IMF sees RP economy declining 1% this year

MANILA, Philippines – The International Monetary Fund (IMF) expects the country’s economic growth to decline by one percent this year before posting a modest 2.25-percent expansion in 2010.

The IMF said there is little that the Arroyo Administration could do to avoid a contraction, saying that there is “very real danger” that a higher public spending could backfire.

The IMF revised its earlier zero-growth forecast, saying that the negative effects of the global slowdown on the Philippine economy are more severe than it originally anticipated.

But fund officials refused to describe the decline as a recession, saying that the IMF preferred to describe the economic contraction as measured by the gross domestic product (GDP) as a “slowdown.”

The IMF has just concluded its 2009 staff visit mission and according to mission head Il Houng Lee told a press conference that the economy entered 2009 with less momentum as private consumption weakened and investments continued to contract.

“You’re starting the year with a 2.3-percent contraction so there is not much you can do and there is a very high danger that additional spending will backfire,” Lee said.

Beyond semantics, however, Lee said the one percent contraction in GDP is likely the bottom, with quarterly performance gradually expanding until 2010 when growth is projected to average at 2.25 percent.

“We are looking at a gradual recovery of the Philippine economy but that would also depend on the performance of workers remittances,” Lee said. “If remittances would expand, then growth would be higher.”

Remittances from Filipino workers abroad have been the main driver for domestic private consumption and although inflows are still increasing in the first months of the year, private spending has begun to slow down.

Lee said there is improving but still cautious optimism about the global economic outlook for 2009 and on to 2010. Although this should have meant improved outlook for the Philippines this year, he admitted that the IMF had underestimated the spillover from the global slowdown.

Lee said the seasonally-adjusted GDP performance in the first quarter actually translated to a 2.3-percent decline and said this was the main reason behind the decline expected for the rest of the year.

“The impact on the Philippines is more severe than we expected even if global outlook is actually more positive in 2009,” he said. “But we expect a gradual improvement so the next quarters would be positive growth.”

Even faced with the worst global recession since the Great Depression, the IMF said the Philippines is still performing better than its neighbors due in part to the fact that it is relying less on exports and more on domestic consumption.

According to Lee, the government would maintain its neutral fiscal stance in order to avoid having to increase its debt burden and creating a negative impact on market confidence.

“Fiscal response should be measured,” Lee said. “A deficit of about 3.5 percent of GDP in 2009 would unlikely unsettle investors in view of the global recession but a higher deficit could trigger rising risk aversion.”

Lee said a higher deficit would also increase the financing cost for both the government and the private sector and make the stimulus program ineffective in terms of spurring economic activity.

“Given the modest recovery in 2010, a broadly neutral fiscal stance should be targeted, impluing a deficit of around 3.5 percent of GDP,” he said.