RP economy to slow sharply this year - IMF

MANILA, Philippines - The country’s economic growth is set to slow sharply this year as the economy faces “strong head winds” from falling global demand and a drop in remittances from Filipinos working abroad, the International Monetary Fund (IMF) said yesterday.

In its annual review of the Philippines economy, the IMF forecast that gross domestic product growth will ease to 2.9 percent this year, down from a projected 4.4. percent in 2008.

The IMF said inflation targeting has helped anchor inflation expectations in the Philippines and urged the authorities to cut interest rates if inflation expectations continue to fall.

The country’s annual inflation rate eased to 7.1 percent in January, the lowest rate in 10 months, from eight percent in December.

The IMF said the value of the peso is “broadly in line with longer-term fundamentals”.

It said exposure by banks in the Philippines to failed and “distressed” global banks is limited but urged the central bank to step up surveillance of banks’ off-balance sheet activities.

“Continuing strains in global financial markets could lead to further losses on banks’ security holdings, reduce the availability of external financing, and raise risks related to banks’ off-balance sheet activities,” the IMF warned.

It said combined exposure to bankrupt US investment bank Lehman Brothers and 10 other distressed global banks amounted to $1.5 billion, or 13 percent of equity.

IMF resident representative Dennis Botman said in a briefing yesterday that the 2.25-percent growth this year was based on the Fund’s latest revision in the World Economic Outlook (WEO).

According to Botman, however, the IMF’s numbers might still change, especially the balance of payments projection of a $500 million deficit for 2009. He said authorities are watching the movements in the prices of commodities which are still coming down.

On the whole, however, Botman said the IMF expects the growth in the country’s exports and imports to be flat, so would foreign direct investments. “Modest financial transactions would lead to that very small BOP deficit,” he said.

Botman said the IMF is also monitoring remittances from overseas Filipino workers that he said the Fund expected to grow by two percent this year –dramatically lower than the double-digit growth rate seen in the last decade.

Meanwhile, Botman said the IMF expects the country’s inflation rate to slow down to 4.8 percent in the beginning of this year and then drop further to four percent at the end of 2009.

“These projections are in line with the recovery in the Philippine and the world economy towards the end of the year and on to 2010,” Botman said.

In the Public Information Notice released by the IMF, fund officials said that the Philippine economy faced “strong headwinds”, but it also started from a position of strength.

“Directors expected growth to moderate over the near term as external demand falls, and private consumption wanes with more modest remittance inflows,” the IMF said in the report. “Weaker domestic demand, accompanied by receding commodity prices, should anchor expectations of lower inflation.”

The IMF expressed satisfaction over the strengthening of financial sector that the official findings indicated should enable banks to better withstand the impact of the economic slowdown. – Des Ferriols