IMF trims RP growth forecast
By Gerard s. dela Peña
Intensifying challenges in the global arena have prompted the International Monetary Fund (IMF) to again reduce its Philippine growth projections.
The Washington-based lender yesterday said 2008 economic growth would likely hit 5.2%, down from April’s 5.8% forecast, due to slowing external demand and softening consumption.
The latest outlook is lower than the government’s target of 5.7-6.5%, and compares to the 6.0-6.2% projection the IMF made last year following an annual Article IV consultation. That forecast was trimmed in April given a sharper-than expected global downturn.
"The Philippines, together with its peers in the region, faces the twin challenges of a slowing global economy and escalating food and fuel prices," the IMF said.
An IMF staff team led by Il Houng Lee visited the country last week for a fresh Article IV check of the country’s economic health.
The team, in a statement, said inflation would likely hit double-digit levels in the near future due to volatile oil and food prices in the global market.
"Growth is expected to slow and inflation will likely remain elevated," it said, adding that "Continued prudent macroeconomic policy management is needed to navigate through the challenging times ahead."
Inflation hit a nine-year high of 9.6% in May and central bank governor Amando M. Tetangco, Jr. has said inflation may peak at 10-11% in the third quarter.
While the government has been forced to spend to mitigate the impact of higher food prices, the IMF said past reforms had helped contain the overall impact of the deteriorating external environment.
The lender also said a deregulated oil sector had helped the Philippines avoid fiscal problems being faced by other countries that provide fuel subsidies.
The government, among others, has said it would provide subsidized fuel for the transport sector — some P3 billion per quarter. It is currently handing out a total of P2 billion to "lifeline" power users.
It now expects to post a budget deficit of as much as P75 billion this year, having moved a plan to balance the budget to 2010.
The IMF said the Philippines needed to protect its fiscal program for 2009, when it expects to post a smaller deficit, to convince investors the country was committed to its fiscal consolidation program.
"The mission is supportive of a targeted increase in pro-poor spending that may entail a modest fiscal deficit in 2008, but it is important to protect the 2009 fiscal program," it said.
"The recent reduction in public debt, from about 100% of GDP (gross domestic product) in 2003 to 62% in 2007, has provided some scope for increased social spending."
The IMF said the government must adopt legislation, possibly on reforming fiscal incentives and tax administration, to recover lost revenues from recent reforms in personal income taxation and a planned reduction in corporate income taxes in 2009.
The central bank’s Mr. Tetangco, meanwhile, said that the government’s growth target could still be met, buoyed by increased government spending and sustained growth in a number of sectors.
Remittances from overseas Filipino workers, for one, are expected to hit $16.45 billion this year, higher than an earlier forecast of $15.7 billion.
"Notwithstanding that the downward revision to the BoP (balance of payments) surplus is due in part to slower global demand, there are other factors such as the steady or increased private consumption ... possible increases in government consumption due to the recent initiatives; and, the expected sustained growth in the BPO (business process outsourcing) and mining sectors," Mr. Tetangco told reporters via e-mail.
The central bank recently cut its BoP outlook to a surplus of $2.5 billion, down from an earlier forecast of $3.4 billion. It has also raised its inflation forecast to 7-9%, above its target of 3-5% for this year.
The IMF also corrected itself in saying that the central bank had acted appropriately in raising key policy rates by 25 basis points last June 5.
IMF Deputy Managing Director Takatoshi Kato had earlier said that countries such as Vietnam, Indonesia and the Philippines appeared to have fallen behind the curve in terms of monetary policy given the magnitude of inflationary pressures.
The IMF said the recent rate hike was a pre-emptive move given that second round effects of inflation have barely started. — with a report from Reuters