IMF downgrades PH growth forecast to 5.7%

Published October 16, 2019, 12:00 AM

by manilabulletin_admin

By Lee Chipongian

The International Monetary Fund (IMF) has cut its 2019 Philippine growth forecast to 5.7 percent from 6.5 percent previously, citing still subdued global growth partly because of trade and domestic policy uncertainties, its latest World Economic Outlook (WEO) reported.

The International Monetary Fund logo is seen inside its headquarters at the end of the IMF/World Bank annual meetings in Washington, U.S., October 9, 2016. REUTERS/Yuri Gripas (MANILA BULLETIN)

The IMF forecasts lower inflation for the country of 2.5 percent for 2019, the same estimate given by the Bangko Sentral ng Pilipinas (BSP) on September 26 when it cut benchmark rates to stimulate growth which slowed down in the first two quarters due to budget delays and underspending. For 2020, the IMF’s inflation forecast is lower at 2.3 percent compared to the BSP’s 2.9 percent.

The WEO, released every April and October, has also downgraded next year’s GDP growth projections to 6.2 percent from 6.6 percent for the Philippines.

Based on previous reports, the IMF projected 6.6 percent for 2019 for the Philippines (October 2018 WEO) and later lowered the forecast to 6.5 percent (April WEO 2019), and further down to the latest 5.7 percent. There was a mid-year six percent GDP forecast made in between the WEO reports but was not updated into the official IMF forecast data. Last year, the local economy grew by 6.2 percent.

The IMF has noted that emerging and developing Asia “remains the main engine of the world economy” but that the growth is “softening gradually” due to China’s structural slowdown.

The IMF forecasts lower GDP of 5.9 percent for 2019 and six percent for 2020 for emerging and developing Asia which includes China and India. The previous forecasts (April 2019 WEO) was 6.3 percent for 2019 and 2020.

Growth for Association of Southeast Asian Nations 5 (ASEAN 5) which includes the Philippines, Indonesia, Thailand, Malaysia, and Vietnam is also lower at 4.8 percent for 2019 and 4.9 percent for 2020, versus previous forecasts of 5.1 percent and 5.2 percent, respectively.

“Growth will be supported by the lagged effects of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory uncertainty, and government programs to support rural consumption,” the IMF said in assessing the regional growth projections.

The IMF also said that among emerging economies with more stable conditions, the “recent softening of inflation has given central banks the option of easing monetary policy to support activity.”

“Against a volatile external backdrop and possible adverse turns in market sentiment, ensuring financial resilience is a key objective for many emerging markets and developing economies. Regulation and supervision should ensure adequate capital and liquidity buffers to guard against disruptive shifts in global portfolios and a possible deterioration in growth and credit quality,” the IMF said.

The IMF’s global growth forecast is down to three percent for this year, the lowest pace of growth since the financial crisis of 2008-2009, blaming the slowdown to the ongoing US-China trade wars and policy uncertainties. For 2020, the projection is 3.4 percent but the IMF warned that the recovery “is not broad based and is precarious”

The IMF said that monetary policy “cannot be the only game in town and should be coupled with fiscal support where fiscal space is available and where policy is not already too expansionary.”

“While monetary easing has supported growth, it is important to ensure that financial risks do not build up,” said the IMF.

Based on its October 2019 Global Financial Stability Report, it noted that with an expected interest rates regime that could be  “low for long” it stressed the “significant risk of financial vulnerabilities growing, which makes effective macro-prudential regulation imperative.”

The Philippines, one of the fastest growing economies in the world, has official growth targets of six percent to seven percent for 2019, 6.5 to 7.5 percent for 2020 and 7.5 percent to eight percent for 2021.

To support the 2019 growth and keep it above the six-percent level, the BSP’s Monetary Board moved to reduce key rates by 75 basis points (bps) so far. Since the BSP increased interest rates by 175 bps in 2018 to curb high inflation at the time, economic managers think the BSP still has room to further cut policy rates in the last two Monetary Board policy meetings in November and in December. In the second quarter, the local economy only grew by 5.5 percent.

Based on the IMF’s previous assessment of the local economy, it said that the country will continue to post positive growth despite “persistent poverty and inequality” but that the “new environment requires adjustment of the policy mix to balance growth and stability objectives, while fostering inclusion.”

The IMF said the Duterte government should have “careful selection and management of infrastructure projects to maximize their impact on growth” while also supporting reforms to make tax incentives more effective in achieving national policy goals and improve economy-wide productivity.

The IMF said the government should also open new sectors of the economy to competition to encourage foreign investment and further “improve the business environment through better infrastructure, create more and better jobs through investment in human capital and labor market reforms, and modernize the bank secrecy legal framework.”