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February 25, 2009

Philippines: Rate cut, raised spending to boost economy
The Philippines has room to ease monetary policy further to support growth this year with inflation firmly on a decelerating path, a central bank deputy governor said, underscoring expectations of a rate cut next week.

The Southeast Asian country also forecast the budget deficit could widen to as much as 178 billion pesos ($3.7 billion) this year, or 2.2 percent of gross domestic product, as it increases spending to boost domestic demand.

"Monetary policy will continue to focus on price stability, to the extent that we have scope to reduce interest rates and continue easing monetary policy, and that flexibility is provided by a good inflation outlook and well-anchored inflation expectations," Diwa Guinigundo told a business forum on Tuesday.

"You can expect monetary authorities to continue being a partner of economic growth."

Guinigundo's comment echo what other senior central bankers have said since the previous policy meeting on Jan. 29, when it cut rates by half a percentage point for the second straight time.

The central bank is widely expected to cut rates further on March 5 -- the same day February inflation data will be released.

The overnight borrowing rate is now at 5.0 percent and overnight lending at 7.0 percent.

Authorities hope slowing inflation, which hit a 10-month low of 7.1 percent in January, would boost consumption -- a key driver of growth.

Finance Secretary Margarito Teves told a congressional committee that higher spending on infrastructure and social services would likely widen the budget deficit this year to 2-2.2 percent of GDP against a current estimate of 102 billion pesos, or 1.2 percent of GDP.

The government expects growth of at least 3.7 percent this year from 4.6 percent in 2008, with state spending on irrigation seen boosting farm production and the services sector expected to weather the global financial crisis.

Growth and the country's balance of payments (BOP) are expected to be under pressure this year from slowing exports and remittances from overseas Filipino workers, Guinigundo said.

The central bank forecasts remittances, which last year was estimated at nearly 11 percent of GDP and is a pillar of domestic consumption, to slow to 3-6 percent growth from double-digit increases in at least the last three years.

But the Philippines' BOP would remain in surplus of at least $500 million this year, Guinigundo said, following the government's $1.5 billion global bond issue last month and lower oil imports. Manila had a BOP surplus of $89 million last year.

Guinigundo also said the central bank had raised its estimate for the country's end-2009 foreign reserves to a record $40 billion from $37-37.5 billion previously.

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