024,” BSP said in its Monetary Policy Report (MPR).
World GDP, based on International Monetary Fund (IMF) projections, could average 3 percent in 2023 and 2024 and 3.2 percent in 2025. In its May MPR, BSP said growth could average 2.8 percent in 2023 and 3 percent in 2024.
Oil prices are expected to trade higher at $81.9 per barrel in 2023 from the initial estimate of $77.2 per barrel. Dubai crude prices could also trade at $82.3 per barrel in 2024 and $78 per barrel in 2025.
The BSP also noted “waning pent-up demand” that could contribute to the slowdown in the growth of the Philippine economy this year.
Below DBCC target
With this, the BSP expects full-year GDP growth to be below 6 percent this year and next year. The Development Budget Coordinating Committee (DBCC) target is to post a 6-7 percent GDP growth rate for 2023 and 6.5-8 percent for 2024.
“The full-year growth forecasts for 2023 and 2024 were adjusted downward from the previous MPR to reflect slower-than-expected Q2 2023 GDP growth outturn of 4.3 percent, benign global economic conditions, and higher global crude oil prices,” BSP also said in the MPR.
The report noted that the BSP’s latest estimates from its Policy Analysis Model for the Philippines (PAMPh) continue to indicate a “broadly neutral output gap” which is the difference between actual and potential output for 2023.
However, the report stated that based on the results of the PAMPh model, the output gap will fall to slightly negative territory in 2024 and 2025.
BSP noted that the PAMPh is a monetary policy model for a small open economy like the Philippines. It is a semi-structural gap model based on New Keynesian foundations.
“The projected gradual decline in the output gap reflects the impact of BSP policy interest rate adjustments on consumption and investment, projected slowdown in global growth owing in part to tightening monetary conditions across major economies, and a decline in real income in the domestic front owing to high inflation and fiscal consolidation,” BSP said.
However, BSP noted that the output gap could be supported by the projected increase in remittances amid a peso depreciation.
BSP Governor Eli M. Remolona Jr. earlier said cash remittances could “rise further” next year from this year’s projected total amount of $33.5 billion. (Full story here: https://businessmirror.com.ph/2023/08/16/remittances-of-overseas-filipinos-seen-to-breach-33-5b-in-24/)
The MRP also said the country’s potential output points to the economy’s ability to sustain its recovery given the increase in economic activity after Covid-19 was declared as no longer a health emergency.
This reopening of the economy has, BSP said, led to improvements in labor market conditions and continued investment growth.