World Bank: RP headed for outright recession

MANILA, Philippines – The World Bank (WB) expects the Philippines to hit “outright recession” this year with domestic production declining by half a percent before recovering to a 2.4-percent growth in 2010 and 4.5 percent in 2011.

The WB’s projection for 2009 was only marginally better than earlier projections made by the International Monetary Fund (IMF), which had expected the economy to decline by one percent this year before posting a modest 2.25-percent growth in 2010.

The WB said in its latest Global Development Finance report that gross domestic product of the Asia Pacific region in general is expected to improve beginning in late 2009 and continuing into 2010.

The exceptions, aside from the Philippines, are Malaysia and Thailand.

The three countries are seen to have weaker growth because of their heavy trade with the US and countries in Europe hit hardest by the global financial turmoil.

“Recovery is expected to be relatively gradual, reflecting substantial fiscal stimulus in China combined with a gradual recovery of demand for the region’s exports among high-income countries,” the WB said, adding that on average, GDPs in the region should increase by 6.6 percent in 2010 and by 7.8 percent by 2011.

Faced with a quickly deteriorating situation, most developing economies in East Asia and the Pacific have eased monetary policy aggressively by lowering interest rates, reducing reserve requirements and, in some cases, providing direct liquidity to the banking system.

“To the extent affordable, most have launched fiscal stimulus programs; the most ambitious of these is in China,” the WB said.

According to the WB, middle-income countries have introduced discretionary fiscal stimulus packages and low-income countries like the Philippines, typically with limited or no fiscal space and weak or limited absorptive and administrative capacity, have been working to obtain a boost in external aid to create room for additional outlays.

But the WB said discretionary cuts in tax rates and increases in spending have combined with lower revenues in line with weaker growth and declining commodity prices to increase fiscal deficit throughout the region.

“The packages in China and the Philippines incorporate measures to be financed by both the public and private sectors,” the WB said.

Earlier, the IMF said there was little that the Arroyo administration could do to avoid a contraction, warning there was “very real danger” that higher public spending could backfire.

The IMF revised its earlier zero-growth forecast, saying that the negative effects of the global slowdown on the Philippine economy were more severe than anticipated.

But fund officials refused to describe the decline as a recession, saying the IMF preferred to treat the economic contraction as measured by GDP as a “slowdown.”

The IMF has just concluded its 2009 staff visit mission with mission head Il Houng Lee telling a press conference that the economy entered the year with weaker private consumption and investment.

But Lee said the one percent GDP contraction was likely the bottom, with quarterly performance gradually expanding until 2010 when growth is projected to average at 2.25 percent.

“We are looking at a gradual recovery of the Philippine economy but that would also depend on the performance of workers’ remittances,” Lee said. “If remittances would expand, then growth would be higher.”

Remittances from Filipino workers abroad have been the main driver for domestic private consumption and although inflows have remained positive, private spending has begun to slow down. –Des Ferriols, Philippine Star