IMF sees Philippine economic contraction in 2009

The Philippine economy is expected to contract this year because of weak remittance inflows and export earnings despite the increase in government spending and lower interest rates, the International Monetary Fund (IMF) said on Wednesday.

The IMF told a press briefing at the conclusion of its Staff Visit Mission that the Philippines’ gross domestic product (GDP) is expected to decline by 1 percent this year from 3.8-percent growth last year as remittances from overseas Filipino workers (OFWs), the main drivers of consumption growth, would decline by 4 percent.

GDP is a proxy for the country’s economic performance, which represents the amount of goods and services produced locally.

“Private consumption and external demand are expected to recover modestly in the remaining quarters, but would remain weak,” said Il Houng Lee, the IMF adviser for Asia and Pacific Department.

The Bangko Sentral ng Pilipinas (BSP) expects remittances to post a flat growth this year from $16.4 billion last year, supporting the projection of its governor, Amando Te­tangco Jr., that there would be no economic recession in 2009.

“Remittances are expected to contract by 4 percent this year, although it cannot be ruled out that OFWs could rise to the occasion once again, particularly if the global economy recovered faster than anticipated aided by strong implementation,” Lee said.

“The [1-percent] contraction [of GDP] includes potential overshooting of savings and contribution from fiscal measures,” he added.

Lee said that it was difficult to avoid economic recession this year, given the weak GDP growth of 0.4 percent in the first quarter of 2009.

“The economy entered with less momentum as private consumption weakened and investment continued to contract, except for private construction,” he added.

Lee said that the credit quality of banks will be affected by the slowing economy, especially in the consumer-loan and real-estate segments, Lee said.

With the decline in remittances, the country’s balance of payment (BOP) is expected to post a small surplus this year, which is way below the Bangko Sentral’s forecast of $700-million surplus for 2009.

“There would be decline in remittances but this would be compensated by small trade balance similar to [that of] last year. The capital account is slightly better than [that of] last year. Overall, BOP will [post a] small surplus but depending on the capital flows, it would change,” Lee said.

For 2010, the IMF projected GDP to grow by 2.5 percent as a result of recovery from the global economic slowdown.

Lee said that the Philippine government’s budget deficit could post 3.5 percent of GDP this year, higher than the government target of 2.5 percent of GDP, or P199.2 billion, which could trigger rising risk aversion and increasing financing costs for the government and the private sector and render the stimulus ineffective.

“To protect fiscal credibility, it will be critical to clearly demonstrate assurance to medium-term fiscal consolidation, anchored on strengthened revenue efforts,” he added.

Lee said that the monetary easing will not help the economy post growth this year although he cited that the Bangko Sentral still has more room to cut its policy rates.

“Weaker growth, well-anchored inflation expectations and the outlook for commodity and food prices provide moderate scope for further easing. An exit from the easier monetary stance should commence only when the recovery is on solid footing,” he added.

Bangko Sentral has reduced its interest rates by 175 basis points since December last year, bringing the overnight borrowing rate to 4.25 percent and the lending rate to 6.25 percent. –Maricel E. Burgonio, Senior Reporter, Manila Times