Press Release No. 24/355

IMF Staff Completes 2024 Article IV Mission to the Philippines

October 3, 2024

• The Philippine economy has successfully navigated multiple external headwinds in recent years. Growth is expected to pick up to 6.1 percent in 2025, supported by more accommodative financial conditions and investment.
• Decisive monetary tightening and other measures have helped mitigate inflationary pressures. With inflation and inflation expectations returning to target, a continued gradual reduction of the policy rate is appropriate.
• Medium-term fiscal consolidation plans remain appropriate and should be supported by a sustainable plan to raise tax revenues and implement expenditure reforms.

Washington, DC – October 3, 2024: An International Monetary Fund team led by Ms. Elif Arbatli Saxegaard conducted discussions on the Philippine economy for the 2024 Article IV Consultation from September 18-October 2, 2024. At the end of the mission, Ms. Arbatli Saxegaard issued the following statement:

The Philippine economy has navigated well multiple external headwinds in recent years and remained among the best performing economies in the region. Growth was 6.0 percent in the first half of 2024, reflecting strong public investment and consumption while private consumption was subdued. Growth is expected to reach 5.8 percent and 6.1 percent in 2024 and 2025 respectively, supported by more accommodative financial conditions and investment growth. The current account deficit is expected to continue to narrow to 2.0 and 1.9 percent of GDP in 2024 and 2025 respectively, supported by lower commodity prices, a gradual rise in service exports, and higher remittances.

“Downside risks to the outlook stem from a slowdown in major economies that could disrupt trade and financial flows; commodity price volatility and supply shocks; and an escalation of geopolitical tensions or regional conflicts. On the upside, an easing of global financial conditions, or faster than anticipated private investment linked to public-private-partnerships (PPPs) and larger FDI inflows, could stimulate higher growth.

“A restrictive monetary policy stance and commodity price easing led inflation to decelerate and fall within the Bangko Sentral ng Pilipinas’s target band, allowing for a reduction in the policy rate in August, followed by a reduction in the reserve requirement ratio. Recent tariff cuts on imported rice and other non-monetary measures to reduce food prices should further ease headline inflation by year-end. With inflation expectations returning towards target, a continued gradual reduction of the policy rate is appropriate. A data-dependent approach and careful communication around policy settings will help manage expectations amid uncertainty and more frequent supply-side shocks.

“Fiscal consolidation is proceeding in 2024, albeit more moderately than envisaged in earlier projections. Higher-than-anticipated interest payments and higher capital spending are being partly financed by a one-off increase in non-tax revenues. The 2025 budget adopts a broadly neutral fiscal stance that will help mitigate downside risks to growth, but additional tax policy measures should be considered to create more space for spending in priority areas. The medium-term fiscal consolidation remains appropriate and should be supported by a sustainable plan to raise tax revenues and implement expenditure reforms in order to protect social spending and ensure deficit targets are met. Tax reforms could prioritize excise taxation, enhancing VAT efficiency, improving tax administration, and ensuring effective control of tax incentives. Introducing carbon taxation could also be explored in due course. Efforts to reduce current spending and manage fiscal risks linked to PPP projects will benefit from enhanced public financial management at the national and local government levels.

“Systemic risk within the financial system remains moderate, with a banking sector characterized by strong capitalization, liquidity, and profitability. Continued vigilance is warranted against pockets of vulnerability in the real estate sector and a fast-growing consumer credit market. Adjusting macroprudential policy as credit picks up, including by moving toward a positive neutral level for the countercyclical capital buffer will help preempt the build-up of vulnerabilities. Efforts underway to update the bank resolution framework will benefit from parallel efforts to improve emergency liquidity assistance and lender of last resort frameworks. Establishing a credible yield curve and restoring the interest rate swap market, including by making the reverse repurchase rate the official reference rate for interest rate swaps, as recently announced, are significant steps toward enhancing the Philippines fixed income securities and money market. Important progress has been made in addressing Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) issues, and the current momentum should be maintained to close the outstanding gaps in the AML/CFT framework and achieve prompt removal from the Financial Action Task Force grey list.

The Philippine economy holds significant potential with its abundant natural resources, untapped blue economy, and a sizable demographic dividend. Unlocking the medium-term growth potential will crucially depend on comprehensive and well-sequenced structural reforms. These reforms, coupled with strengthened social protection programs, should aim to boost job creation, enhance productivity, increase resilience to climate change, and reduce poverty and inequality. Priority areas include upgrading infrastructure, making significant investments in healthcare and education, addressing land fragmentation and low productivity in the agricultural sector, and enhancing governance. In this context, digitalization provides an important opportunity to improve access to quality education, promote financial inclusion, and enhance public spending efficiency.

“The IMF team would like to thank officials in the government, the central bank, other public agencies, and representatives of the private sector and civil society, for their constructive and open engagement.”