Outlook for Asia and the Philippines: Unabated recovery amid uncertainty
THIS LOOKS to be a challenging year for the global economy, with global growth decelerating owing to monetary tightening and Russia’s war in Ukraine continuing to weigh on activity. Persistent inflation pressures, and now financial sector problems in the US and Europe, are injecting additional uncertainty into an already complex economic landscape.
Against this somber backdrop, the Asia-Pacific remains a dynamic region. Despite weakening external demand — such as the downturn in demand for tech exports towards the end of 2022 — and monetary tightening, domestic demand has so far remained strong, with China’s reopening providing fresh impetus. Growth in Asia and the Pacific is projected to increase this year to 4.6%, up from 3.8% in 2022, an upgrade of 0.3% from the October 2022 World Economic Outlook. This means the region would contribute around 70% to global growth. Following an impressive acceleration to 7.6% in 2022 stemming from strong private consumption and investment, growth in the Philippines is projected to remain strong in 2023, even though it is expected to moderate to 6% due to the confluence of global shocks and recent monetary policy tightening.
However, this dynamic outlook does not imply that policymakers in the region can afford to be complacent. The pressures from diminished global demand will weigh on the outlook. Headline inflation has been easing, but remains above targets in most countries, while core inflation has proven to be sticky. Although spillovers from turmoil in the European and US banking sectors have been limited thus far, vulnerabilities to global financial tightening and volatile market conditions, especially in the corporate and household sectors, remain elevated. Growth is expected to fall to 3.9% five years out, the lowest medium-term forecast in recent history, thus contributing to one of the lowest medium-term global growth forecasts since 1990.
Risks to the outlook are to the downside, reflecting the possibility of stickier global and regional price pressures, the disconnect between markets’ anticipation of monetary policy paths and major central banks’ communications, additional turmoil in global financial markets, adverse spillovers to the region from China’s medium-term growth slowdown, and deeper geo-economic fragmentation.
Monetary policy should remain tight until inflation falls durably back within target. The exceptions are China and Japan, where output is below potential and inflation expectations have stayed muted. In the Philippines, where headline inflation appears to have peaked, core inflation has accelerated, and a continued tightening bias in the near term will help anchor inflation expectations and safeguard the country’s external position. Unless strains in financial markets increase and financial stability is at stake, central banks should separate monetary policy objectives from financial stability goals, using available tools aimed at addressing financial stability risks to allow them to continue to tighten policy to address inflationary pressures.
Monitoring pockets of vulnerability linked to elevated debt burdens in the corporate and household sectors, and market risks and corporate credit risk exposure in the financial sector, is essential for safeguarding financial stability. While the banking system in the Philippines remains sound, with sufficient liquidity and capital buffers, declining NPLs, and healthy credit growth, higher for longer interest rates and corporate credit risks warrant close monitoring. Capacity to assess financial stability risks and resolve troubled financial institutions if warranted should also be strengthened.
Elevated public debt and rising interest costs call for continued — and, in some cases accelerated — fiscal consolidation, which can also support the battle against inflation while protecting the vulnerable through targeted measures. Continued efforts to ensure spending discipline and enhance revenue mobilization should underpin medium-term consolidation in the Philippines, while creating fiscal space and securing adequate resources for education, infrastructure, food security, healthcare, and clean energy.
Lastly, structural reforms are needed to improve growth potential through innovation and digitalization, accelerate the green energy transition, and reduce risks from fragmentation. Combined with efforts to attract foreign direct investment, accelerating reforms to raise productivity, reduce infrastructure and education gaps, and harness benefits from the digital economy can boost the Philippine economy’s potential growth. These reforms should be complemented by strengthening existing social protection schemes and addressing climate change through a more integrated strategy that includes a carbon pricing scheme.
Ragnar Gudmundsson is the International Monetary Fund’s resident representative to the Philippines.
