MANILA (UPDATE) - The International Monetary Fund (IMF) said on Wednesday it has raised its economic growth forecast for the Philippines for this year to 6 percent and 5.5 percent in 2014, but warned a surge in capital flows could make growth more volatile.
Strong growth would be fueled by strong domestic demand and higher public spending, the IMF said in a statement.
It also said potentially volatile capital flows were placing upward pressure on the peso exchange rate.
"There remains the possibility of extreme events originating in advanced economies. On the domestic side, a surge in capital flows could extend asset price gains in the near term, but make asset prices and growth more volatile down the road," the IMF said.
"Large, stable foreign earnings over the past decade as well as potentially volatile capital flows are placing upward pressure on the exchange rate," the Fund also said, adding low interest rates were fueling a rise in prices of financial assets and a switch of investments to sectors such as real estate.
But it said the central bank's move to tighten policies via a broader definition of banks' real estate exposure, stronger bank governance requirements, and the accelerated start of Basel III capital from January 2014 would help prevent the emergence of financial sector risks.
The Fund had projected growth of 4.8 percent for the Philippines in 2013, based on its forecast as of October, though IMF Managing Director Christine Lagarde said in November during a visit to Manila that the economy may grow around 5 percent this year after projected growth of more than 5 percent in 2012.
The government has forecast growth at 6 to 7 percent this year, rising to 6.5 to 7.5 percent in 2014.
The Fund also said it expects domestic consumer prices to stay manageable and come in near the lower end of the government's target band of 3-5 percent this year and the next.
The Philippine central bank, which will meet on Thursday to review policy, looks certain to keep the benchmark overnight borrowing rate at a record low of 3.5 percent for a second meeting in a row.
Manila has committed to increase spending on infrastructure this year after successfully raising revenues through stricter imposition of tax laws and prudent debt management.
The IMF said timely and transparent execution of private-public partnership projects and state spending on infrastructure could boost private investment, while relaxed foreign ownership limits may enhance growth prospects.
Manila's fiscal management efforts have been rewarded with credit rating upgrades, and analysts expect the country to attain an investment grade rating as early as this year.
But Fitch Ratings has said more work needs to be done.
While the country's public finances have become less of a drag on its credit profile, Fitch said in a Jan. 22 report, the Philippines must prove it can sustain reforms to raise investments and widen its revenue base.
"A key weakness of the sovereign credit profile is a narrow revenue base," Fitch had said.