The International Monetary Fund (IMF) continues to expect a recovery of the global economy in the second half of the year after “a series of adverse shocks in the first half of 2003.” According to the IMF’s September 2003 World Economic Outlook, projected growth rates of the world’s output for 2003 and 2004 still remain at 3.2% and 4.1% since April this year compared to 3.0% in 2002.

Different Tracks
Outgoing IMF Economic Counselor and Research Director Kenneth Rogoff says the Fund is “reasonably optimistic about seeing a return to normal growth in the global economy,” pointing to immediate geopolitical uncertainties that have receded, the aftershocks from the equity price bubble that are dissipating, and the massive policy stimulus in place after the downturn that is starting to bear fruit.

The World Bank, however, is more pessimistic about the strength of the world economy. Using international dollar purchasing power parity weights, the Bank downscaled its forecast under Global Economic Prospects 2004 since its previous release in March this year to 3.1% from 3.2% for 2003 and to 3.9% from 4.1% for 2004. The report observes business and consumer spending declined following events that undermined confidence – “the buildup to war in Iraq, transatlantic tensions, persistent concerns about terrorism, and the outbreak of Severe Acute Respiratory Syndrome (SARS).” For rich countries, recovery is moderate. For developing countries, the outlook is robust.

Engine of Growth
Dr. Rogoff explains growth will not be balanced. For the United States and “emerging” Asia, the issue is the sustainability of the rebound. With recent developments in the financial markets, the World Economic Outlook states growth may even pick up faster than currently expected, particularly in the U.S. Despite “a weak labor market and considerable excess capacity,” there are encouraging signs of improvement in the U.S. – robust productivity growth, advanced corporate balance sheet restructuring, and increasing budgetary spending, with further provisions for Iraq and Afghanistan.

On the other hand, Western Europe is just “struggling to turn around the corner.” IMF has cut growth prospects for the euro area due to the deep and prolonged slowdown. Its leading problems are “weak consumer confidence and fragile corporate balance sheets.” A synchronized recovery with the U.S. economy is based on many common factors, common shocks including “technology, oil prices, and confidence.”

Conversely, Japan posted stronger GDP growth in the first semester, resulting in higher growth forecasts till next year. Data on exports, industrial production, retail sales, fixed investments, equity prices, and bond yields, however, remain mixed. Nevertheless, the IMF identifies “roadblocks to sustained growth: problems with corporate and bank balance sheets, a soaring government debt, and entrenched deflationary expectations.”

The continuing “dependence of global growth on the United States” as the engine of expansion of the world’s economy, as well as the “widening of global imbalances,” however, worry the IMF, as it underscores the urgent need for “structural reforms in many countries.” Beyond 2004, many risks still remain for the world economy even as worst case scenarios have been reduced. One of the risks is the global current account imbalance, a large share of which is being absorbed by the U.S., and much of it is benefiting Asia, where the level of foreign reserves of its emerging economies is surging.

For emerging economies, therefore, IMF recommends a slowdown in accumulating foreign exchange reserves, increasing reliance on domestic demand, and greater exchange rate flexibility.

Oil 'Em Up
Based on studies on the correlation between oil prices and economic growth, IMF reports “the run-up in oil prices in 2002 and early 2003, as well as the increase in oil price volatility may have contributed to the slower-than-anticipated pace of the global recovery.” With increased oil supply next year, particularly from Iraq, the IMF expects a 10.5% decline in oil prices after a 14.2% rise this year.

Even then, Dr. Rogoff admits, “it is extremely difficult to predict oil prices.” A divergence between expectations of analysts (sharp fall) and the futures market (sustained) on oil prices could cause oil prices to spike.
For its part, the World Bank notes that oil prices since late 1999 until 11 September 2001 averaged above $25 per barrel. According to the Prospects, “OPEC will maintain strong production discipline over the next few years to keep prices at or above $25 per barrel.”

Orient Express
Collectively, Dr. Rogoff calls emerging Asian economies the “fourth locomotive in the global economy” and “one of only two (engines) that’s really working.” Surging oil prices, the war in Iraq, and the outbreak of SARS in early 2003 slowed down domestic demand in the region. SARS did not only affect China’s GDP in the second quarter, but also tourist arrivals and retail sales in Hongkong SAR and Singapore. Furthermore, the softness of the IT sector slowed down interregional trade, particularly electronics exports from Korea and the Philippines.

Among the ASEAN-4, economic growth in Malaysia and Thailand seems well sustained, but Indonesia lacks investments. While IMF notes that policy response to weaker growth in the region has been appropriate, it continues to underscore the need to sustain progress on structural reforms to consolidate the recovery. IMF still believes in Asia-Pacific as “the world’s fastest growing region this year and further in 2004.”

Meanwhile, the Philippines needs “strong efforts” to “achieve the balanced budget target even by 2009, and secure a more rapid disposal of banks’ NPLs.” China, Indonesia, and Thailand likewise have nonperforming loan problems to address. In addition, the IMF calls on the Philippines – along with India, Korea, and Thailand – to “strengthen insolvency laws to facilitate loan workouts and corporate restructuring.”

Rev Up Please
Significantly, the country’s very high level of public debt presents a medium-term-financing problem should policy-makers ignore “the risk of a reversal of historically low spreads.” The Philippines falls within the World Economic Outlook average estimates of public debt-to-GDP ratio of about 70% among emerging market economies as against a sustainable public debt-to-GDP ratio of 25% for a typical emerging market economy.

Dr. Rogoff challenges, “the current benign financing environment provides a window of opportunity in which countries with particularly acute debt problems need to begin steering debt ratios to safer ground, ideally taking quality measures such as strengthening the tax base and reducing unproductive expenditures.” Incidentally, a pending priority legislation (House Bill 5606 and Senate Bill 2504) limiting the ratio of the public debt to 80% to 100% of GDP finds support in Poland, which set a constitutional limit on public debt up to 60% of GDP.

Power Booster
IMF country representative Vikram Haksar further explains the flat growth expectations for the Philippines until next year as domestically-driven, with strong dollar remittances, low consumer prices and positive current account balance – the downside on election-related uncertainty. He also cited the challenge to reduce losses in the power sector by privatizing National Power Corporation assets soon.

Like last year, Philippine macroeconomic managers remain confident of beating IMF’s 4.0% GDP growth projection this year with a low-end GDP growth forecast of 4.2%. The domestic economy expanded 4.4% in 2002.