shocks! more shocks?

IMF says more shocks likely
by Gerard S. de la Peña/BWorld/11.26.08

THE PHILIPPINES and other Asian countries could be hit by more economic shocks, the International Monetary Fund (IMF) warned, as domestic consumption might not be enough to hold up economies given a substantial weakening of export receipts.

An IMF official called for interest rate cuts and said governments must hike public expenditures to stimulate economic activity, as well as make sure financial systems remain stable so banks continue lend — giving them more capital through public funds if necessary.

In a teleconference with journalists on Monday evening, Jerald Schiff, senior adviser at the IMF’s Asia and Pacific Department, said Asian economies would be hit hard hit by external shocks even if economic "fundamentals," like dollar reserves and strong corporate earnings, remained strong.

The IMF expects Asia’s economy as a whole to grow by 6% this year, down slightly from an earlier forecast of 6.1%. Next year, the multilateral agency sees a "substantial slowdown," with growth of only 4.9%. The original 2009 forecast was 5.6%.

"Risks to this outlook are unusually large and tilted squarely to the downside. In particular, a sharper-than-expected global slowdown and a more protracted period of financial turmoil could raise pressures on corporates and households in Asia, contributing to a rise in bad loans and risking an adverse cycle of tightening credit conditions and deteriorating growth," Mr. Schiff said.

He said an export slowdown was a given considering that major markets were drying up, but financial sector links between Asia and developed countries in the West would also drag down the region’s economies.

"We never actually expected the region to de-couple," Mr. Schiff said in response to a question raised by BusinessWorld.

"And ... in this particular situation, we can see that it is not just trade linkages but also financial sector linkages that are causing de-linking to be even less of a plausible expectation."

In its latest Regional Economic Outlook for Asia and the Pacific, the IMF said the Philippine economy would grow by 4.4% this year, unchanged from its previous forecast, and by 3.5% in 2009, lower than the earlier forecast of 3.8%.

The IMF’s 2008 growth projections for the Philippines are well within the government’s revised forecast range of 4.1-4.8%, but its outlook for next year is lower than the official forecast of 3.7-4.7%.

The World Bank has trimmed its 2009 forecast for Philippine gross domestic product (GDP) to 3-4% from 4-4.5% this year. The Asian Development Bank has forecast 4.7% growth next year from 4.5% this year, but could still revise its estimates.

With weaker exports bearing down on growth, Mr. Schiff pointed out that most of economic growth would have to come from demand.

"Domestic demand will be supported to some extent by lower oil prices which represents an important turnaround from the past several years, and also in many countries by policy stimulus.

"But still I think it’s an open question as to how strong domestic demand can be when exports are declining," he said.

Around 70% of the Philippines’ GDP is due to private consumption, fueled by remittances from overseas workers.

Exports, which are equivalent to 40% of economic output, grew by merely 1.2% in September. The government now expects export growth of 2-4% this year from 5% earlier, and only 1-3% next year from the original 7% estimate, with the crisis hitting top markets United States and Japan.

Philippine central bank officials last week said domestic demand may be sustained by robust remittance inflows, which are expected to reach $16.6 billion by yearend, or about 15% more than the $14.4 billion posted in end-2007.