IMF says economic growth possible with low inflation
Manila (21 October) -- The Philippines will likely sustain its strong economic growth momentum even under a low inflation regime, the International Monetary Fund (IMF) said. "We expect this [low inflation vis-a-vis robust economic output] to be sustainable. We saw improvements have been made in the way the Philippine economy is being run from a macroeconomic policy perspective," said Timothy Callen, division chief of the IMF's World Economic Studies Division.
"The central bank has been firm when inflation picks up. Monetary policy focusing on managing inflation rate is the right way to go," he added.
The IMF said the Philippines is among the countries in the region that has been successfully managing the surge in foreign exchange inflows.
The international lender, which has been recently aggressive in its surveillance of currency regulations, pointed out that continued liberalization of restrictions on capital outflows would be helpful in dealing with the flood of capital into middle and lower income countries.
"What really helps is being careful with fiscal spending. The lesson here is not that a country needs to cut spending when there are inflows, but rather it needs to exercise fiscal restraint," said Simon Johnson, IMF economic counsellor and director.
The IMF also urged greater exchange rate flexibility, particularly in China, whose large current account surplus remains a key factor to rising global imbalances. Meanwhile, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo noted that with fiscal restraint already being observed, the Philippines will likely experience more capital inflows coming as fiscal consolidation boosts investor sentiment.
The central bank, however, ruled out the adoption of tightened capital controls to address the continued influx of funds. Instead, the BSP will continue to push for further liberalization of the foreign exchange market — an initiative it started early in the year when it relaxed banks' currency trading rules and residents' outward investments, Mr. Guinigundo said.
"A disciplined approach to foreign exchange liberalization would be integral to the BSP's responses to handling real exchange rate movements over the long term," Mr. Guinigundo told BusinessWorld. "In addition, the BSP will continue to adopt a mixture of policies in dealing with the surge in capital inflows, [including] exchange rate flexibility, the build-up of reserves as buffer against exogenous shocks, and prepayment of external obligations where feasible," he added.
The IMF has warned against resisting the appreciation of a local currency, a policy move that it said might lead to more serious adverse macroeconomic consequences when the surge of capital ends. And to this, Mr. Guinigundo agreed. "This is in line with the policy framework of the BSP, which is to let the market determine the level of the exchange rate with a view to participating only to reduce excessive volatility," he pointed out.
"In fact, under the inflation-targeting framework, there is willingness to tolerate greater flexibility in the exchange rate, and to respond to exchange rate movements only when these impact on inflation and inflation expectations," Mr. Guinigundo added. In its World Economic Outlook paper released on Wednesday night, the IMF said the Philippine economy is expected to remain buoyant and at the same time enjoy a benign inflation environment despite threats of a global slowdown arising from problems in credit markets.
The government's fiscal and monetary policies are "appropriate" to shield the country from shocks, Mr. Callen said. "Clearly, there are risks on the downside. [But] at the moment... policies are broadly appropriate in the Philippines," he told BusinessWorld. "The sound macroeconomic framework did boost the economy and reduced volatility. We believe this is a sustainable situation," he added.
The IMF trimmed down its forecast for global growth by almost a half-a-percentage point to 4.8% in 2008 amid concerns that the weak US housing market could continue dampening financial markets and restrain credit. Emerging market economies, however, which have been less affected by the financial market turmoil, are well positioned to weather a weaker external condition and provide support to global growth, Mr. Johnson told a press briefing at the IMF's headquarters in Washington, DC.
The Philippine economy, in particular, is expected to post a 6.3% growth this year, well within the government's target band of 6.1% to 6.7%, and slow down a bit to 5.8% in 2008, the IMF said. The country's economic output in the first half has been robust at 7.3%, largely driven by consumption and government spending.
Inflationary pressures are likely to pick up in the face of rising oil and food prices in the global market, as well as strong capital inflows, but inflation should remain low in the Philippines, the latest report said. The IMF forecasts inflation in the Philippines to settle at 3% this year, below the central bank's official target of 4% to 5%, and at 4% in 2008. Inflation has so far averaged 2.6% in the nine months to September. (Phil-Central Newsletter) [top]