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November 10, 2008

Philippine central bank keeps rate cut option open

November 8, 2008
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November 15, 2008

IMF cuts Philippine GDP forecast to 4.4%
The International Monetary Fund (IMF) on Friday cut its 2008 growth forecast for the Philippines to 4.4 percent from 5.2 percent and said a prolonged slowdown would warrant an easing in monetary policy in the coming months, reported Reuters.

The IMF also said it expects growth in the Philippines' gross domestic product (GDP) to slow further next year, to 3.5 percent, amid the worst global financial crisis in decades.

But it added that the fallout of the crisis on domestic financial markets had so far been limited since the banking industry had minimal exposure to toxic assets.

"If the economic slowdown proves protracted and inflation expectations adjust sufficiently downwards, which appears to be a likely scenario, monetary policy could be eased in the period ahead," an IMF mission said in a statement after it concluded talks with the government.

The Philippine central bank will review its monetary policy on Nov. 20 and most analysts expect it to cut interest rates for the first time since January with inflation steadily decelerating.

But when asked if the central bank should cut rates at its meeting next week, IMF mission chief Il Houng Lee said: "The current monetary policy stance is appropriate."

The central bank kept rates steady at its last meeting in October but raised rates at each of its three previous meetings by a total of one percentage point to rein in inflation.

However, it has also taken steps to try to boost liquidity in the financial system, such as a two percentage point cut in banks' reserve requirement which took effect on Friday.

Annual inflation could slow to below 10 percent by January, earlier than the central bank's forecasts, from a 17-year peak of 12.5 percent set in August, said socioeconomic planning Secretary Ralph Recto.

"It could be single digit by January because of easing oil and commodity prices," Recto told reporters on the sidelines of a business meeting.

The new IMF growth estimates are in line with the government's forecasts. The Southeast Asian country expects gross domestic product growth will slow to 4.1-4.8 percent this year from a record 7.2 percent last year. It sees growth slowing further, to 3.7-4.7 percent, in 2009.

Manila has said it would spend more on infrastructure and social services to counter impact of the global financial crisis on the domestic economy, but the higher expenditure means it could miss its target of balancing its budget by 2010.

Recto said the government could have a fiscal shortfall of 0.5 percent of GDP in 2010.

The Philippines said it expects its budget deficit to reach 102 billion pesos next year, more than two-thirds higher than an earlier estimate of 60 billion pesos. That compares with an estimated shortfall of 75 billion pesos this year.

The IMF projects a higher budget deficit of 140 billion pesos, or 1.7 percent of GDP, in 2009.

"The country is faced with external shocks," said Reza Baqir, IMF resident representative to the Philippines. "It is appropriate to have a modest fiscal stimulus."

But the IMF said the scheduled lowering of corporate income taxes to 30 percent from 35 percent in 2009 and a law exempting minimum wage earners from paying income tax would depress the government's tax revenues to levels seen before a wider sales tax reform in 2005.

"This could rekindle investor concerns, especially in the context of expected tight external financing conditions for emerging markets next year," the IMF said in its statement.

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