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Resilience of the Philippine Economy to Mitigate the Transmission of Global Economic and Financial Strains

10.31.2008

Conditions in the global economy continue to raise challenges. In addition to financial market disruptions - which have intensified - there is growing consensus over a major downturn in global economic activity. While the downturn is expected to be more pronounced in the advanced economies, growth in emerging and developing countries is also likely to weaken after years of strong performance.

Despite a difficult external environment, the Philippine economy nonetheless grew by a respectable 4.6 percent in the first semester of 2008. The growth outlook for the whole of this year is one of guarded optimism. Domestic demand has proven to be fairly resilient in previous global slowdowns, and should once again provide a cushion against the ongoing global downturn. Moreover, inflation appears to have peaked and is expected to moderate over the near term, mainly as food and oil prices have retreated from their recent highs. As a result, consumer demand is expected to recover, also supported in part by the steady stream of remittances. Meanwhile, investment would be underpinned by public infrastructure and continued growth in the property sector, which should boost construction activities. Government interventions to enhance agricultural productivity should also help support economic growth. Apart from these, other important growth drivers in the economy include business process outsourcing, tourism and mining. The BSP’s business cycle analysis is broadly in line with the growth forecast of the National Economic and Development Authority.

The spillover effects of the global financial turmoil on Philippine financial markets have thus far been limited. This is due in large part to the package of financial sector reforms earlier adopted by the BSP. Specifically, the underpinnings of the Philippine banking system have been strengthened by critical reforms that raised bank capitalization, enhanced risk management, and improved bank supervision. As well, Philippine banks have limited exposure to structured credit products, which were behind the large losses of international banks. More generally, their dependence on external financing is low relative to the standards of emerging market economies.

Going forward, the economy will have to prepare itself for challenging times. However, resilient domestic demand, gains from the sustained implementation of financial sector reforms and improved policy frameworks provide the buffers that will help the Philippine economy surmount the challenges ahead.

The BSP, for its part, will continue to keep a watchful eye on evolving developments and will remain attentive to the need to promote the stability of the banking and financial sector, as well as the strength of domestic economic activity. Continued vigilance over price developments will be exercised, with the BSP ready to act appropriately with a view to taking decisive and timely monetary policy action. The BSP is also committed to undertake policy actions that will help maintain the public’s confidence in the banking system, including by ensuring adequate liquidity in the financial system.

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