Economic Health check
Positive Signs for Philippines Amid Global Gloom
IMF Survey online
March 5, 2012
- Fragile global economy hit growth in 2011 after strong expansion in 2010
- Overall macroeconomic conditions have held steady in downturn
- Key challenge is setting foundation for faster and more inclusive growth
Along with many countries in Asia, the Philippines has been hit by the fragile global economy. After reaching 7.6 percent in 2010, growth slowed to 3.7 percent in 2011.
But in their annual review of the country’s economy—known as the Article IV consultation—IMF economists say overall macroeconomic conditions have held steady, with inflation staying within targets, the national government deficit remaining low, the balance of payments in surplus, and the financial sector withstanding the global stress.
Growth is projected to rise to 4.2 percent in 2012 and to recover to its potential rate of around 5 percent in the medium term.
“The growth outlook for the Philippines is generally positive, despite a slowdown in 2011 as result of fiscal contraction and the effect of the global headwinds,” said the outgoing IMF Mission Chief for the country Vivek Arora.
“We expect that the combination of the fiscal stimulus that has been put in place, supportive monetary conditions, and continued robust remittances will allow domestic demand to pick up in 2012 to offset the drag from weak external demand.”
The slowdown in economic activity in 2011 reflected a fall in electronics exports, particularly of semiconductors, and lower public construction, the IMF says. Exports were subdued by the weak global environment and by supply chain disruptions following the March 2011 Japan earthquake. Export weakness led to a slowing in manufacturing growth, while twin typhoons in September 2011 caused extensive damage to agricultural output.
Key policy challenge
In their assessment, the report’s authors identify a key policy challenge for the Philippine authorities as navigating through the uncertain global environment to maintain macroeconomic stability and build strong inclusive growth.
In recent decades, the level of poverty has fallen in the Philippines, the IMF says, but it has done so relatively slowly and during the last decade, some of this progress was even reversed.
Low fiscal revenue has constrained public investment, and business climate perceptions, limited infrastructure and costly power have held back private investment, IMF economists say. Also, unemployment and under-employment remain high.
Building inclusive growth
“Growth must benefit a broader section of the population than it has done in the past,” Arora said. “There are two planks to this—strengthening investment and governance complemented by a set of mutually reinforcing policies to ensure that areas such as education, governance, and social safety nets are boosted.”
The national government deficit fell substantially short of the targeted annual budget objective of 3 percent of GDP, reflecting lower capital expenditure, particularly on public construction, as a result of improved budget processes.
To support the emphasis on social programs, Philippine authorities remain committed to pursuing a gradual fiscal consolidation over the medium term, envisaging a gradual reduction in the national government deficit from 3.5 percent of GDP in 2010 to 2 percent of GDP from 2013 onwards.
“Bringing down the deficit and at the same time increasing expenditure requires that more revenue is raised,” Arora added. “This will entail strengthening tax collection and administration, something that IMF is supporting through technical assistance. Additional tax measures are likely needed to achieve the authorities’ targets. ”
Weathering global turbulence
Financial conditions have remained supportive of growth. Real lending rates are well below pre-crisis levels, interbank and short-term government bond yields remain below policy rates, and credit growth is rapid. These monetary conditions have not, however, led to inflation pressures because of the emerging slack in the economy.
The balance of payments remains in sizable surplus, since remittances, services exports, and capital inflows have offset the impact of lower electronic exports. During 2011, international reserves rose by nearly $13 billion to $75.3 billion (11 months of imports).
The financial sector has weathered the global turbulence so far, IMF economists say, and the central bank’s recent stress tests suggest that the banks are well placed to withstand the direct effects of a range of shocks. Potential spillovers from global financial disruptions, real estate exposures, rapid credit growth, and concentration and interest rate risk are identified as among the key vulnerabilities.
Overall, the outlook for the Philippines is subject to significant downside risks arising mainly from global spillovers. Renewed global shocks or a prolonged period of sluggish growth could have substantial spillovers to the domestic economy through goods and services exports, financial flows, and remittances.
“In the event of further negative global shocks, there is policy space for the Philippines to respond across a broad front,” Arora said. “Many of the measures used successfully during the 2008-2009 global crisis could be reactivated .The authorities’ policy management is supporting confidence and has built up room for a strong response.”