IMF urges RP to tighten fiscal policies

MANILA, Philippines – The International Monetary Fund (IMF) stressed the need for emerging economies in Asia including the Philippines to start tightening its accommodative monetary and fiscal policies in light of emerging signs of inflationary pressures as well as strong influx of capital brought about by the robust economic growth in the region.

In its Regional Economic Outlook (REO) for Asia and the Pacific, the IMF said the strong economic growth in the region is leading to new policy challenges as inflation pressures continue to build, prices in some property markets continue to grow at double-digit rates, and strong capital inflows add further to domestic price pressures.

IMF director for Asia and Pacific Department Anoop Singh said Asia remains firmly in the lead of the global economic recovery and the time has come for countries in the region to normalize monetary and fiscal policy stances.

“We welcome the steps so far taken by policymakers to control inflation risks and limit the build-up of financial sector vulnerabilities, but more now needs to be done given the continued strong growth in the region,” Singh stressed.

The IMF said it has upgraded the gross domestic product (GDP) growth forecast in Asia to eight percent instead of seven percent this year before easing to a more sustainable pace of 6.8 percent next year.

The IMF said economies across the region are expanding strongly led by China with a projected GDP growth of 10.5 percent this year and 9.6 percent next year followed by India with 9.7 percent this year and 8.4 percent next year.

On the other hand, the GDP growth of Association of Southeast Asian Nations (ASEAN) + 5 that includes the Philippines, Thailand, Vietnam, Malaysia, and Indonesia would hit 6.6 percent this year and 5.4 percent next year.

IMF upgraded the country’s GDP growth projection to seven percent instead of six percent this year after the country posted a surprising economic turnaround in the first half of the year. This was the second time that IMF has upgraded the country’s GDP growth forecast as it originally expected the domestic output of the Philippines to grow by 3.6 percent this year.

“In the Philippines, above-trend growth in 2010 reflects a recovery in exports, strong consumption supported by robust remittance inflows, and a pickup in investment,” it stated in the report.

Thailand is expected to lead the pack with a GDP growth of 7.5 percent this year followed by the Philippines with seven percent, Malaysia with 6.7 percent, Vietnam with 6.5 percent, and Indonesia with six percent.

Economic managers in the Philippines through the Cabinet-level Development Budget Coordination Committee (DBCC) upgraded the country’s GDP growth target to 5.0 percent to 6.0 percent instead of 2.6 percent to 3.6 percent this year as the country’s GDP posted a stronger-than-expected growth of 7.9 percent in the first half of the year from 1.2 percent in the same period last year.

For next year, the IMF retained the GDP growth outlook of the Philippines at 4.5 percent making it the second slowest country in terms of GDP growth next or slightly better than Thailand’s 4.0 percent. Vietnam is expected to lead the pack next year with 6.8 percent followed by Indonesia with 6.2 percent, and Malaysia with 5.3 percent.

“In 2011, as the recovery matures, growth is expected to return to trend,” the multilateral lender added.

The DBCC expects the country’s GDP growth to improve further to a range of seven percent to eight percent next year.

The IMF stated in its latest REO that there is a need for further tightening of monetary policy in many countries in Asia, including through greater exchange rate appreciation.

“A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating,” IMF explained.

It pointed out that there is room to return to a more stimulative policy stance should a worsening of global economic conditions negatively affect Asia.

The Bangko Sentral ng Pilipinas (BSP) has kept its accommodative policy stance by keeping its key policy rates at record lows due to the benign inflation outlook but has withdrawn almost all the liquidity enhancing measures that were introduced during the height of the global financial crisis in November of 2008.

It would be recalled that the BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 bringing the overnight borrowing rate to a record level of 4.0 percent and the overnight lending rate to 6.0 percent.

The IMF said central banks in the region including the BSP would face a difficult challenge in managing capital inflows that pose potential risks to financial stability.

“Macro-prudential measures have appropriately been taken in many regional economies to minimize risks, but more action may be needed,” the IMF said. –Lawrence Agcaoili (The Philippine Star)