IMF lowers PH growth forecast
The International Monetary Fund (IMF) on Friday lowered its 2018 growth forecast for the Philippines to 6.5 percent, noting that short-term risks such as rising inflation and a challenging external sector have increased since its last review.
The IMF forecast downgrade followed that of a similar move by the Asian Development Bank (ADB) last Wednesday. The ADB cut forecasts for both 2018 and 2019 to 6.4
percent for this year from its previous 6.8 percent estimate, and 6.7 percent for 2019 from an earlier forecast of 6.9 percent.
The IMF’s previous assessment in July had a 6.7 percent GDP growth for both 2018 and 2019.
The IMF warned that the Philippine economy may be facing the risk of overheating, and that the projected positive output gap, rising inflation and inflation expectations, as well as high and sustained credit growth, and the planned fiscal expansion in 2018−2019 all lead to the risk of overheating.
It added that rising inflation of past months has “weakened political support for tax reform. “It further cautioned the government about dealing with factors that have piled up to threaten long-term growth, that the “combination of tighter global financial conditions, higher oil prices, a widening current account deficit and portfolio outflows, have put downward pressure on the peso.”
The IMF, based on its latest Article IV consultation with the Philippines report, however, retained the 6.7 percent forecast for next year as they expect continued support from strong domestic demand despite uncertainty coming from inflation, but decided to lower this year’s growth estimate as “the new environment requires adjustment of the policy mix to balance growth and stability objectives,” IMF Staff headed by IMF Mission Head, Luis E. Breuer, said. The report was presented in Manila by IMF Resident Representative Yongzheng Yang.
“On balance, risks to the growth outlook are tilted to the downside, stemming mainly from rising inflation and overheating, higher oil prices, high credit growth, intensification of global trade tension, and the impact of higher US interest rates and volatile capital flows on borrowing costs over the short term,” explained the IMF. “On the upside, fiscal incentive for streamlining and liberalizing foreign investment, if approved and implemented, would boost productivity over the medium term and strengthen investor confidence.”
The IMF sees a higher inflation average of 4.9 percent this year versus previous forecast of 4.8 percent. For 2019, it estimates 3.9 percent. This was actually lower than the central bank’s own forecast of 5.2 percent for this year and 4.3 percent in 2019.
Aside from high inflation which rose to 6.4 percent in August, and uncertainty in the global environment, Yang noted that while the country’s current account deficit will remain manageable, backed by foreign direct investments, the downside risks will come mainly from rapid credit growth, higher US interest rates and the strong US dollar, volatile capital flows, and trade tensions. “Nonetheless, the medium-term economic outlook remains favorable, placing the Philippines in a good position to tackle stillelevated poverty and inequality.”
The Washington-based international organization, which has supported the Bangko Sentral ng Pilipinas’ (BSP) tightening policy stance, said the recent 50 basis points hike on Thursday – thus bringing the benchmark rate to its highest level since 2009 at 4.5 percent – is an expected decision in response to rising inflation and weak peso.
It also recommends a closer monitoring of supply-and demand-side pressures to inflation since “despite recent tightening of monetary policy, inflation is projected to remain above the four percent upper target bound in 2018 and stay in the upper half of the target band (three-four percent) during 2019–2020.”
“The BSP should look to tighten monetary policy further. The exact pace of monetary tightening should depend on evolving external and domestic conditions,” IMF Staff said. “Exchange rate flexibility should continue to support the economy’s ability to adapt to external shocks.”