MANILA – The underlying fundamentals of the Philippine economy remain "solid" despite foreseen risks, the Bangko Sentral ng Pilipinas (BSP) said.
In its latest report on Economic and Financial Developments, the BSP said the country’s domestic economy “continues to expand above historical average. Household consumption is expected to remain steady and growth in services sustained.”
“The favorable trends in the manufacturing sector indicate the potential resurgence of the industry sector, which can potentially transform the sector into a major driver of growth in the Philippines,” the central bank added.
The Philippine economy grew 5.3 percent in the third quarter, a slower pace compared to the 6 percent growth in the second quarter.
The slowdown in the third quarter brought the nine-month expansion to 5.8 percent, way below the target for the year of 6.5 to 7.5 percent.
The BSP said “the near to medium-term economic outlook remains uncertain, with risks largely external.”
It added that US recovery and strong performance of emerging Asia countries have driven global growth, but dim prospects in the euro area, Japan, and emerging markets in Latin America and the Middle East will affect global output.
“Second, the uncertainty surrounding the timing of the US Federal Reserve’s shift towards monetary policy normalization indicates that capital flow volatility could materialize anew, which could affect financial markets,” BSP said.
The BSP also tagged as risks a possible “hard landing” in China and a sustained weaker growth in advanced economies, which could slacken trade activities even in emerging economies like the Philippines.
“On the domestic front, operational constraints related to weak absorptive capacity of operating agencies, administrative bottlenecks in the implementation of key programs along with changes in the budgeting system remain,” the central bank said.
The central bank also cited the risk of short-term disruptions in activities due to typhoons and power outages.
“Amid downside risks and challenges in the external environment as well as bottlenecks in the domestic front, the BSP will continue to pay close attention to the outlook for inflation and growth to ensure that monetary policy settings remain consistent with price and financial stability,” it said.
Key policy rates were raised earlier to ensure inflation will remain within the 3 to 5 percent target for the year and the 2 to 4 percent range for 2015 and 2016.
Inflation has averaged 4.3 percent in end-November. The BSP is expecting inflation rate to average 3 percent in 2014 and 2.6 percent in 2016.
“The BSP also remains prepared to deploy a menu of policy actions, as needed, to rein in inflation expectations further and pre-empt potential second-round effects even as previous monetary responses continue to work their way through the economy,” the central bank said.
“This is also to weaken the adverse impact of capital outflows on the domestic economy by ensuring adequate level of liquidity in the economy and the financial markets during periods of heightened uncertainty and increased risk aversion,” it added.