IMF cuts Philippine growth estimate

By Keisha B. Ta-asan

THE INTERNATIONAL Monetary Fund (IMF) expects Philippine expansion to slow this year as rising interest rates cloud the global economic outlook.

It lowered its growth forecast for this year to 6.5% from its 6.7% estimate in July, matching the lower end of the government’s 6.5-7.5% goal.

“IMF staff projected real gross domestic product to grow by 6.5% in 2022 but slow to 5% in 2023, as the confluence of global shocks weigh in the economy in the coming months,” IMF Mission Chief for the Philippines Cheng Hoon Lim told a news briefing in Manila on Monday after finishing their yearly review.

“The IMF has had successive downgrades of global growth, including China and the US. The Philippines is not isolated from the rest of the world. So if these countries slow down, the Philippines will also slow down,” she said.

Ms. Lim said the growth outlook remained clouded by uncertainties caused by the slowdown in major economies such as the United States and China, and tightening monetary policy to temper inflation. 

In its latest World Economic Outlook (WEO) the IMF slashed the global GDP growth outlook to 3.2% from 3.6% this year and to 2.9% from 3.6% for 2023.

Inflation is also expected to rise to 5.3% this year before declining in 2023 as tighter monetary policy keeps inflation expectations anchored, Ms. Lim said.

Prices rose by 6.3% year on year in August — above the central bank’s 2-4% target — for a fifth straight month. The average inflation in the first eight months was 4.9%.

The Bangko Sentral ng Pilipinas (BSP) has raised benchmark interest rates by 225 basis points (bps) this year to tame inflation, including its 50-bp hike last week.   

Ms. Lim said the central bank’s policy tightening is appropriate to keep inflation expectations anchored.

The IMF said the Philippine banking system has shown resiliency as profitability returned to pre-pandemic levels and bad loans have only increased slightly.   

“Downside risks to growth and higher interest rates warrant close monitoring of financial stability risks especially in sectors that are overleveraged,” Ms. Lim said, citing the need to amend the country’s Bank Secrecy Law and enhancing bank supervision.

The Philippines’s continued fight against money laundering and terrorist financing would also improve business sentiment and encourage more foreign direct investments.

“The government’s plan to undertake fiscal consolidation while prioritizing highest infrastructure spending is commendable,” the IMF mission chief said. “The issuance of the medium-term fiscal framework that covers a six-year horizon, beyond the usual three-year horizon, helps signal the National Government’s commitment to fiscal consolidation and fiscal sustainability.

“Fiscal consolidation should be underpinned by stronger revenue mobilization and cost-effective government spending. This is important to secure the resources needed for the Philippines’ important social and development plans,” she added.   

Ms. Lim said central bank intervention in the foreign exchange market could ease inflationary pressures especially when there is “heightened volatility with sharp and disorderly exchange rate depreciation.” This could relieve some of the pressure on monetary policy and lower output costs.

Meanwhile, S&P Global Ratings lowered its growth forecast for the Philippines to 6.3% from its 6.5% estimate in June, citing rising interest rates meant to curb inflation that could temper expansion.

“More domestic demand-oriented economies are less exposed to the global slowdown,” it said in a report. “We expect a larger slowdown in 2023 in South Korea and Taiwan than in India, Indonesia and the Philippines.”

“Considering economies other than Indonesia, we expect elevated core inflation to drive up policy rates materially further in Australia, India, New Zealand, the Philippines and South Korea,” the credit rating company said.

S&P said it expects inflation in the Philippines to quicken to 5% this year before easing to 4.25% in 2023 and to 3.5% in 2024.

It also sees the central bank further raising key policy rates by 75 basis points (bps) to end the year at 5% before cutting rates by 75 bps to 4.25% in 2023 and another 75 bps to 3.5% in 2024.

“In some countries, the domestic demand recovery from COVID-19 has further to go,” it said. “This should support growth next year in India, Malaysia, the Philippines and Thailand. The latter three should also further benefit from improving tourism.”