THE International Monetary Fund (IMF) slashed its growth projection for the Philippines on Wednesday, citing slow recovery in the first half of the year.
Following the Philippines’s annual economic check-up from the IMF via its Article IV consultation this year, the global monetary authority cut its growth projection of the Philippines from 6.9 percent to 5.4 percent for this year.
What pulled the economy down in the first half of the year is largely the second wave of Covid-19 cases in the country, which likely peaked in April, IMF Article IV Consultation Mission Head Thomas Helbling told reporters in a virtual briefing. The resurgence of cases during the period necessitated stricter quarantine measures which disrupted economic activity and has “weighed” on market confidence, Helbling added.
While the IMF said the economy is expected to start its path to recovery toward the third quarter of the year, Helbling warned of pockets of uncertainty in the near-term recovery.
“Uncertainty around the pace of the economic recovery is high, and the balance of risks to economic activity is tilted toward the downside. Supply constraints could lead to delays in vaccinations, which in turn would increase the risk of virus resurgence after the recent second wave and tightening quarantine measures,” Helbling said. “Also, it could amplify the effect of external shocks, such as rising global interest rates and inflation, that would constrain the monetary policy response and raise financing costs for the public and private sector,” he added.
On Wednesday, the Department of Health (DOH) reported 5,414 new Covid-19 cases, bringing the total to 1,332,832 in the country. This is larger than the previous day’s 5,389 new cases recorded.
For 2022, the IMF revised its growth projection upward from 6.5 percent to 7 percent on account of expected vaccination rollouts, global economic recovery, reopening of business and low base effects.
Sustained monetary policy
THE projection of growth, Helbling said, is largely hinged on the Bangko Sentral ng Pilipinas’s (BSP) ability to keep monetary policy accommodative to support the economy.
“For the recovery to take hold, monetary policy should remain accommodative. While the recent spikes in inflation should be closely monitored, the present monetary policy setting is appropriate as the current inflation pressure appears to be temporary and is likely to taper off in the second half of the year,” Helbling said.
Despite an elevated inflation in the first few months of the year, the BSP has been maintaining its interest rate at record low in its monetary policy setting meetings for the year. The BSP is expected to meet for another monetary policy setting next week.
“I think the main task for monetary policy is really to support recovery and help households and firms, including by keeping debt service costs at low levels,” Helbling said.
Ample fiscal space
ON the fiscal front, the IMF said the Philippines currently has ample fiscal space to respond to downside risks in the economy, should they materialize.
The IMF official also stressed that the timely implementation of fiscal support—with flexibility to address evolving priorities—is crucial for continued recovery.
“The fiscal deficit targeted in the 2021 budget provides significant stimulus to economic activity, but given the imperative to beat the virus and the continued difficulties faced by vulnerable families and businesses, more resources could be needed,” Helbling said.
“Such resources should aim to bolster the health-care system to accelerate vaccinations, strengthen capacity for testing, tracing, isolation, and treatment, and support affected families and businesses. A medium-term fiscal strategy should underpin the eventual rebuilding of fiscal space,” he added.
Crucial reforms
GOING forward, the IMF warned that the Philippines should continue to monitor potential pockets of risks that may disrupt economic recovery in the near term. Helbling urged the government to pass crucial laws to ensure continuity of recovery in the long run.
“The full impact of the pandemic is yet to manifest itself, and continued vigilance is needed to safeguard financial stability. To this end, an expansion of the macroprudential toolkit would help enhance the resilience of the financial system,” Helbling said.
“Faster implementation of the credit guarantee scheme and FIST [Financial Institutions Strategic Transfer], together with expected passage of GUIDE [Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery], would help recovery in bank credit, especially for micro, small and medium-sized enterprises.
Moreover, to avoid potential grey-listing by the Financial Action Task Force, it is urgent to continue strengthening the Philippines’s anti-money laundering/combatting the financing of terrorism regime,” he added.
The IMF official said sustained efforts will also be needed to reduce restrictions on foreign investment, fast-track the rollout of the national ID, scale up social protection, strengthen health care and education, and implement climate change commitments.
“These reforms will help the Philippines build back better and position the country for a more equitable and greener future,” he said.
Image courtesy of Nonie Reyes
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