IMF Executive Board Concludes 2019 Article IV Consultation with the Philippines

February 6, 2020

On January 27, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the 2019 Article IV consultation [1] with the Philippines, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis. [2]

The Philippine economy continues to perform well. Economic growth regained momentum in the second half of 2019, following a brief slowdown in the first half of the year. The latter primarily reflected some temporary government underspending, combined with external trade uncertainty and a decisive monetary policy tightening in response to the inflation spike and overheating risks in 2018. Inflation declined through much of 2019, driven by lower food and energy inflation, before rebounding to 2.5 percent in December 2019. Bank lending growth has also slowed in the first half of 2019, amid increased lending rates and the dampening effect on aggregate demand of the temporary fiscal contraction, but it has stabilized at around 10.5 percent in September 2019.

The current account deficit is expected to have declined to 1.6 percent of GDP in 2019, down from 2.6 percent in 2018, mainly reflecting weaker imports of goods. Gross international reserves reached US$87.9 billion as of end‑2019, or about 200 percent of the IMF’s reserve adequacy metric, against the backdrop of sustained portfolio inflows since late 2018. Based on staff’s preliminary estimates, the 2019 external position is assessed as being in line with medium-term fundamentals and desirable policy settings.

The outlook is positive. GDP growth is projected to have reached 5.7 percent in 2019 [3] and rise to 6.3 percent in 2020, underpinned by government spending acceleration and the recent monetary policy easing. Inflation is projected at 3.0 percent by end‑2020, accompanied by a slight widening of the current account deficit to 2.3 percent of GDP in 2020 as investment picks up. Risks to the outlook are to the downside, reflecting risks to the global economy from augmented trade tensions, shifts in global financial conditions, and natural disasters.

The structural reform momentum and infrastructure push remain strong. Several landmark reform bills have been signed into law recently, including rice tariffication, a national digital ID, the ease of doing business, and BSP charter amendments. The government has also revised the list of priority flagship infrastructure projects based on feasibility and cost-benefit considerations, with the objective of raising infrastructure investment to over 6 percent of GDP by 2022.

Executive Board Assessment

In concluding the 2019 Article IV consultation with the Philippines, Executive Directors endorsed the staff’s appraisal, as follows:

The Philippine economy continues to be a strong performer despite recent headwinds but faces downside risks to the outlook. Prudent policies and structural reforms have supported economic activity and macroeconomic stability over the past decade. Real GDP growth has regained momentum in the second half of 2019 after a short-lived slowing and is projected to firm up further in 2020, underpinned by government spending acceleration and the recent monetary easing. The risks to the outlook are tilted to the downside, however, reflecting higher risks from global trade tensions, shifts in global financial conditions, and natural disasters.

Macroeconomic policies are attuned to the outlook. The moderate fiscal stimulus planned for 2020 and the monetary policy easing since mid-2019 are consistent with the economy moving back to growing at capacity and achieving the inflation objectives in the baseline outlook.

The Philippines has policy space and could adopt a more expansionary macroeconomic policy stance should downside risks materialize. Under these adverse risk scenarios, fiscal stimulus should be prioritized toward public capital and social spending programs. The Bangko Sentral ng Pilipinas (BSP) also has substantial space to lower its policy rate if downside surprises materialize.

The 2019 external position is, based on preliminary estimates, assessed to be broadly in line with medium-term fundamentals and desirable policy settings. Nonetheless, the recent rise in portfolio and other volatile capital inflows amid declining household saving should be monitored closely. The exchange rate should remain a primary shock absorber against external shocks. Publishing FX intervention data could be considered, with appropriate lags and aggregation to guard against market sensitivities.

Closing the infrastructure gap would require further reform efforts. Enhancing public investment management, including by promoting greater competition and allowing easier public access to information in the procurement process, would enable the planned increase in the infrastructure investment enveloped and contribute to its timely and cost-effective implementation, and also reduce incidence of corruption. The planned tax incentive reform would make the regime more accountable and effective in encouraging investment and job creation.

The macroprudential policy response should be proactive if risks of and from high credit growth increase again. The BSP should timely activate the Countercyclical capital buffer (CCyB) if risks of broad-based rapid credit growth reemerge, develop targeted macroprudential measures, such as loan-to-value and debt-to-income caps, and tighten them if high credit growth risks are more sector-specific―for example, in the real estate sector.

Building on the progress in recent years, bolder implementation efforts would help the strong structural reform momentum bear fruit. Strengthening the capacity of the public administration, advancing with the ease of doing reforms, and continuing with the infrastructure push will be central in this respect. The reform agenda could be reinforced by further lifting restrictions on foreign direct investment, broadening the scope of poverty reduction efforts, mobilizing more resources for climate change adaptation and mitigation, robust implementation of the AML/CFT regime, and easing the stringent bank secrecy law.


Philippines: Selected Economic Indicators, 2015–2020

2015

2016

2017

2018

2019

2020

Proj.

Proj.

(Annual percentage change, unless otherwise indicated)

National account

Real GDP

6.1

6.9

6.7

6.2

5.7

6.3

Consumption

6.5

7.4

5.9

6.5

6.5

6.6

Private

6.3

7.1

5.9

5.6

5.9

6.2

Public

7.6

9.0

6.2

13.0

10.0

9.3

Gross fixed capital formation

16.9

26.1

9.4

12.9

5.3

15.6

Domestic demand

8.7

11.7

6.8

8.2

6.1

9.1

Net exports (contribution to growth)

-3.1

-4.9

-0.7

-2.8

-1.1

-3.8

Real GDP per capita

4.3

5.1

5.0

4.6

4.0

4.6

Output gap (percent, +=above potential)

-0.3

0.1

0.4

0.2

-0.2

-0.1

Labor market

Unemployment rate (percent of labor force)

6.3

5.5

5.7

5.3

5.2

5.1

Underemployment rate (percent of employed persons)

18.6

18.3

16.1

16.4

14.0

…

Employment (percent change)

2.8

4.7

-1.6

2.0

2.4

2.5

Non-agriculture daily wages (Q4/Q4) 1/

3.2

2.1

4.3

4.9

0.0

…

Price

Consumer prices (period average, 2012 basket)

0.7

1.3

2.9

5.2

2.5

2.6

Consumer prices (end of period, 2012 basket)

0.7

2.2

2.9

5.1

2.5

3.0

Core consumer prices (period average, 2012 basket)

1.1

1.5

2.5

4.1

3.2

…

Residential real estate (Q4/Q4) 2/

…

3.3

5.7

0.6

10.4

…

Money and credit

3-month PHIREF rate (percent, end of period) 3/

2.7

2.0

3.3

6.5

3.1

…

Claims on private sector (percent of GDP)

41.8

44.8

47.8

49.9

50.7

52.6

Claims on private sector (percent change)

12.4

16.4

16.4

15.1

8.6

13.2

Public finances (in percent of GDP)

National government overall balance 4/

-0.9

-2.4

-2.2

-3.3

-2.7

-3.2

Revenue and grants

15.8

15.2

15.6

16.3

16.5

16.7

Total expenditure and net lending

16.7

17.6

17.9

19.6

19.2

19.9

General government gross debt

41.5

39.0

39.9

38.9

38.9

38.9

Balance of payments (in percent of GDP)

Current account balance

2.5

-0.4

-0.7

-2.6

-1.6

-2.3

FDI, net

0.0

-1.9

-2.2

-1.8

-1.4

-1.4

Gross reserves (US$ billions)

80.7

80.7

81.6

79.2

85.6

85.0

Gross reserves (percent of short-term debt, residual maturity)

409.5

418.2

419.3

369.7

402.2

385.0

Total external debt

26.5

24.5

23.3

23.9

23.6

22.4

Memorandum items:

Nominal GDP (US$ billions)

292.8

304.9

313.6

330.9

365.0

399.7

Nominal GDP per capita (US$)

2,883

2,953

2,989

3,104

3,370

3,632

GDP (in billions of pesos)

13,322

14,480

15,808

17,426

18,614

20,302

Real effective exchange rate (2005=100)

111.4

108.2

103.4

100.5

…

…

Peso per U.S. dollar (period average)

45.5

47.5

50.4

52.7

51.8

…

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

1/ In National Capital Region.

2/ Latest observation as of 2019:Q3.

3/ Benchmark rate for the peso floating leg of a 3-month interest rate swap.

4/ IMF definition. Excludes privatization receipts and includes deficit from restructuring of the previous Central Bank-Board of Liquidators.


[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] The projections for the Article IV consultation were completed before the release of the 2019 annual national account data.

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