IMF tells PH, emerging markets: Intensify deficit-reduction efforts

MANILA, Philippines—The International Monetary Fund has urged emerging markets like the Philippines to intensify deficit-reduction efforts while inflows of foreign portfolio investments remain significant.

The IMF said that although inflows of foreign funds have been huge, the situation could still reverse.

When advanced economies recover from their current lackluster performance, the foreign capital inflows could suddenly shift back in favor of the advanced markets, according to the IMF.

If this happened, the IMF said, emerging markets with still high deficits could suffer from high interest rates, which would bloat their borrowing costs.

Latest data from the Bangko Sentral ng Pilipinas showed that net inflow of foreign portfolio investments surged to over $3 billion in the first eight months of the year from only about $925 million in the same period last year.

“Although conditions in emerging economies generally remain healthier than in advanced economies, risks in some emerging economies may be on the rise. Thus, continued fiscal adjustment remains appropriate, and in some cases would need to be accelerated,” the IMF said in the latest “Fiscal Monitor Report,” one of its major publications.

The strong inflows of foreign capital, mostly portfolio investments, into emerging economies like the Philippines are credited to the gap in economic-growth performance between that of the advanced economies in the West and the emerging markets, especially in Asia, in favor of the latter.

Economists said foreign fund owners have been shifting their money to emerging markets where growth prospects have been better lately.

The IMF said, however, that the phenomenon might be reversed if the anemic performance of Western economies, which have been serving as major export markets, eventually dampened the growth performance even of emerging economies.

When such a time comes, the IMF said, countries with better fiscal positions could perform better than those with worrisome deficit burden, especially in terms of getting lower interest rates on their borrowings in the international capital market.

“Many emerging economies need to make faster progress in strengthening fiscal fundamentals before cyclical factors or spillovers from advanced economies—which have been limited to date—turn against them,” The IMF said.

In the case of the Philippines, its national government posted a P314-billion budget deficit in 2010 and aims to trim it to P300 billion in 2011.

Finance officials are confident about the ability of the government to keep this year’s deficit within ceiling.

The IMF said that fixing the fiscal situation would not only help avoid steep rise in interests once foreign capital inflows shrink, but would also give more room for governments to fund social services, such as subsidies for the poor.

In the case of the Philippines, subsidies are given to the poorest households selected by the social welfare department under the “Conditional Cash Transfer” program. Under the program, poor families are given monthly allowance in exchange for their commitment to keep children in school.

IMF said, however, that granting of subsidies should be well-targeted to ensure the fulfillment of the subsidy’s objectives. In the case of the CCT, the goal is to keep more poor children in school and reduce poverty.

“Meeting the challenge of rebuilding fiscal space while addressing social needs will require greater targeting of subsidies and other measures, as well as enhancing revenue mobilization,” the IMF said.