So far, so good
It has been a slow crawl out of the pandemic for the economy. 1H2022 output has surpassed the pre-pandemic level but the economy has emerged only to face a gloomy world economic outlook, with elevated commodity prices, tighter financial conditions and slowing global growth. The government lacks the policy space to counter these external headwinds, with monetary policy constrained by rising inflation, aggressive US interest rate increases, and foreign reserve losses due in part to ballooning imports caused by high import prices. Even as domestic interest rates have risen rapidly, fiscal policy has also become less expansionary as the government begins to repair public finances and steer the debt ratio towards a downward path.
The credibility of the new administration’s economic recovery program rests mainly on the good name of the economic managers and the team’s readiness (the President included) to engage with the private sector. So far, the business sector seems satisfied, although most regard the government’s high 6.5% to 8% GDP growth targets aspirational, especially in the short term. Overall, we expect economic growth to underperform government targets in the short-term. We are cutting our GDP growth forecasts to 6.3% this year and 5% next year, with downside risks high for 2023 given external headwinds. We are nevertheless mindful of the medium-term potential upshift in the country’s growth trajectory from the reforms this administration has promised to undertake, including in the agriculture, mining and energy sectors, as well as in increasing inclusivity, job quality and overall productivity from digitalization.
On the political front, the President’s seeming misstep in handling a major controversy in the agriculture sector, where he is serving concurrently as agriculture secretary and thus is in the direct line of fire, is being closely watched as a possible canary in the coal mine as to how he makes decisions in situations where narrow, short-sighted political interest and broad public interest conflict.
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