"They are all less gung-ho about this country’s likely near-term economic performance."
International lending institutions and foreign financial facilities are always careful when preparing GDP forecasts for their client-countries. They not only take into account the mix of circumstances—economic, political and social—under which an economy is currently operating, they also review the economy’s record of ability to stay on the same course and to maintain a momentum. Things happen as a year progresses that will make the economy go off-course or lose momentum.
International lending institutions—in the Philippines’ case, the International Monetary Fund, the World Bank and the Asian Development Bank—and foreign financial entities are even more careful when they decide to revise country GDP growth forecasts downward. The reason for this is the negative effect of downward forecast revisions on economic, and more importantly, political sentiment in the countries that they adjudge to be unlikely to perform less well.
But institutions like the World Bank, the IMF, Nomura Securities and J.P. Morgan Chase have no reason to sugarcoat their assessments of the economic prospects of their client-countries. They tell it—good things or bad things—like it is.
Until around the middle of this year, international lending institutions and the foreign financial community were quite positive about the growth prospects of the Philippine economy in 2018. But in recent months, they have become more cautious in their assessments of this country’s 2018 economic growth prospects. They have become somewhat less gung-ho.
Thus, Asia’s other development financing institution—the China-sponsored Asian Infrastructure Investment Bank—is now in the picture. It has reduced its Philippines’ growth forecast for 2018 to 6.4 percent. The previous forecast was 6.6 percent. In its explanation for the forecast revision, ADB spoke, among other things, of the lively adverse impact of the current inflationary surge on the Philippine economy.
Though it made a downgrade, IMF was a little more sanguine about the Philippine economy’s prospects in 2018. It revised its forecast to 6.5 percent. Like ADB, IMF expressed concern about the likely adverse economic impact of the steady rise in this country’s inflation rate, which is now 6.7 percent, a nine-year high. IMF also expressed concern about the widening of the national budget deficit.
The Duterte administration is targeting a deficit of 3.3 percent and 3.2 percent of GDP for 2018 and 2019, respectively. IMF considers those deficit figures expansionary. It would like the Philippine government to target a neutral—not expansionary— fiscal policy. Deficit targets of 2.4 percent this year and 2.5 percent in 2019 would, in IMF’s view, be neutral targets.
Though even more sanguine, the World Bank has nonetheless lowered its Philippine 2018 growth forecast by two notches to 6.5 percent from 6.7 percent.
What was it about the Philippine economic environment that cause World Bank to become less gung-ho?
In its most recent Philippine Economic Update, World Bank stated: (T)he domestic economy slowed in the first half of the year due to weak exports of electronics and underproduction in the agriculture and fisheries sectors due to unforeseen weather disturbances.”
World Bank’s senior economist in the Philippines elaborated on the PEU by saying this: “Food inflation is the main driver of the rapid inflation rate…(T)he external factors, along with the widened trade deficit, have resulted in the further weakening of the peso by 7 percent so far this year…(H)igher oil prices and transport costs… contributed to the above-target inflation the past few months.”
Zeroing in further on inflation, the PEU stated: (A) high inflation rate poses another risk to growth, which could dampen private consumption and investments.”
As can be seen, World Bank’s concerns are the rising inflation rate, possible declines in private consumption and investments, weak exports, agricultural underproduction, rising transport costs, and the steady weakening of the peso.
They may differ in their reasons for revising downward their forecasts for the 2018 Philippine economic growth, but the international lending institutions and the foreign financial entities have one thing in common at present: they are all less gung-ho about this country’s likely near-term economic performance.