IMF: Philippines robust for rate hikes, trade gap

October 15, 2018

THE PHILIPPINE ECONOMY is strong enough to cope with rising interest rates and a growing external trade gap, the International Monetary Fund (IMF) said last weekend.

 

Ken Kang, deputy director at the IMF’s Asia and Pacific Department, said that the Philippine economy is resilient in the face of rising interest rates worldwide. “Overall, I think the debt repayment capacity in the Philippines remains strong,” Mr. Kang said in a press briefing at the sidelines of the joint World Bank-IMF annual meeting in Bali, Indonesia late Friday.

 

  

 

The IMF official said the Philippines can absorb the impact of rising yields on its outstanding debt, given that this burden accounts for a “relatively low” share in the overall economy.

 

Unpaid debts from foreign creditors amounted to $72.199 billion as of June, equivalent to 22.5% of gross domestic product (GDP). This declined from a 23.5% share as of June 2017 and is modest compared to the country’s counterparts.

 

The Philippines can also stand its ground in the face of a growing trade gap, the multilateral lender said. “The current account deficit has increased on the back of higher oil prices and import demand, but at a 1.5% (of GDP) deficit, it still remains manageable,” Mr. Kang said.

 

“Moreover, reserves at about $80 billion represent seven months of import coverage and about four times the size of short-term external debt falling due,” he added. “But perhaps most importantly, growth remains robust.”

 

The current account reflects fund flows from goods and services trading. A deficit meant more funds fled the country compared to what went in.

 

The IMF sees the current account deficit settling at 1.5% of GDP this year, which if realized will top the 0.9% of GDP forecast of the Bangko Sentral ng Pilipinas (BSP) for 2018. It will likewise widen from the $2.518-billion gap posted in 2017 equivalent to 0.8% of GDP.

 

The current account posted a $3.1-billion deficit as of end-June, compared to a $133-million gap in 2017’s first half, already hitting the full-year 2018 estimate as imports continue to grow by double-digit pace while exports remain slumped.

Global oil prices have increased for the ninth consecutive week, leading to a bigger import bill for the Philippines.

 

Still, this is expected to be offset by the $75.161-billion dollar reserves held by the BSP. This is enough to cover 6.8 months’ worth of imports or pay 5.9 times outstanding foreign debt, although it was the lowest level seen in seven years.

 

The IMF has downgraded its growth forecast for the Philippines to 6.5% this year and 6.6% in 2019, falling short of the 7-8% target set by the Duterte administration.

The growth estimate for 2018 was revised from 6.7% previously, with the IMF citing last semester’s slower-than-expected 6.3% that compared to the 6.6% recorded in 2017’s first half.

 

The IMF sees faster growth this semester, but flagged risks like rising oil prices and headline inflation, rapid credit growth, worsening global trade tensions and tighter credit conditions.

 

The 2019 revision, on the other hand, factors in the impact of a changing external environment, particularly “escalating trade tensions” between the United States and China, IMF country representative Yongzheng Yang said last week.

 

The IMF expects the government’s infrastructure push and a steady stream of foreign direct investments — coupled with continuing robust private consumption — to sustain the economy’s expansion.

 

The forecasts for the Philippines are better than the Association of Southeast Asian Nations (ASEAN) averages of 5.2% and 5.1% for 2018 and 2019, respectively.

 

World leaders and central bankers gathered in Bali last Oct. 8-14 for the annual IMF-World Bank meeting, where they cited the need to “act promptly” and put in place reforms to “protect the expansion, mitigate risks, rebuild policy space, enhance resilience and raise medium-term growth prospects for the benefit of all,” according to the communiqué published on Friday.

 

The economic officials cited the need to maintain strong fundamentals, sound policies and a resilient international monetary system to maintain stable and flexible exchange rates, which comes at a time of highly-volatile currency markets.

 

In a separate statement issued over the weekend, BSP Deputy Governor Diwa C. Guinigundo assured that Philippine authorities are taking steps to keep the economy on solid footing. “We are very confident in the underlying strength of our economy,” Mr. Guinigundo said following the World Bank-IMF meeting. “The Philippines remains one of the best performing economies in the fastest growing region in the world. GDP growth remains strong, FDI inflows are at record levels, infrastructure investment is booming, and we have historically low levels of public sector debt.” He added that recent peso swings against the dollar are “expected” and that the local unit remains “stable and competitive” relative to other currencies.

 

 

 

from: Business World

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