IMF Executive Board Concludes 2016 Article IV Consultation with the Philippines

September 26, 2016

IMF Executive Board Concludes 2016 Article IV Consultation with the Philippines

On September 14, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Philippines.

The Philippine economy has continued to perform strongly. Real GDP regained strength from a slowdown in mid­2015 to record a robust 5.9 percent growth rate in 2015 and 6.9 percent in the first half of 2016. Both consumption and investment grew rapidly, while net exports were held back by weak external demand. Job creation was also strong, with the unemployment rate declining to 6.3 percent in 2015 and 6.0 percent in the first half of 2016. Inflation has remained moderate, falling below the BSP’s target band (3±1 percent) in 2015 and the first seven months of 2016 due to lower commodity prices. The external and fiscal position remained robust in 2015, with a current account surplus of 2.9 percent of GDP, gross international reserves of US$81 billion (or 11 months of imports of goods and services), a national government fiscal deficit of 1.4 percent of GDP, and general government debt at 35 percent of GDP.

The outlook for the Philippine economy remains favorable despite external headwinds. Real GDP growth is expected at 6.4 percent in 2016 and 6.7 percent in 2017 on continued robust domestic demand and a modest recovery in exports. Unemployment is projected to decline to 5.9 percent in 2016 and 5.7 percent in 2017. Inflation is expected to return to within the BSP’s target range later this year and in 2017 as commodity prices stabilize and strong economic activity continues. The current account surplus is expected to decline in 2016−17 due to higher commodity prices and infrastructure related imports. The public debt-to-GDP ratio is expected to remain in a declining trend. Risks to the outlook are tilted to the downside. The Philippine authorities are well equipped to respond as needed with suitable policies should any risks materialize, particularly given the strong fundamentals and ample policy space.

Executive Board Assessment2

Executive Directors commended the authorities for their continued strong macroeconomic management, with robust growth and low inflation. Directors noted, however, that the favorable macroeconomic performance has not led to corresponding improvements in poverty reduction, inequality, and unemployment. They considered that the new administration has an opportunity to put the economy on a higher and more equitable growth path. Directors encouraged efforts to increase investments in infrastructure and human capital, improve targeting of social spending, enhance competitiveness and foreign direct investment, and making the financial system deeper and more inclusive.

Directors supported the increase in the fiscal deficit target to 3 percent of GDP from 2017, anchoring fiscal policy to a broadly stable public debt-to-GDP ratio. They noted that this would allow a welcome boost to infrastructure and social spending, while ensuring fiscal sustainability. Directors highlighted the need for additional revenue to finance further infrastructure and social spending and welcomed the authorities’ plans to implement a comprehensive tax reform that would be revenue positive, more equitable, and efficient. They urged the authorities to formulate a medium-term public infrastructure plan with clear project prioritization and appropriate choices between budget and PPP spending, with due consideration of contingent liabilities. Further efforts to strengthen public financial management and budget execution were also encouraged.

Directors considered the current monetary policy stance as appropriate in view of the low inflation and near zero output gap. However, they noted the need for continued vigilance, particularly in light of the fiscal stimulus. Directors encouraged the Bangko Sentral ng Pilipinas (BSP) to stand ready to take measures if there are signs of overheating or accelerating credit growth. They commended the BSP for the smooth implementation of the new interest rate corridor and deposit auctions, which will improve monetary policy transmission and help develop domestic capital markets. Directors encouraged passage of the central bank charter that would authorize the issuance of central bank bills and BSP recapitalization. They emphasized the need for continued exchange rate flexibility.

Directors noted that the financial system remains sound. They supported the authorities’ use of targeted prudential policies to strengthen resilience and limit systemic risks. Directors encouraged broadening the central bank’s financial stability mandate.

Directors supported the authorities’ goal to accelerate poverty reduction and their priorities for structural reforms. They called for well-targeted infrastructure and social spending, including for education and health, especially in rural areas, as well as continued efforts to enhance competition and open the economy to foreign investment. Directors also welcomed the focus on financial deepening and inclusion as essential elements of the authorities’ inclusive growth strategy. They emphasized the importance of strengthening the AML framework, including to make tax evasion a predicate crime.

Philippines: Selected Economic Indicators, 2011–17

2011

2012

2013

2014

2015

2016

2017

Proj.

Proj.

GDP and prices (percent change)

Real GDP

3.7

6.7

7.1

6.2

5.9

6.4

6.7

CPI (annual average)

4.7

3.2

2.9

4.2

1.4

2.0

3.4

CPI (end year)

4.2

3.0

4.1

2.7

1.5

2.9

3.2

Investment and saving (percent of GDP)

Gross investment

20.5

18.2

20.0

20.5

20.6

23.7

24.7

National saving

23.0

21.0

24.2

24.3

23.4

25.5

26.1

Public finances (percent of GDP)

National government balance (authorities' definition)

-2.0

-2.3

-1.4

-0.6

-0.9

-2.0

-3.0

National government balance 1/

-2.0

-2.4

-1.5

-0.6

-1.4

-2.0

-3.0

Nonfinancial public sector balance 2/

-0.7

-0.6

0.6

0.9

0.1

-0.5

-1.6

Revenue and grants

18.6

19.4

20.2

19.8

19.6

19.6

19.7

Expenditure

19.3

20.0

19.6

18.9

19.5

20.1

21.3

Nonfinancial public sector debt

55.3

53.0

51.3

47.8

45.8

43.5

41.4

Monetary sector (percent change, end of period)

Broad money (M3) 3/

7.1

9.4

31.8

11.2

9.4

12.4

...

Interest rate (91-day treasury bill, end of period, in percent) 4/

1.7

0.5

0.5

2.5

2.7

1.8

...

Credit to the private sector (in percent) 3/

19.3

16.2

16.4

19.9

13.6

17.6

...

External sector

Export value (percent change) 5/

4.1

21.2

-4.0

11.9

-13.1

-3.4

4.1

Import value (percent change) 5/

9.5

11.3

-4.8

8.0

-3.2

4.0

6.0

Current account (percent of GDP)

2.5

2.8

4.2

3.8

2.9

1.8

1.4

Capital account (US$ billions)

0.2

0.1

0.1

0.1

0.1

0.1

0.1

Financial account (US$ billions) 5/

-5.3

-6.8

2.2

9.6

2.5

0.4

0.5

Direct investment (net) 5/

0.3

1.0

-0.1

1.0

-0.1

-1.0

-1.1

Errors and omissions (US$ billions)

0.3

-4.6

-4.2

-4.1

-3.3

-2.5

-2.3

Overall balance (US$ billions)

11.4

9.2

5.1

-2.9

2.6

2.7

2.1

Total external debt (percent of GDP) 6/

33.7

32.0

28.9

27.3

26.5

25.1

22.7

Debt service ratio 7/

13.6

9.9

11.1

8.4

7.4

11.2

10.7

Reserves (US$ billions)

75.3

83.8

83.2

79.5

80.7

84.0

86.5

Reserves/short-term liabilities 8/

482.5

397.9

406.2

418.9

396.9

397.5

401.7

Exchange rate (period averages)

Pesos per U.S. dollar

43.3

42.2

42.4

44.4

45.5

47.0

...

Nominal effective exchange rate (2005 =100)

99.0

102.6

105.4

102.7

108.8

106.0

...

Real effective exchange rate (2005 =100)

100.7

105.6

109.8

109.4

116.7

114.4

...

 

Sources: Philippine authorities; World Bank; and IMF staff projections.

1/ Fund definition. Excludes privatization receipts and includes deficit from restructuring of the previous central bank (Central Bank-Board of Liquidators).

2/ Includes the national government, 14 government-owned enterprises, social security institutions, and local governments.

3/ Universal and Commercial Banks. The latest observation is June 2016 (year-on-year).

4/ Secondary market rate. The latest observation in July 2016.

5/ In BPM6. An increase in either assets or liabilities is always positive and a decrease is always negative. Net investment is assets minus liabilities.

6/ Includes external debt not registered with the central bank, and private capital lease agreements.

7/ In percent of exports of goods and nonfactor services.

8/ Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year).

9/ Average January-June 2016.

1. Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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