IMF raises RP economic forecast

THE Bangko Sentral ng Pilipinas (BSP) kept its interest rates steady on Thursday, as the International Monetary Fund (IMF) raised its economic growth forecast for the country until 2010. Citing the country’s sustained remittance growth and the slow recovery in exports, Dennis Botman, IMF Philippines resident representative, said the country is likely to post growth of one percent this year, an improvement from its previous forecast of a 1-percent contraction.

For next year, Botman said the country could grow by 3.2 percent, higher than the IMF’s previous forecast of 2.25 percent.

The IMF’s growth projections are within the government’s target range of 0.8 percent to 1.8 percent for this year and 2.6 percent to 3.6 percent next year.

Later in the day, the BSP announced that its policy-making Monetary Board decided against changing its interest rates to continue supporting the country’s economic recovery.

“The Monetary Board decision to maintain policy rates is based on its assessment that current monetary settings remain appropriate,” BSP Deputy Governor Diwa Guini-gundo said.

The BSP has reduced its policy rates by 200 basis points since December last year, bringing its overnight borrowing and lending rates to record lows of four percent and six percent. This resulted a 151 basis points reduction in the lending rates of Philippine banks.

Based on its latest World Economic Outlook (WEO), the IMF raised growth forecasts for most economies ahead of the annual meetings with the World Bank in Istanbul next week.

The IMF projected the global economy would shrink 1.1 percent this year and rebound to an annualized growth of 3.1 percent in 2010, better than the July forecasts of 1.4 contraction in 2009 and 2.5 percent growth in 2010.

Botman said remittances to the Philippines would be resilient and likely to grow by four percent this year, a turnaround from the IMF’s previous forecast of a four percent contraction, and higher than the BSP forecast of about three percent from $16.4 billion last year.

The IMF said exports would post a slower contraction of 19 percent this year, but still above the government’s projection of 13 percent to 15 percent.

Sustained remittance growth and a smaller contraction in exports will result in an increase in the current account, boosting the balance of payments (BOP) surplus to $4.9 billion this year from $89 million last year.

Botman said inflation would reach 2.8 percent and 4 percent this year and next year. These are within the BSP’s inflation target of 2.5 percent to 4.5 percent this year and 3.5 percent to 5.5 percent next year.

“The Philippines has been able to weather the global financial storm well due to past reforms,” Botman said, referring to the reforms in the banking system which led to a decline in non-performing loans, high capital adequacy ratio (CAR), prevention of toxic assets, as well as liquidity measures.

He however said it would be premature to prepare an exit strategy, as financial institutions remain weak, credit intermediation impaired, and households having suffered from asset price busts.

In the area of public finance, he said the Philippines’ improved fiscal position has helped reduce sovereign risk and created space for fiscal stimulus.

“A sizeable increase in the tax effort remains the key priority in the economic agenda,” he said, adding that legislative commitment to reforms would support collection performance. –Maricel E. Burgonio, Senior Reporter, Manila Times With A Report From AFP