RP less vulnerable to fiscal crisis—IMF

MANILA, Philippines—The Philippines is “not immune” to the worst financial crisis to ravage the global economy in 80 years but is “less vulnerable” to it, thanks to significant fundamental macroeconomic reforms implemented over the years, a visiting International Monetary Fund mission said on Friday.

In a press briefing after an annual country review, IMF mission chief Il Houng Lee said the domestic economy may grow at a slower pace of 4.4 percent this year and 3.5 percent next year.

The forecast for 2009 was scaled down from the earlier IMF projection of 3.8 percent given the financial turmoil.

The latest growth forecast for this year is in line with the government’s latest forecast of 4.1-4.8 percent for this year but is less optimistic than the 3.7-4.7 percent official forecast for next year.

“The global economy is facing financial turmoil at a global scale we haven’t seen since the Great Depression,” Lee said.

“As for the Philippines, significant reforms in fiscal and banking sectors in the past few years, as well as the buildup of (foreign) reserves in good times, have lessened the economy’s vulnerability,” he said.

“Nevertheless, the economy is not immune to the turmoil and it is important to take preemptive measures to face the challenges that lie ahead.”

In a separate assessment, the World Bank said the Philippines was “in a better position” to cope with the global slowdown despite prospects of slower growth and higher inflation. (See related story on this page.)

Reduced OFW remittances

Lee said the financial turmoil weighing on the global economy would reduce the Philippines’ export earnings as well as its share of foreign investments and even remittances from overseas Filipino workers.

Thus, the IMF backed the need to pump-prime the domestic economy even if this meant incurring a slightly higher government budget deficit. But Lee said it should be the “right balance”—not exceeding 1.7 percent of gross domestic product (or about P150 billion) for 2009.

Given the external shocks, IMF resident representative Reza Baqir added: “It is appropriate to have a modest fiscal stimulus. The question is how much would it be without backfiring because if the deficit is very large, it will be counter productive.”

For next year, the IMF said the key challenge for fiscal policy would be to cushion the impact of the global downturn on the real sector while maintaining fiscal discipline.

While allowing that a higher deficit would soften the blow of the global shocks on the real economy, the mission warned that recent changes in the income tax law and the planned reduction in corporate income tax may pull down tax collections as a ratio of gross domestic product, to levels seen before the reform of the value-added tax (VAT).

“This could rekindle investor concerns, especially in the context of expected tight external financing conditions for emerging markets next year,” the mission said in a statement.

NFA subsidies

Hence, the IMF urged the government to reform excise taxes on tobacco and alcohol products and rationalize fiscal incentives, as well as accelerate tax administrative reforms, to generate more resources for fiscal spending.

The financial hemorrhage of state-owned National Food Authority figured prominently in government discussions with the IMF, which started on Nov. 5 and ended on Friday.

The IMF mission noted that higher spending for NFA’s subsidies would likely result in a deficit for the agency equivalent to 1 percent of gross domestic product (GDP) this year from a broadly balanced position last year.

The government’s goal of protecting the poor, the IMF said, can be better realized by using direct intervention or well-targeted conditional cash transfer schemes.

Overall, the IMF expects the national government to end up with a budget deficit equivalent to 0.9 percent of GDP this year (P70 billion), aided by privatization receipts.

“The tax effort is expected to remain broadly unchanged at about 14 percent of GDP as windfall revenue gains from high oil prices were broadly offset by changes to the income tax law and weaknesses in VAT revenues,” the mission said.

Monetary easing

The IMF mission sees the Bangko Sentral ng Pilipinas easing monetary policy in the months ahead, if the economic slowdown proves protracted and inflation expectations fall further.

When the inflation rate is on the decline, central banks tend to ease monetary policy to support growth, such as by cutting interest rates or the reserves that banks are required to keep in low yielding instruments.

The BSP recently slashed the reserve requirement by 2 percentage points to 19 percent as a ratio of total deposits and deposit substitutes.

“We see some scope for further easing going forward if growth slows,” Lee said.

The mission shares the BSP’s assessment that consumer price pressures are beginning to ease and that inflation would likely average 9.8 percent this year and 6 percent in 2009.

The IMF added that preserving the foreign reserves at a sufficiently high level would also help sustain confidence in the peso as well as the resilience of the financial system.

Banking reforms

The IMF mission said recent reforms had strengthened the financial system but spillovers from the global financial crisis must continue to be monitored.

“The fallout of the global financial crisis on the domestic financial system has to date been limited. While direct exposure to Lehman Brothers and to toxic assets has been small, rising sovereign spreads have led to mark-to-market losses on banks’ holdings of Philippine sovereign bonds,” it said.

Marking to market refers to the accounting practice of assigning a value on certain assets based on current market prices.

The IMF welcomed the BSP’s recent measures giving some relief to banks in booking mark-to-market losses and providing liquidity support to the financial system.

Hike deposit insurance

The mission also supported plans to raise the maximum deposit insurance coverage offered by the Philippine Deposit Insurance Corp. Lee said an increase in the limit to P500,000 from the current P250,000 would be reasonable enough.

“At the same time, it is important to recapitalize the PDIC to match the higher insurance liabilities under the new limits,” the IMF said.

The discussions with the IMF were part of the so-called Article IV Consultations, the Philippines being an IMF member although it is no longer under any IMF funding program.

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