Construction workers in Manila
Construction workers at a site near Manila Reuters

The Philippines' economic growth will rise this year helped by lower commodity prices and strong fundamentals but asynchronous monetary policies in advanced economies pose risks through disruptive asset price shifts in financial markets, the International Monetary Fund said on Wednesday.

The IMF projected a GDP growth of 6.7% for the east Asian country as lower commodity prices, higher public spending, and continued strong private construction and export growth are supporting.

The 6.1% growth in 2014, helped by strong household consumption, fixed capital formation and net exports, was one of the fastest in the region, the Fund noted.

"While agricultural production and government spending were weaker than expected, both sectors rebounded in the last quarter of 2014. The unemployment rate fell to 6.8% in 2014 with about 1 million new jobs created, while poverty remained a challenge," IMF said in its 31 March press release.

"Inflation is projected to remain in the lower end of the BSP's target range, reflecting lower commodity prices. The current account surplus is expected to strengthen due mainly to lower oil prices and strong inflows from business process outsourcing, tourism and remittances."

Inflation in the Philippines had fallen to an 18-month low of 2.4% in January and has seen only a marginal rise in the next month to 2.5%.

Risks to growth in the Philippines are mainly from external sources, according to IMF.

"External demand could be weaker if risks of deflation and lower potential growth in advanced economies and key emerging markets were to materialize."

Fiscal and Structural Policy

IMF said the fiscal policy should help widen the fiscal deficit for it to be expansionary even though the monetary policy is accommodative.

"Fiscal policy was contractionary with the budget deficit at 0.6% of GDP in 2014 while monetary conditions remained supportive of growth."

The Philippines had hiked the benchmark interest rate by 50 basis points in two tranches in 2014 in order to tame inflation pressures.

"Going forward, the fiscal stance should provide a stimulus as budget execution picks up in 2015/16 toward the 2% of GDP deficit target, while monetary and macroprudential policies continue to anchor inflation and financial stability," the Fund said.

According to IMF, the Philippine central bank's proactive policy actions have reduced financial stability risks and added that structural policy issues centre around increasing investment, particularly in infrastructure and human capital, over the medium term.

"The BSP's generally proactive approach to oversight of the financial sector, particularly real estate exposures, provides additional support in this regard," IMF said.

"Continued efforts at enhancing revenue mobilization will be critical to address the large spending needs, including enacting measures to offset any revenue eroding policy change and preferably through a comprehensive tax reform."

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