IMF cautious on PHL growth prospects

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THE INTERNATIONAL MONETARY FUND (IMF) maintained its Philippine gross domestic product (GDP) growth projection for this year but slightly raised its 2020 forecast despite increased risks, as state spending improves further, according to a statement the multilateral lender released on Monday at the end of its annual health check on the country.

“After a soft patch in the first half of this year, the Philippines’ GDP growth is expected to strengthen in the remainder of 2019 and in 2020, underpinned by government spending catching up with targets, and the recent monetary policy easing,” the IMF said in its statement.

“Growth is projected at 5.7% in 2019, unchanged from the October 2019 World Economic Outlook and to strengthen to 6.3% in 2020, underpinned by an increase in government spending and the recent monetary policy easing.”

The IMF had slashed its Philippine GDP growth projection to 5.7% last month from six percent in July and from 6.7% in October last year.

Last month, the multilateral lender also cut its 2020 growth forecast for the country to 6.2% from 6.3% in July and from 6.6% before that.

GDP growth picked up to 6.2% last quarter after a muted 5.5% in the first half as state spending reeled from late national budget enactment and a ban on new public works 45 days ahead of the May 13 midterm elections. The latest clip fueled the year-to-date pace to 5.8% against the past year’s 6.2% and the government’s 6-7% target for 2019. For 2020, the goal is 6.5-7.5%.

The IMF’s projection compares to the 5.8% of the World Bank and Moody’s Investors Service, the six percent of the Asian Development Bank, the ASEAN+3 Macroeconomic Research Office, S&P Global Ratings and Fitch Solutions and the 6.1% given by Fitch Ratings.

Last January, the United Nations Department of Economic and Social Affairs, the UN Conference on Trade and Development and the five UN regional commissions gave a 6.5% projection for this year, while the Organization for Economic Cooperation and Development in November 2018 cut its forecast for this year to 6.5% from the 6.7% outlook it gave in July 2018.

An IMF team led by Thomas F. Helbling, division chief in the lender’s Asia and Pacific Department, visited Metro Manila, as well as Clark City and New Clark City in Central Luzon on November 5−18 for the 2019 Article IV consultation with Philippine officials.

In a briefing in Manila on Monday, Mr. Helbling said his team sees “a further substantial increase in Q4 [GDP expansion]… on government spending, especially on the infrastructure program [that] will accelerate growth.”

“The medium-term economic outlook remains favorable, especially if the strong structural reform momentum continues,” the IMF said in its statement on Monday, referring to various reforms being pushed by the administration of President Rodrigo R. Duterte, especially those seeking to make the current tax system more equitable while yielding more collections.

“Structural reform progress has been strong and important bills have been passed, including rice tariffication, tax reform, a national digital ID, the ease of doing business and BSP charter amendments” designed to further strengthen monetary supervision.

Saying “[i]t will be critical to speed up the implementation of reforms,” the multilateral lender said that “[f]urther steps could be taken to promote inclusive growth, including continued tax reform, relaxing restrictions on foreign investment, broadening poverty reduction efforts, easing the stringent banking secrecy law and upgrading the capacity of public administration.”

“Bold implementation efforts are needed for the strong structural reform momentum to lift medium-term growth and reduce poverty.”

The IMF also noted that the government has so far wielded appropriate fiscal and monetary tools to address slowing growth, especially as inflation has been easing from last year’s successive multi-year peaks.

“With the current projections of global commodity prices and domestic policy trajectories, inflation is projected at 1.6% by end-2019 and at three percent by the end of 2020, within the 2-4% target range” of the central bank.

“The recent cuts in the BSP’s policy rate are appropriate for achieving the inflation target in the next one to two years, barring any unforeseen events.”

The government has fired off reductions in benchmark interest rates totaling 75 basis points this year, partially dialing back a cumulative 175 bp hike in 2018 as inflation soared then, as well as reductions in banks’ reserve requirement ratio totaling 400 bp this year after 2018’s 200 bp reduction.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno has signaled there will be no more monetary policy adjustments this year — the Monetary Board steadied policy settings last Nov. 14 and is scheduled to hold this year’s eighth and last policy review on Dec. 12 — as monetary authorities watch if past adjustments have increased bank lending to productive economic activities.

“The planned increase in government spending for 2020 and the recent monetary policy easing will help the economy move back to its growth potential and achieve the inflation target,” the IMF said on Monday.

At the same time, it added, “near-term downside risks to the outlook have increased, reflecting increased risks from global trade tensions, shifts in global financial conditions and natural disasters.”

“Risks to the outlook are tilted to the downside. The near-term rebound in GDP growth could be weaker than expected because of global trade tensions and related policy uncertainty, a change in global financial conditions and natural disasters.”

Despite tempered growth projections, “[t]he Philippines remains one of the best-performing economies in the region,” the IMF noted.

“On the upside, structural reform progress and infrastructure improvements could boost confidence and growth,” it added, noting that “[t]he small fiscal stimulus planned for 2020 is timely and appropriate in magnitude” in reference to the P4.1-trillion national budget proposed for 2020 that is in the Senate and now on track to yearend enactment.

Under an initial draft of the budget, infrastructure expenditures for 2020 were programmed at P972.5 billion, equivalent to 4.6% of GDP, about 6.9% more than P909.7 billion this year that is equivalent to 4.7% of GDP.

“Within the budgeted fiscal envelope… there is scope to expand and better target social spending and infrastructure,” the IMF said.

Overall, it noted, “[t]he Philippines has space for an expansionary macroeconomic policy response should downside risks materialize.”

With the expected economic growth pickup comes the risk of “rapid credit growth,” the multilateral lender warned.

Hence, “[t]he BSP should be prepared for macroprudential policy responses if renewed high credit growth poses risks to systemic financial stability.” — Luz Wendy T. Noble