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IMF cuts Philippine growth forecast for 2018 amid new challenges

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By Elijah Joseph C. Tubayan, Reporter

THE INTERNATIONAL Monetary Fund (IMF) lowered its gross domestic product (GDP) growth projection for the Philippines this year, amid downside risks from “rising inflation, continued rapid credit growth, higher US interest rates and US dollar, volatile capital flows, and trade tensions.”

The IMF expects Philippine GDP to grow 6.5% this year, a downward revision from the 6.7% estimate recorded in its July report. It kept the 2019 forecast steady at 6.7%.

“The economy continues to perform well but is facing new challenges,” the IMF said in its Article IV consultation staff report published on Friday, following discussions with local authorities here in July.




“However, short-term risks have risen, including inflation and overheating risks, and greater external uncertainty,” it added.

The IMF said rising inflation and inflation expectations, high and sustained credit growth, and the expansionary fiscal policy until 2019 “point to the risk of overheating.”

This is on top of external risks such as the global monetary policy tightening, global trade tensions, higher oil prices, a widening current account deficit, and portfolio outflows, which have put downward pressure on the peso.

“Nonetheless, the medium-term economic outlook remains favorable, placing the Philippines in a good position to tackle still-elevated poverty and inequality,” the IMF said.

The IMF said “strong” domestic demand will lead economic growth, supported by the government’s infrastructure spending and stable foreign direct investment inflows.

In a press briefing at the Bangko Sentral ng Pilipinas (BSP) complex on Friday, IMF country representative Yongzheng Yang said the downward revision of the 2018 growth forecast takes into account the slower-than-expected second quarter figures.

Mr. Yang said the second quarter slowdown — which was due to the weak performance of agriculture and exports — was only “temporary.” He expects “a rebound during the second half of the year,” driven by stronger household consumption due to increasing dollar remittances from overseas Filipino workers.

The economy grew by 6% in the second quarter, slower than the 6.6% a year ago and in the first quarter this year. For the first semester, GDP growth stood at 6.3% versus 6.6% in the same period in 2017.

The IMF’s GDP forecast compares with World Bank and Organisation for Economic Co-operation and Development’s estimate as of July at 6.7% for 2018 and 2019, and the ADB’s 6.4% and 6.7% projections for both years. The United Nations Economic and Social Commission for Asia and the Pacific expects GDP at 6.8% for 2018 and 6.9% for 2019.

TIGHTEN MONETARY POLICY
Mr. Yang said the government needs to further tighten monetary policy, while easing fiscal pressures to mitigate the risk of overheating.

The IMF “urged” the government to have a “neutral” fiscal deficit position at 2.4% this year and 2.5% next year, lower than the 3% and 3.2% programmed deficit cap for 2018, and 2019, respectively, but slightly higher than the 2.2% shortfall recorded in 2017.

“We fully support infrastructure investment. But we think it’s very desirable and very helpful to keep the fiscal stance neutral. That will reduce the risk of overheating. We have a monetary policy tightening, and that is a good move. But the monetary policy cannot do it alone. It needs the support of a more moderate fiscal stance,” said Mr. Yang.

The IMF report noted the government could ease the fiscal deficit by “intensifying efforts on the revenue side,” such as improving tax administration, and enacting the succeeding packages of the tax reform program.

It also recommended “further reduction” in non-priority spending, such as those unrelated to flagship infrastructure projects and social protection, when tightening of global financial conditions “engenders a surge in borrowing costs.”

The IMF said the central bank’s move to raise benchmark rates is “appropriate,” but noted that it “should look to do more.”

The BSP hiked interest rates by 150 basis points so far since May, in a bid to rein in inflation expectations, and mitigate second round effects, amid broadening price pressures.

“Higher rates will also mitigate inflation risks from the expected fiscal stimulus, weaker currency, and help anchor inflation expectations. The exact pace of monetary tightening should depend on evolving external and domestic conditions,” the report read.

The IMF sees inflation to average 4.9% this year and 3.9% in 2019, higher than the 4.7% and 3.8% forecasts for both years in its previous report.

Inflation in August accelerated to 6.4% from 5.7% a month ago and 2.6% a year ago. The eight-month average in the rise in prices stood at 4.8%, above the central bank’s 2-4% target range.

Also among the IMF’s recommendations to support growth include: the implementation of banks’ countercyclical capital buffer requirement; the approval of the amendments of the BSP charter to narrow data gaps from persons and financial institutions; replacing the rice import quota system with a tariffication scheme; further lifting restrictions on foreign investment; improving the ease of doing business; and promoting financial inclusion through digital innovations.