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‘Outright recession’ for RP

Tuesday, June 23, 2009 | MANILA, PHILIPPINES [ BusinessWorld Online ]

BY PAOLO LUIS G. MONTECILLO, Reporter


THE WORLD BANK expects the Philippines to be one of the few countries in Asia-Pacific region to slip into "outright recession" this year as a global slump slows trade and capital flows.

In a report titled "Global Development Finance, Charting a Global Recovery," the multilateral lender said the Philippines, which it now expects to shrink by 0.5%, was one of five East Asia and Pacific economies — out of a list of 11 — likely to record a contraction this year.

The new forecast is down from the bank’s previous 2009 outlook of 1.9% growth.

"GDP (gross domestic product) for the region is anticipated to revive over the course of late 2009 and into 2010, though for several countries, including Malaysia, Thailand and the Philippines, outright recession is anticipated this year," the World Bank said.

The other countries expected to contract in 2009 are Fiji (-2.5%), Malaysia (-4.4%), Thailand (-3.2%) and Vanuatu (-2.5%).

Neighbors such as Indonesia, Laos and Papua New Guinea, meanwhile, are expected to grow by around 6% this year.

The country’s growth has slowed significantly as exports, which make up more than a third of domestic output, have slumped due to weak demand from abroad. Concerns over the economy have also prompted consumers to save instead of spending money.

The World Bank’s latest growth forecast for the Philippines follows dismal first quarter growth of just 0.4% from a year earlier, lower than a 1.8-2.8% target. The bank’s forecast is also lower than the official full-year goal of 0.8-1.8% growth, revised earlier this month from 3.1-4.1% previously.

The Philippines grew by 3.9% last year, down from 2007’s three-decade high of 7.2%.

The bank said foreign investment flows, which accounted for more than a third of the region’s GDP last year, would continue to thin in 2009 due to risk aversion towards emerging markets.

Regional exports have also declined significantly by an average of 48% since September, the bank said, while industrial production has fallen by 4.6% over the same period.

An expected 5% decline in remittances from migrant workers would also weigh down growth for countries like the Philippines, it said.

"In the past, remittances have been stable, or even countercyclical, during economic downturns in the recipient economy. The present crisis, however, is affecting the countries from which remittances originate," the World Bank said.

"Future flows are bound to be affected by the simultaneous economic recession in the high-income countries."

The bank expects remittances to the Philippines, which at a record $16.4 billion made up more than a tenth of the domestic output in 2008, to fall by 4% this year. This is lower than the Bangko Sentral ng Pilipinas’ (BSP) zero-growth forecast.

For the region, GDP growth is projected to slip to 5% in 2009 from 8% during 2008, the World Bank said.

Excluding China, which is expected to outpace all other countries in the world this year with a 9% growth, the region will likely decline by 0.2%, it said.

Global output is expected to fall by 2.9% but developing nations as a whole are expected to do better with a 1.2% growth, or down from 5.8% in 2008, boosted mainly by China and India.

"[But] when China and India are excluded, GDP in the remaining developing countries is projected to fall 1.6% or 0.6% in per capita terms, a real setback for poverty reduction," the World Bank said.

It said various policy actions, including fat fiscal stimulus packages and substantial monetary easing by East Asian economies, would lift the region’s growth next year.

To encourage local banks to lend and spur economic activity, the BSP has cut policy rates by a total of 175 basis points since December — the longest easing cycle since the adoption of the central bank’s inflation targeting framework in 2002.

The government has also put in place a P330-billion stimulus package.

The region is expected to recover with a 6.6% growth next year, followed by a 7.8% expansion in 2011, the World Bank said.

But it said the ability of developing countries to combat the crisis may come under pressure due to lower government revenues and shrinking foreign investments.

"Falling government revenues and limited access to external sources of capital constrain most countries’ ability to respond with countercyclical fiscal policies," the World Bank said.

"The implications for poverty reduction and the Millennium Development Goals of a failure to maintain social spending could be far-reaching.

"Not only is social spending essential to protect the vulnerable and avoid loss of human capital, it also is a more effective form of fiscal stimulus than tax cuts," the World Bank said, urging governments to continue to spending despite financial tightness.

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