IMF cuts RP growth forecast, warns of fiscal blowout

THE Philippines is likely to incur a bigger budget deficit for this year than what the government has programmed due to weak revenue collection and high expenditures, the International Monetary Fund (IMF) said Wednesday.

Dennis Botman, IMF resident representative, said the government’s fiscal gap, excluding proceeds from the sale of state assets, would widen to P150 billion, or 2 percent of gross domestic product (GDP). This is higher than the government assumption of P102 billion, or 1.2 percent of GDP.

As a measure of the amount of goods and services produced locally, GDP is a proxy for economic output.

“Looking forward, fiscal policy will need to walk a fine line between supporting growth, while capping the deficit at 2 percent of GDP to entrench investor confidence,” Botman said during a briefing held at the conclusion of the IMF’s Article IV Consultation with the Philippines.

Botman said slower economic growth would translate to lower government revenues, with the tax effort expected to fall this year as a result of the implementation of a tax relief law and the reduction in the corporate income tax.

“To fully pay for the expenditures, it’s important for the Congress to pass tax measures such as rationalization of tax incentives, sin tax reforms,” Botman said.

The IMF official said the legislative revenue measures are needed to finance the ambitious increase in public investment in the 2009 budget so as not to breach the deficit-to-GDP ratio of 2 percent.

He however said financing the investments in infrastructure and social services is more important than containing the deficit.

“It’s very critical to raise revenue effort and tax compliance,” he added.

For this year, the government aims to collect P1.393 trillion in revenues and expects privatization proceeds of P10 billion.

Llower exports, remittances

Citing slower remittance, exports and foreign direct investments growth, Botman said the country’s GDP would grow by 2.25 percent this year, lower than the IMF’s previous projection of 2.9 percent.

“The downward revision for growth in the Philippines is smaller compared to other emerging market countries, owing to relatively robust domestic demand and a more muted impact of the crisis on net exports,” Botman said.

He said relatively robust remittances would support domestic consumption and further monetary policy easing would support growth.

The IMF expects inflation to decelerate this year, but pick up in the fourth quarter, during which time the country’s growth is expected to recover.

Botman said the IMF expects inflation to average this year at 4.8 percent and end 2009 at 4 percent.

Last month, the Bangko Sentral ng Pilipinas (BSP) decided to slash its interest rates by 50 basis points to spur economic growth, thus reducing its overnight borrowing and lending rates to 5 percent and 7 percent, respectively.

Based on the latest inflation outlook, BSP expects inflation to fall within the target range of 2.5 percent to 4.5 percent for 2009 and 3.5 percent to 5.5 percent for 2010.

“Well anchored inflation expectations, lower commodity and food prices, and inflation is projected to decline within the inflation target toward the end of the year have created maneuvering room for monetary policy to support growth,” Botman said.

He said the country’s dollar surplus would reach $500 million this year, lower than BSP’s forecast of less than $2 billion.

Local banks face challenges

Botman said the banking sector confronts challenges despite lower non-performing loan ratios, limited direct exposure to toxic assets and high capital adequacy ratio.

“Spillovers from the crisis through financial channels have so far been contained but present challenges due to elevated risk premiums in relation to the banking system’s large holdings of government debt securities,” he said.

In this regard, he said Congress should approve amendments to the BSP charter to strengthen further its bank supervision powers amid the financial crisis.

“The proposed amendments in the BSP charter should be adopted without further delay,” he said.

The IMF also supports a lower increase in the deposit insurance limit to P500,000 from the current P250,000. State-run Philippine Deposit Insurance Corp. had proposed to raise the cap to P1 million. –Maricel E. Burgonio, Reporter, Manila Times