Bangko Sentral ng Pilipinas Governor Felipe M. Medalla admitted there are significant downside risks to Philippine growth in 2023, but stressed that there is no threat of a recession.
“The question is not a recession but the extent to which growth will decline,” said Medalla in an interview with CNBC Asia TV on Friday, Nov. 18.
The government forecasts a 6.5 percent to eight percent GDP growth for 2023 and 2024, way higher than what the International Monetary Fund (IMF) is projecting of five percent for 2023.
“It’s low growth, not a recession,” said Medalla. “And, by low growth, I mean here anything lower than five (percent),” he added.
A recession occurs when there is prolonged economic contraction, typically two quarters of consecutive decline such as what happened in the Philippines in 2020 when the GDP decelerated by 9.5 percent. The local GDP, however, recovered by late 2021 and pulled growth back to 5.7 percent.
Medalla said the government is hoping that GDP will grow by at least six percent next year, missing the target of 6.5 percent to eight percent for both 2023 and 2024.
“The IMF thinks that growth rate will be five percent next year whereas the Philippine government thinks it’s going to be at least six percent. If it turns out that the global scenario is much worse than we are thinking now, then maybe the Philippine government estimates will go down by 100 bps (basis points) and the IMF estimate may go down by 100 bps too,” said Medalla.
Based on the November Monetary Policy Report (MPR), the central bank said GDP growth will reach the inter-agency Development Budget Coordinating Council’s target range of 6.5 percent to 7.5 percent for 2022, but “economic headwinds could result in slower GDP growth in 2023 and 2024.”
The GDP forecast for 2024 is also lower due to slower external demand as well as the impact of the BSP’s monetary policy tightening.
Still, the MPR noted that domestic economic activity has recovered above its pre-pandemic level and will be “slightly above potential” since the output gap is expected to be positive in 2023 as a continuation of the expansion this year.
“Output gap will return to broadly neutral territory in 2024 as the impact of the BSP’s policy rate adjustments take hold on the economy,” said the BSP.
“Improved external trade competitiveness and sustained remittances amid peso depreciation, albeit the slowdown in global growth outlook, could drive the higher domestic output gap. Meanwhile, potential output is expected to sustain its recovery given the continued reopening of the economy, improvements in labor conditions, and investment growth,” the BSP further explained.
In support of growth, and to ensure inflation expectations are sufficiently achored as well exchange pressures are tempered, the BSP’s Monetary Board has raised the policy rate six times this year by a cumulative 300 bps.
As of Nov. 18, the overnight borrowing rate is set at five percent, the highest since Jan. 29, 2009.
The IMF on Sept. 26 said they expect local GDP to grow by 6.5 percent this year and to low to five percent in 2023 “as the confluence of global shocks weigh on the economy in the coming months.”
“Looking ahead, sustaining the economy recovery will require a focus on policies to address inflationary risks, increase fiscal and financial resilience to adverse shocks, and successful implementation of reforms to mitigate pandemic scarring and raise productivity growth,” said the IMF.
The IMF, in general, has a positive growth outlook for Southeast Asia which it expects to expand by four percent this year, and 4.3 percent in 2023, but below what it used to be which was above five percent average.
Some countries in the region though will be affected by recession threats in the US, following the aggressive US interest rate hikes this year. Asian stockmarkets including the PSEi will also not escape the effects of a US recession.