IMF cuts PH growth to 6.6% this year

The International Monetary Fund (IMF) has revised lower its Philippine growth forecast to 6.6 percent from an earlier estimate of 6.8 percent because of a slower-than-anticipated first quarter economic performance.

IMF’s Luis Breuer in reviewing their latest IMF Article IV staff assessment on the country, said the downgrade was a factor of a “deceleration” in public expenditures albeit temporary, and strong base effects after the 2016 election spending.

Despite the lower 2017 growth projection, Breuer said the IMF’s medium-term outlook for the Philippines remains optimistic at 6.8 percent.

According to the report, the economy is still “very strong” with and the manageable inflation path supports this growth. The IMF also acknowledged efforts to prevent the economy from overheating, with programs and projects that would preserve investor confidence, and plans to increase infrastructure and social spending.

“The economic performance of the Philippines continues to be very strong, featuring robust growth combined with low inflation,” said Breuer. While the economy slowed down to a growth of 6.4 percent in the first quarter compared to 2016’s 6.9 percent, the medium-term outlook remains favorable due to domestic demand and recovery in exports.

“Inflation is projected at the center of the target band in 2017-2018 reflecting stable commodity prices and a near zero output gap. The current account balance is projected to turn negative from 2017 and gradually widen due to higher imports driven by investment, but the external sector remains strong and international reserves ample,” noted Breuer.

“Risks are tilted to the downside and stem mainly from external sources,” he added, listing these external risks as slowing China growth, the US monetary policy tightening, and globalization worries by some rich nations. He also worried about the “combination of rapid credit growth, buoyant private investment, and fiscal expansion could lead to overheating.”

As for domestic risks, these mainly include natural disasters and security issues.

“On the upside, the approval of the first tax reform package could lead to higher infrastructure investment which raises potential growth,” said Breuer. The flexible exchange rate regime and strong fundamentals should help continue to cushion the economy from external shocks, he said.

The IMF staff also noted that the Bangko Sentral ng Pilipinas’ monetary stance continue to be appropriate but that it should “stand ready to adjust to changing market conditions or if inflation pressures build.” It also cautioned on plans to reduce high reserve requirements on banks and that this should be “carefully calibrated and timed over the medium term.”

“Financial sector indicators suggest that the banking sector is sound, while credit growth has accelerated,” said Breuer. “Strengthened micro-prudential supervision including the early introduction of Basel III and allowing the additional single borrower limit on PPPs to lapse is to be commended. Nevertheless, macro-prudential policies should address systemic risks to financial stability such as rising leverage in some parts of the corporate sector, and build on the results of the real estate stress tests and enhanced monitoring of exposures.”