IMF projection: PH economy to shrink by 3.6 percent

by Ben O. de Vera, Philippine Daily Inquirer, 24 Jun 2020

The International Monetary Fund (IMF) has further downgraded its economic outlook for the Philippines, with the Washington-based multilateral lender projecting gross domestic product (GDP) to shrink by 3.6 percent this year.

The updated GDP forecast in the IMF’s World Economic Outlook (WEO) June 2020 Update report reversed a projection last April of a 0.6 percent GDP growth for the Philippines in 2020. The report was released on Wednesday night (June 24).

The IMF’s updated GDP projection for the Philippines painted a picture darker than government estimates of a negative 2-3.4 percent growth.

The IMF nonetheless projected the Philippine economy to revert to growth next year with a 6.8-percent expansion.

“The downward revision to growth forecasts is mostly attributable to larger-than-expected supply disruptions related to COVID-19 and weaker demand in major trading partners,” said IMF resident representative in the Philippines Yongzheng Yang in an e-mail.

He was referring to the impact of the lockdown imposed in mid-March, said to be among the most stringent in the region, which sent to paralysis at least 75 percent of the economy.

“We now expect the resolution of COVID-19 to be more gradual, and hence the impact of the pandemic on economic growth to be larger and longer than previously anticipated,” Yang said.

“With the latest downgrade of the global outlook, the external environment for the Philippines has also worsened,” Yang added.

The IMF expected the global economy to shrink by 4.9 percent this year, 1.9-percentage points lower than the estimate in April.

“The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s,” the IMF said.

In the case of the Philippines, Yang said the policy fiscal and monetary responses by the government and the Bangko Sentral ng Pilipinas (BSP) to fight the health and socioeconomic crises caused by the COVID-19 pandemic so far were “appropriate.”

“Fiscal measures have rightly targeted the health sector, the vulnerable people, and affected businesses. Monetary policy responses have been swift, with cuts on the interest rate and banks’ reserve requirements,” Yang said.

“To protect the recent progress on poverty reduction, social protection programs should be strengthened as current temporary income support measures are phased out,” he said.

“Moreover, speedy policy implementation will be crucial to mitigate the scarring effects of COVID-19 on the economy,” Yang added.

As the legislative and the executive branches of government finalize bills aimed at a “V-shaped” economic recovery, Yang said “the Philippines still has some policy space for additional stimulus if needed.”

“Owing to prudent debt management over the recent years, the Philippines’ public debt-to-GDP ratio is well below the emerging market average,” Yang said.

“The government therefore has room to provide additional fiscal support, as needed, to the health sector, affected people and businesses. There is also room to cut further the policy rate and banks’ reserve requirements,” he said.

“Moreover, the Philippines has accumulated ample international reserves as a policy buffer against disorderly market conditions,” Yang said.

Economic managers had said they will only allow COVID-19 stimulus packages equivalent to 9 percent of GDP, which is median in the country’s Asean neighbors and other emerging market economies.

The Cabinet-level Development Budget Coordination Committee (DBCC) had projected the end-2020 budget deficit to already reach P1.613 trillion, equivalent to 8.4 percent of gross domestic product (GDP).

Asked if the IMF would recommend widening the budget deficit beyond 9 percent of GDP, Yang replied: “Whether to increase the deficit further or not depends on the need, considering the pros and cons of such a move.”

On Wednesday, Finance Secretary Carlos G. Dominguez III reiterated that “we have allowed for a much-larger budget deficit because it is what public health requires.”

“But we cannot banish the basics of fiscal discipline at the risk of bringing ourselves to bankruptcy or severe unsustainable indebtedness,” Dominguez said.

“We might have managed the surge in infections so far. But, as epidemiologists warn, we could face a second wave of infections,” he said.

“Prudence dictates that we keep our powder dry. We should be able to finance fighting the second wave should this happen,” said the finance chief.

“We have to be very pragmatic as we confront a health crisis whose end we yet do not see. Presented with a variety of options for stimulus programs, we can only afford to finance those that will work best,” Dominguez added.

“A generous stimulus package may be ideal. But if it is unfundable and unsustainable, then it is just wishful thinking,” Dominguez told an online forum.

TSB