IMF warns about economic turbulence 

The International Monetary Fund (IMF) has warned emerging economies including the Philippines about bouts of economic turbulence amid the hawkish stance of the US Federal Reserve as well as the stubbornly resurgent COVID-19 pandemic, according to a report by Philippine Star.

In a blog post titled “Emerging Economies Must Prepare for Fed Tightening,” IMF economists Stephan Danninger, Kenneth Kang and Helene Poirson said policymakers may need to react by pulling multiple policy levers depending on the actions of the US Fed, as well as challenges in their respective countries.

“While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence,” the IMF warned.

According to the multilateral lender, the US central bank has decided to accelerate the tapering of asset purchases. There is also the possibility of three rate hikes this year due to inflation developments.

“Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labor market has started to feed into wage increases. The new Omicron variant has raised additional concerns of supply-side pressures on inflation,” it said.

The IMF said the changes have made the outlook for emerging markets more uncertain.

“These countries also are confronting elevated inflation and substantially higher public debt. Average gross government debt in emerging markets is up by almost 10 percentage points since 2019, reaching an estimated 64 percent of GDP by end-2021, with large variations across countries,” the IMF said.

It explained that emerging market currencies could still depreciate amid robust growth in the US and moderating inflation.

“The Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook. Should policy rates rise and inflation moderate as expected, history shows that the effects for emerging markets are likely benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery,” the IMF said.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has maintained an accommodative monetary policy stance to help the economy fully recover from the impact of the pandemic.

After slashing key policy rates by 200 basis points in 2020, the Monetary Board has kept the benchmark interest rate at a record low of two percent for more than a year now.

This allowed the Philippines to emerge from the pandemic-induced recession with a back-to-back gross domestic product (GDP) growth of 12 percent in the second quarter and 7.1 percent in the third quarter of last year.

The Philippines slipped into recession in 2020 as the GDP shrank by 9.6 percent when the economy stalled after the government imposed the longest and strictest lockdown in the world to slow the spread of the virus.

This year, economic managers expect a faster GDP growth of seven to nine percent against last year’s five to 5.5-percent projection.

Likewise, inflation may ease back to the BSP’s two to four percent target in 2022 and 2023 after exceeding the range when it accelerated to 4.5 percent in 2021 from 2.6 percent in 2020 despite easing to a 12-month low of 3.6 percent in December.

BSP Governor Benjamin Diokno said monetary authorities would do whatever it takes on the monetary stance of the recovery equation.

The Philippine central bank said it would implement a data-driven exit strategy from these measures only when there is certainty that the roots of economic recovery have firmly taken hold.

“Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation. In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities. Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively,” the IMF said.

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