Positive Signs for Philippines Amid Global Gloom

Fragile global economy hit growth in 2011 after strong expansion in 2010

Overall macroeconomic conditions have held steady in downturn

Key challenge is setting foundation for faster and more inclusive growth

But in their annual review of the country’s economy—known as the Article IV consultation—IMF economists say overall macroeconomic conditions have held steady, with inflation staying within targets, the national government deficit remaining low, the balance of payments in surplus, and the financial sector withstanding the global stress.

Growth is projected to rise to 4.2 percent in 2012 and to recover to its potential rate of around 5 percent in the medium term.

“The growth outlook for the Philippines is generally positive, despite a slowdown in 2011 as result of fiscal contraction and the effect of the global headwinds,” said the outgoing IMF Mission Chief for the country Vivek Arora.

“We expect that the combination of the fiscal stimulus that has been put in place, supportive monetary conditions, and continued robust remittances will allow domestic demand to pick up in 2012 to offset the drag from weak external demand.”

The slowdown in economic activity in 2011 reflected a fall in electronics exports, particularly of semiconductors, and lower public construction, the IMF says. Exports were subdued by the weak global environment and by supply chain disruptions following the March 2011 Japan earthquake. Export weakness led to a slowing in manufacturing growth, while twin typhoons in September 2011 caused extensive damage to agricultural output.

Key policy challenge

In their assessment, the report’s authors identify a key policy challenge for the Philippine authorities as navigating through the uncertain global environment to maintain macroeconomic stability and build strong inclusive growth.

In recent decades, the level of poverty has fallen in the Philippines, the IMF says, but it has done so relatively slowly and during the last decade, some of this progress was even reversed.

Low fiscal revenue has constrained public investment, and business climate perceptions, limited infrastructure and costly power have held back private investment, IMF economists say. Also, unemployment and under-employment remain high.

Building inclusive growth

“Growth must benefit a broader section of the population than it has done in the past,”...