October 9, 2008

IMF lowers GDP growth outlook for Philippines

by Maricel E. Burgonio
from The Manila Times

The International Monetary Fund (IMF) revised downward its economic-growth forecast for the Philippines for 2008 and further lowered it for 2009, adding that the US financial turmoil would further decelerate economic activities in the Philippines.

The IMF’s World Economic Outlook update projected the growth of the Philippines’ gross domestic product (GDP) at 4.4 percent this year, from the July forecast of 5.2 percent. Such growth is the lowest among the Philippines and four other member-countries of the Association of Southeast Asian Nations (Asean)—Indonesia, Malaysia, Thailand and Vietnam. But the forecast is within government’s lower-end GDP growth forecast of 4.4 percent to 4.9 percent for 2008.

For 2009, the IMF expects the GDP growth to further decline to 3.8 percent, which is below government’s forecast of between 4.1 percent and 5.1 percent. GDP is the total value of goods and services produced in a country in a year.

The economies of the five Asean countries, it said, are projected to grow 5.5 percent this year and 4.9 percent next year. In most countries, the IMF added, domestic demand is weakening rapidly and some policy tightening had taken place. Asean also groups Brunei, Cambodia, Laos, Myanmar and Singapore.

“A major policy dilemma for the region is how to respond to the weakening growth outlook and global financial turbulence, without losing sight of inflation risks,” it said.

Global growth is also expected to moderate to 3.9 percent in 2008, from 5 percent in 2007, and further weaken to 3 percent in 2009, its slowest pace since 2002.

Financial markets weakened in recent months, driven by increasing concerns about the global outlook and declining investor risk appetite, particularly in the context of the September market turbulence that saw big investment banks in the US filing for bankruptcy.

Domestic demand

The domestic demand, the IMF said, had softened, with rising food and fuel prices starting to weigh on consumption. Declining profit margins and weakening demand, it added, have prompted firms to scale back their investment plans.

The IMF said that financial stress could remain very high and that credit constraints from deleveraging could be deeper and more protracted.

“Additional credit losses are very likely as the global economy decelerates. In this setting, financial institutions’ ability to raise new capital will remain very challenged,” it added.

Inflation forecast

The IMF projected inflation to increase to 10.1 percent in 2008 and to decline to 7 percent in 2009.

These forecasts are within the Bangko Sentral ng Pilipinas’ 9 percent to 11 percent this year and 6 percent to 8 percent next year.

In Asia, monetary authorities have tightened interest rates as the first line of defense against rising inflation. The IMF, however, said that it may need to be complemented in some cases by greater exchange-rate flexibility or fiscal action.

“Fiscal restraint could help reduce inflation pressures, especially in countries where rising food and fuel subsidies, as well as public-wage increases, have weakened fiscal positions and contributed to price pressures,” it added.

Recovery in 2009

The IMF said gradual economic recovery is also expected in the latter part of 2009, when oil prices are seen to stabilize and boost consumption in oil-importing countries.

Also in 2009, the US housing sector is also expected to finally bottom out and emerging economies to provide a source of resilience as a result of strong productivity growth and improved policy frameworks.

The Philippines’ economic growth is driven mainly by exports earnings, which have been declining since the US mortgage crisis emerged this year.