Managing dark clouds in the Philippines

One key assumption of the Philippine Government’s growth and inflation targets for this year and the next is a relatively manageable global economy. Growth targets of 6-7% in 2024 and 6.5-7.5% for 2025, as well as the inflation target of 2-4% for both years must be anchored on our major trading partners growing at less than 2%, based on the IMF’s latest forecasts.

Overall, the world economy is expected to modestly expand by just slightly over 3% for both 2024 and 2025. By historical standards, this prognosis is low, the weakest in fact in decades.

This was admitted by IMF Managing Director Kristalina Georgieva during the United Nations’ Summit of the Future in New York on Sept. 22. While arguing that the world economy “has proven to be remarkably resilient to the multiple shocks of the last years,” Ms. Georgieva also clarified that growth forecasts are a percentage point lower than in the decades prior to the pandemic. Sluggish growth prospects are most pronounced for low-income countries which have to struggle at a below-pandemic path. Unfortunately, they could be victims of a low growth, high debt trap — something that we experienced in the 1980s.

What is more concerning about the global economy is that the risks sound so close and real, including the high cost of money, fiscal consolidation, the longer-term effects of the pandemic, and the raging war between Israel and its neighbors. Downside risks could be weak productivity across borders and sustained geo-economic fragmentation. Big countries are moving back to their home economies, or to economies friendly to them, to do manufacturing or business processes for them.

These are dark clouds over the global economy.

One plank of global growth, and big risk, of course is China, the second biggest economy with a GDP of around $18.5 trillion, to the United States’ $29 trillion. Although the Fund looks at this year’s risks to be balanced, those in China are clearly on the downside. The Fund was rather emphatic in pointing out that “without a comprehensive response to the troubled property sector, growth could falter, hurting trading partners.” Trading partners include the big economies and emerging markets alike, including the Philippines.

In his interesting report of Oct. 2 in GlobalSource Partners, Andrew Collier cited what Bloomberg called a “massive adrenaline shot” announced by the People’s Bank of China (PBoC). Likened to a bazooka, the package was anything but modest:

• a cut in the seven-day reverse repurchase rate to 1.5% from 1.7%;

• a reduction in the required reserve ratio, freeing up an estimated 1 trillion yuan in bank lending;

• an order by the central bank to commercial banks to lower mortgage rates by at least 30 basis points below the loan prime rate before Oct. 31;

• a new rule allowing home buyers to refinance mortgage loans;

• promises of more fiscal stimulus in an unusual shift away from monetary policy; and,

• Ministry of Finance (MoF) bonds issuance for consumption and local debt resolution.

The sudden announcements by both the PBoC and the central government, GlobalSource wrote, suggested increased nervousness about the state of the Chinese economy. GlobalSource held the view that Beijing’s economy could indeed be under heavy stress. Three reasons were cited by GlobalSource:

First, the expected shift from monetary to fiscal policy could be problematic. Easy monetary policy does not exactly filter down to the entire banking system. Banks are dominated by state banks which usually lend to state enterprises in the industrial sector. Monetary policy therefore is fiscal policy “in disguise” and so far, it has not worked.

Second, China’s fiscal space is limited. It does not have sufficient revenues to fund a more sizeable, more significant fiscal stimulus. Large central bank debt will be augmented by massive bond issuance. Xi Jinping in particular is skeptical about housing providing economic benefits to the future of China. GlobalSource does not buy the possibility of a large-scale change in the Chinese Communist Party’s mind set. It could be a simple attempt to perk up sentiment through policy pronouncements. So far, there has been little follow-through and little result.

And third, even the promised huge new support to the economy might not prove enough. Although bank loans for property acquisition could be large following the stimulus from lower interest rates, this will not happen unless consumer sentiment turns more optimistic. Bank loans data does not show this. True, the stock of loans in RMB grew by nearly 9% for the first seven months of 2024 versus the year-ago level. But new loans for households dropped by more than 71% and nearly 38% for both private enterprises and public institutions. With nominal support of the property sector, GlobalSource believes that “Beijing is leaving the property collapse in the hands of local governments.”

As if China’s wobbly prospects are not enough to depress market sentiment and future growth, Fitch Ratings projected US consumption growth to begin slowing down over the next 12 months. By 2025, US consumption is expected to decelerate to 1.4% from 2.2% this year. “A notably sharper slowdown could have big implications for emerging market sovereigns, though we view this risk as low,” Fitch declared. But as reported in the broadsheets, this dark prognosis is supported by a Reuters report that the decline in US consumption in September was the biggest in three years. In addition, the Conference Board also reported that the consumer confidence index in September dropped the furthest since August 2021.

Fitch explained that the Philippines “is among the countries that could experience spillover effects from the anticipated weakness.” As a consequence, Philippine exports are likely to be hit. Remittances from overseas workers could also be trimmed.

Growth momentum could lose a few basis points.

This is our main takeaway from the recent Article IV consultation with the IMF mission a couple of days ago. Mission Chief Elif Arbatli Saxegaard stressed that risks to the growth outlook are tilted to the downside, thanks to the anticipated slowdown in major economies — no doubt including the US and China — commodity price volatility, supply shocks and geo-political tensions.

With the expected weakening of private consumption, despite the easing of monetary policy and the stabilization of inflation to within target, the Fund decided to trim the country’s growth forecasts from 6% to 5.8% this year and from 6.2% to 6.1% in 2025, both below the official growth targets of 6-7% this year and 6.5-7.5% in 2025.

Fitch’s BMI recently commented that “the BSP’s decision to lower interest rates ahead of the Fed is a sign that policy makers are starting to grow increasingly concerned about the economy’s health.”

The Fund recognized that non-monetary measures have been continuously undertaken by the authorities to reduce food prices and they would certainly contribute to supporting private consumption. Higher private investments, both local and foreign, could also help stimulate economic growth. There is a great potential from the country’s natural resources, blue economy, and demographic advantage.

But such potentials have to be unlocked “through comprehensive and well-sequenced structural reforms.” What is fundamental in this structural approach is good governance, and a word of advice coming from the Fund could have been a good way for the political leadership to keep its feet on the ground. While the Fund was commending the Philippines that its growth projections remain one of the highest in the region, it could have delivered a more sobering piece of advice, that high growth is not enough. It has to be quality growth, it has to be durable over the long run, one that would not perpetuate jobless growth.

If the National Government’s debt level is now inching beyond 60% of GDP, it might be difficult to expect that more and more resources could be earmarked for cheap and reliable energy, stronger connectivity from Luzon to Visayas and Mindanao, and for funding investment in human capital. The authorities ought to start thinking of breaking the old mold of doing the budget, spending it, and monitoring how it was spent within the context of transparency and accountability.

Dark clouds affect everyone on this planet, but if our domestic economy is fortified, we could by all means manage them. We struggle but we survive.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.