IMF: Slower Q2 growth still ‘respectable’

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By Melissa Luz T. Lopez
Senior Reporter

ECONOMIC GROWTH remains “respectable” despite slowing sharply in the second quarter, the International Monetary Fund (IMF) said over the weekend, welcoming last week’s aggressive interest rate hike as a necessary policy step.

IMF country representative Yongzheng Yang said the Philippines’ growth momentum remains intact, even as economic expansion slowed to six percent in April-June.

However, he noted that this could prompt revisions to the IMF’s current forecasts.

“The Q2 growth number was indeed below market expectations. Note, however, that six percent is still a respectful growth rate,” Mr. Yang said in an e-mailed response to a request for comment on latest official growth data.

“Obviously we will be examining the latest numbers to see what are the implications for our whole-year growth forecast for 2018.”

Gross domestic product (GDP) growth slowed from the downward-revised 6.6% pace in the first quarter due to slower expansion in consumer spending and exports, although this was offset by a surge in state spending.

After its latest annual health check on the economy in July, the IMF projected Philippine GDP expanding by 6.7% this year, matching the pace clocked in 2017 but settling below the government’s 7-8% target.

The multilateral lender said the Philippines has been “performing well” but flagged rising inflation and a changing external environment as key sources of risks.

In separate commentaries late last week, ING Bank N.V. Manila and Fitch Solutions (formerly BMI Research) trimmed their growth forecasts to 6.3% following the soft second-quarter figures, coming from previous estimates of 6.8% and 6.5%, respectively.

To accelerate GDP growth, Mr. Yang said significant structural reforms are needed to increase productivity, alongside scaling up infrastructure investments and on social services, particularly health and education.

The IMF has expressed support for succeeding tax reform packages, opening up more industries to foreign investments by relaxing the “negative list” of sectors restricted to foreign participation, as well as replacing import quotas for rice with regular tariffs — a step that is expected to slash retail prices by about P7 per kilogram.

IMF mission chief Luis E. Breuer has backed the Executive’s proposal to overhaul the current tax incentives regime, saying that the Philippines “does not need to resort” to giving away such perks just to invite companies to invest here.

On the other hand, Mr. Breuer also said that the government should work to maintain the fiscal deficit at 2.4% of GDP this year — versus the state’s programmed three percent — noting that the lower ratio will help contain inflationary pressures which have been hurting the economy in recent months.

“The BSP (Bangko Sentral ng Pilipinas) took forceful action [on Thursday] to address inflationary pressure. We welcome the move to raise the policy rate by 50 bps (basis points),” IMF’s Mr. Yang added, referring to the third consecutive rate hike announced by the central bank on Thursday last week.

The central bank fired off its strongest policy adjustment in a decade as inflation remains elevated, having hit a fresh multiyear high of 5.7% in July. Prices of widely used goods have surged by 4.5% for the first seven months, and central bank officials last Thursday hinted that inflation could remain elevated even until 2019.

The IMF had suggested the “further tightening” of policy rates to rein in inflation expectations.

The IMF sees inflation averaging 4.7% this year, which is lower than the 4.9% full-year forecast which the BSP announced last week. Both are well above the central bank’s 2-4% target range.

Several economists are betting that this might not be the last tightening move from the BSP.

“On balance, the central bank has kept the door open for further rate hikes,” ANZ Research said, as it bet another 25bp increase when the BSP’s Monetary Board convenes for its sixth policy review this year on Sept. 27.