IMF downscales 2009 growth projection for RP to zero

MANILA, Philippines - The International Monetary Fund (IMF) has revised its growth projection for the country for this year from 2.25 percent to zero, with remittances from overseas Filipinos actually declining by 7.1 percent.

Faced with the worst global recession since the Great Depression, the IMF said the Philippines is still in a good position to weather the storm, due in part to its strong fiscal track record.

The IMF said in its latest World Economic Outlook (WEO) that the country’s economy, measured as gross domestic product (GDP), would drop to zero this year because of declining trade and spending.

IMF resident representative Dennis Botman told reporters in a press conference late yesterday that revision in the country’s growth projections would have to be viewed in the context of the global economic recession.

World growth declined by 6.25 percent in the fourth quarter of 2008 and the IMF said it expected a similar decline in the first quarter of 2009, with emerging economies retreating by four percent.

Botman said world growth is projected to decline by 1.25 percent this year – the first decline since the Second World War and by far the deepest global recession since the Great Depression.

“The revision (in the Philippines’ growth outlook) reflected the prospect of a significant contraction in exports and imports and a weakened outlook for remittances which we now anticipate to decline by 7.5 percent in 2009,” Botman said.

Before the revision, Botman said the IMF projected zero growth in remittances this year, indicating that the inflows would match last year’s total inflow of $16.4 billion.

But Botman said the projection for the remittances was “highly uncertain” because remittances have often proved more resilient than anticipated. 

Overseas workers send money home to their families depending on how much they need and if prices are low and consumption is declining anyway, the amount would tend to also decline.

Botman said the IMF expected private consumption to remain robust and grow by 2.7 percent – slower but still positive. He said the increase in public spending also indicated that public consumption would make a contribution.

“The recent announcement to increase the deficit target to close to three percent of GDP is appropriate and provides an upside risk to our growth projections while not affecting investor confidence,” Botman said.

Because of these factors, Botman said the IMF expected the Philippines to avoid a recession this year and start posting a modest but delayed recovery in 2010.

Overall, Botman said the growth outlook is still uncertain and certain factors would prove helpful, like the fiscal stimulus and the recent uptick in remittances.

The IMF said actions so far taken by the government were expected, such as increasing fiscal spending to finance a stimulus program as well as raising insurance cover.

The IMF said the key concern was a deeper and longer recession in advanced economies outside Asia.

The IMF said this could further reduce trade and could impact heavily on exports, investments and growth.

In addition, the fund said further deterioration in global financial conditions might further tighten financing.

The IMF said this would hurt financial and corporate sectors in the region and the impact of external shocks could be worse than originally expected.

The IMF had already downscaled its economic growth projections once this year, after its Article IV review. It went down from its 3.5-percent estimate in November last year to only 2.25 percent.

At the time, the IMF said the Philippines still had “considerable room” for monetary easing that would stimulate growth, especially if done in tandem with a calibrated increase in fiscal spending.

But in the latest WEO, the IMF said the Philippines’ fiscal flexibility has narrowed because of huge debts that could be made worse by higher deficit spending and higher borrowing.

The IMF said it saw growth slowing down even further than originally expected, mainly because of the easing of demand in the country’s major export markets.

The Article IV review is IMF’s annual examination of all its members to determine their macro-economic status. The Fund completed its review mission to the Philippines last January.

The IMF also sees remittances from overseas Filipino workers growing by two percent this year – dramatically lower than the double-digit growth rate seen in the last decade.

The IMF earlier expressed satisfaction over the strengthening of the financial sector, a development the IMF said would enable banks to better withstand the impact of the economic slowdown.

While it called BSP’s monetary easing “appropriate” in the light of receding inflation pressure, the IMF said the government should consider raising its tax effort to finance the planned increase in public spending.

“Given the still-high level of public debt, there should be a measured fiscal stimulus to avoid compromising fiscal sustainability and policy credibility,” the IMF said. “To provide more scope for fiscal easing and outlays on well-targeted pro-poor cash transfers, Directors suggested raising the tax collection effort, broadening the tax base, and rationalizing tax incentives.”