RP growth to be propelled by domestic demand - IMF

With its exports slowing down, the International Monetary Fund (IMF) said all of the country’s growth would come from domestic demand, raising the risky proposition of sustainability with declining exports.

IMF senior advisor Jerald Schiff said in a teleconference with journalists that the Asia Pacific region as a whole was never expected to decouple from the major economies where growth has been the major driver in its trading partners.

“We never actually expected the region to decouple,” Schiff said. “Obviously with the entire global economy slowing, exports of the region will necessarily slow.”

In its recent annual macroeconomic review, the IMF already said the country’s export growth would slow down this year and in 2009 as a result of the weakening demand in its major trading partners.

On the other hand, Philippine officials have been downplaying the impact of this global slowdown, saying that the country has diversified its exports to such an extent that a slowdown in the US would no longer have the same devastating effects as in the past.

The IMF also downscaled its projections for the Philippines, saying that economic growth would be slightly slower than expected in 2009 and warning that the government should not risk incurring a large deficit that could make the problem worse.

But the IMF said that while trade linkages have changed in that there are now more players in the market, the bulk of world trade still invariably ends up in the world’s biggest economies — all hard-hit by the financial meltdown in the US.

Moreover, the increasing globalization of financial markets would make decoupling of economies even more difficult, as demonstrated by the cascading effect of the meltdown in the US that still plagues global markets.

“More to the point, in this particular situation we can see that it’s not just trade linkages but also financial-sector linkages that are causing delinking to be even less of a plausible expectation,” Schiff pointed out.

Against this backdrop, Schiff said domestic demand would have to take up the slack from slowing exports to the country’s major trading partners.

“I don’t have the figures for the Philippines in front of me, but for the region as a whole, net exports will have a slightly negative impact on growth, so basically all of the growth will be coming from domestic demand,” Schiff said.

Domestic demand, according to Shiff, would be supported to some extent by lower oil prices which represents an important turnaround from the past several years.

In the Philippines, Schiff domestic demand could also be supported by policy stimulus. “But still I think it’s an open question as to how strong domestic demand can be when exports are declining, and that certainly represents an important risk to our projections,” he said.

While the country is in a good position to weather the crisis, the IMF said pre-emptive measures are still needed to cope with the full brunt of the economic slowdown.

IMF mission chief Il Houng Lee told a press conference earlier that the Fund retained its 2008 growth forecast of 4.4 percent but next year’s outlook has been downscaled slightly from 3.8 percent to 3.5 percent.

Lee said the growth projection for 2009, however, assumed that the Arroyo Administration would be undertaking a fiscal stimulus program that would dampen the impact of the global slowdown on domestic economic activities.

“For 2009, the key challenge for fiscal policy is to balance the need for cushioning the impact on the real sector against the benefits of maintaining fiscal discipline,” Lee pointed out.