CEBU, Philippines — The Philippine banking sector is poised for sustained profitability throughout the remainder of 2023, as ample liquidity continues to flow through the system.
According to ASEAN+3 Macroeconomic Research Office (AMRO) group head and principal economist Runchana Pongsaparn, the robust performance of the Philippine banking system finds solid support in its substantial financial reserves, due to strong revenue collection and prudent spending practices.
This is also a reflection of a healthy economic path moving forward in the Philippines despite issues of inflation, and food security, among others.
According to AMRO, the Philippine economy maintained its robust growth momentum in the first half of 2023, following a multi-decade-high growth rate of 7.6 percent in 2022. Growth was supported by resilient domestic demand with a strong recovery in the labor market despite weaker external demand.
Notwithstanding a widening current account deficit, the external position remains sound with a sufficient international reserve buffer and low external debt. Despite some moderation in 2023, inflation remained high, at a level above the 2–4 percent target, driven by buoyant demand.
This preliminary assessment was made by the ASEAN+3 Macroeconomic Research Office (AMRO) during its Annual Consultation Visit to the Philippines from August 29 – September 8, 2023.
“Philippines’ economic growth is projected to moderate to 5.9 percent in 2023 due to high base effects and weaker external demand, before edging up to 6.5 percent in 2024 as external demand recovers,” said Dr. Pongsaparn.
Meanwhile, domestic demand is expected to remain robust supported by continued improvement in labor market conditions, lower inflation, robust overseas remittances, and higher government infrastructure spending, Pongsaparn added.
Headline CPI (consumer price index) inflation is projected to moderate to 5.5 percent in 2023 from 5.8 percent in 2022, and slow further to 3.8 percent in 2024.
Despite some moderation, inflationary pressure will likely remain elevated as reflected in the high level of core inflation, due to a positive output gap and the second-round effects induced by increases in the minimum wages and expectations of persistently high inflation.
On the external front, a widening current account deficit was partly offset by net capital inflows. At the same time, external debt remained low and international reserve buffer was adequate. The banking sector has improved profitability, ample liquidity, and sufficient capital buffer. The fiscal position continues to improve in 2023, attributed to robust revenue collection and moderate spending.
Pongsaparn added that the Philippine economic outlook is clouded by various risk factors and challenges. In the short term, the economy could be adversely affected by high inflation, especially due to local supply shocks in the food sector.
An economic slowdown in major trading partners and volatility in the global financial market, along with tighter financial conditions, also pose risks.
The long-term growth potential is largely affected by the scarring effects of the pandemic, the pace of infrastructure development, geopolitical risks, and the economic losses from natural disasters, which are being exacerbated by climate change.
AMRO believes that a comprehensive strategy is warranted to bolster the Philippines' medium- to long-term economic growth potential. Overcoming the scarring effects of the pandemic mandates a sustained focus on upgrading and upskilling the workforce to embrace a more technology-driven economy. The implementation of policies and measures to attract investments, particularly foreign investments, and promote exports of both goods and services are the underpinnings of long-term economic development.
Furthermore, the government can enhance the country’s competitiveness through infrastructure investment, digitalization, and developing a green economy.
The AMRO team, led by Pongsaparn together with AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor, participated in the policy meetings and also met with Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr., Deputy Governor Francisco G. Dakila, Jr., and Department of Finance Undersecretary Maria Edita Z. Tan.
The discussions focused on the risks and challenges facing the Philippines, and policy options to sustain the growth momentum, manage elevated inflationary pressures, restore fiscal buffer, and address long-term structural issues.