IMF’s worst forecast ever makes reforms urgent

THE Philippine economic outlook is getting direr by the month. Last week the International Monetary Fund (IMF) issued the worst forecast yet for the country.

The world’s so-called lender of last resort said the Philippines would register no growth this year.

If true, this would be the country’s worst economic performance in a decade.

Before the IMF, the World Bank also saw a sharp slowdown of less than 2 percent from last year’s 4.3 percent, which in turn was a significant drop from the three-decade record expansion of 7.3 percent.

It appears the Philippines has yet to break free from a boom-bust cycle that has hounded it for so long.

The last contraction happened in 1998, when the country’s gross domestic product shrank 0.8 percent as it joined other Asian nations in a regional currency crisis.

What mitigated that crisis was the surge in remittances, as overseas Filipino workers (OFWs) increased the amount they sent home.

No OFW remittance rescue anymore?

No such rescue appears forthcoming, as the current crisis is bigger in scale, hitting not only the Philippines’ export markets, but also OFW host-countries.

Indeed the dismal outlook for the Philippines stemmed from the feared contraction in remittances, which has fueled domestic consumer spending, the main driver of economic expansion.

A growing number of pundits see OFW money falling this year, the first time in a crisis year.

The country’s exports have been contracting for half a year, pushing up unemployment in the manufacturing sector.

Worse, the faster pace of decline in exports has widened the current account deficit.

Policymakers have understandably chosen to see the bright side, pointing to the local business process outsourcing (BPO) sector, which seems to be enjoying a run up as US and European multinational companies cut down costs by outsourcing jobs.

But the Philippines’ share of the global offshoring market has been paltry at less than 10 percent. It doesn’t look like the country could raise this share faster in the near term.

The Bangko Sentral ng Pilipinas (BSP) also has cited the country’s ample foreign exchange reserves, built up during the country’s recent yet short-lived economic expansion.

The problem is the worsening outlook for the global economy is putting pressure on governments—Malacañang included—to crank up public spending and prevent the world from sliding into another depression.

For the Philippines, the slowing economy has compounded an already challenged revenue effort, as dwindling incomes both at the corporate and household fronts would dampen tax collections.

In the first quarter, the government’s budget deficit more than doubled from last year, and exceeded this year’s ceiling.

We’ve just entered the second quarter and the fiscal gap is already more than half the full-year program. Besides higher spending, the Department of Finance (DOF) blamed the wider deficit.

Pressure on Finance department

The Finance department would then have to raise money fast, which is why it would schedule the sale of remaining state assets in the third quarter. We hope and pray these assets fetch big bucks. But unless new positive developments come, in the prevailing depressed market conditions the government could not demand a high price for these assets. We pray the government is not forced out of desperation to dispose of those assets at fire-sale prices.

Very wisely, perhaps realizing the bad timing for any asset-sale, the Finance department has also announced plans to return to the international debt market in the fourth quarter. It already completed this year’s foreign commercial borrowing program last January. Going back to the lender’s market when other countries are similarly seeking loans—and when everyone knows you’re desperate—would drive up the premium on any additional borrowing.

With that, we doubt whether our reserves would remain ample—and that is the crux of the matter.

We don’t see the country returning to the twin-deficit dilemma in the near term, but we’re slowly building the case for such a scenario.

Our challenge to the government is to not let up on its fiscal reform tack, even as it restructures the country’s incentives scheme to broaden our foreign exchange-earning capacity.

Nothing new here, but a reiteration of the need to make much-delayed economic reforms. –Manila Times