World Bank cuts Phl growth forecast to 4.2% this year

MANILA, Philippines - The World Bank has trimmed its growth outlook for the Philippines this year to 4.2 percent, from an earlier forecast of 4.8 percent, as it warned of the impact of a looming global recession similar to the Lehman-induced crisis in 2009.

In its Global Economic Prospects 2012 report released yesterday, the World Bank warned developing nations, including the Philippines, to prepare for downside risks posed by the eurozone debt crisis and the sluggish US economy.

“The risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains,” it said, adding that should more countries find themselves denied such financing, “a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic could not be ruled out.”

“The world could be thrown into a recession as large or even larger than that of 2008/09,” the report said.

Amid the continuing European fiscal crisis and weakening growth in several big emerging economies, the World Bank has significantly lowered its economic forecasts.

In the report, the World Bank said Philippine gross domestic product (GDP) is now expected to grow 4.2 percent in 2012 and further by five percent in 2013. Last year, the economy likely expanded by 3.7 percent

The Philippines, along with Indonesia, Malaysia and Thailand, have been forecast to experience sharply slowing growth from 6.9 percent in 2010 to 4.6 percent in 2011. Growth in these economies will be mixed in 2012, the World Bank said, with strengthening domestic demand offsetting the dampening trade effects of the global turmoil.

The possibility that political tensions in the Middle East and North Africa could disrupt oil supply may also affect economic outlook. It also noted that unresolved high deficits and debts in Japan and the US, and the slow trend growth in other high-income countries, may trigger sudden adverse shocks.

It also warned that a crisis in high-income countries can have an adverse effect on countries, such as the Philippines, which are heavily reliant on remittance inflows.

“A severe crisis in high-income countries, could put pressure on the balance of payments and incomes of countries heavily reliant on commodity exports and remittance inflows. A severe crisis could cause remittances to developing countries to decline by 6.3 percent a particular burden for the 24 countries where remittances represent 10 or more percent of GDP,” it said.

The World Bank likewise forecast that growth in the economies in East Asia and the Pacific region have slowed to 8.2 percent in 2011, and is projected to ease further to 7.8 percent in 2012.

The slight downgrade of the regional outlook was due to natural catastrophes and the global financial turmoil, particularly the eurozone credit crisis, that adversely affected the region’s exports.

Nonetheless, the World Bank said growth in the region will remain fairly robust due to strong domestic demand, substantial fiscal space for policy interventions, downside flexibility in policy interest rates, and significant reserve levels.

 In the face of a highly uncertain environment, the World Bank stressed the importance of contingency planning for developing countries.

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s chief economist and senior vice president for development economics, in a statement.

The World Bank noted that developing countries now have less fiscal and monetary space for remedial measures than during the 2008-2009 financial crisis. This means the developing countries’ ability to respond may be constrained, when global conditions deteriorate.

Hans Timmer, director of development prospects at the World Bank, said developing countries “should pre-finance budget deficits, prioritize spending on social safety nets and infrastructure, and stress-test domestic banks.”

“An escalation of the crisis would spare no one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09... The importance of contingency planning cannot be stressed enough,” he said.