IMF Executive Board Concludes 2022 Article IV Consultation with the Philippines
November 28, 2022
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation [1] with the Philippines and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
Following a sharp contraction in 2020, the Philippine economy rebounded in late 2021, growing by 5.7 percent. Growth accelerated further to 7.8 percent in the first half of 2022, spurred by strong domestic demand and private investment, as the Omicron wave proved to be less severe than anticipated and improved vaccination rates supported mobility. Both headline and core inflation increased in 2022—to 6.9 and 5.0 percent (year-on-year) respectively in September—surpassing the upper band of the government’s inflation target range of 2-4 percent. The current account swung from a surplus to a deficit in 2021, and the deficit has widened further in the first half of 2022, amid higher commodity prices, and the recovery in domestic demand. The banking system has shown resilience during the pandemic, emerging from the downturn with sufficient liquidity and capital buffers.
The outlook for 2023 is more challenging due to unsettled conditions in major advanced economies, and real GDP is expected to slow from 6.5 percent in 2022 to 5 percent in 2023. Medium-term economic growth is forecast at about 6.3 percent. Inflation is expected to rise to 5.3 percent in 2022, then to decline modestly in 2023, supported by a moderation in commodity prices, and converge to the mid‑point of the band in 2024, as tighter monetary policy keeps inflation expectations anchored. The current account deficit is expected to increase to 5 percent of GDP in 2022 but decline to about 1.7 percent of GDP over the medium term. With a difficult global environment weighing heavily on the economy, the economic outlook is subject to significant downside risks, where policy tradeoffs between supporting output on the one hand and reducing inflation and safeguarding the external position on the other, would become more acute.
Executive Board Assessment [2]
In concluding the 2022 Article IV consultation discussions with the Philippines, Executive Directors endorsed the staff’s appraisal, as follows:
Sustained reforms and disciplined macroeconomic policies proved decisive in steering the Philippines out of a sharp pandemic‑induced recession, but the outlook is overshadowed by a more uncertain global environment. Underpinned by very sound fundamentals, the economy is recovering at a swift pace, credit growth has picked up, and the banking system has shown resilience, coming out of the pandemic with sufficient liquidity and capital buffers. However, a difficult global environment is weighing heavily on the Philippine economy. Amid US dollar strength, high commodity prices, and tightening global financial conditions, inflation has increased sharply, the external position has weakened, and fiscal space has narrowed.
Calibrating the policy mix to preserve macroeconomic stability, enhancing fiscal and financial resilience, and accelerating structural reforms are critical to sustain the recovery. Monetary and fiscal policy are aligned in the right direction to support external and domestic balance. A tightened policy stance will keep inflation expectations anchored and help alleviate pressure on capital outflows and the exchange rate. Exchange rate flexibility remains important as a shock absorber against the backdrop of a persistent terms of trade shock and a wider current account deficit. Policies will have to remain nimble, carefully balancing growth and price stability objectives, while managing limited fiscal buffers, preserving financial stability, and ensuring external sustainability.
The BSP’s prompt action to fight inflation is welcome, but further monetary tightening may be needed to keep inflation expectations well anchored. The current policy stance remains accommodative, and BSP should aim at bringing the policy rate close to the neutral real rate to securely bring inflation within the target range. Should inflation pressures continue to rise, the BSP should respond with a tighter policy stance. Similarly, if inflation proves less persistent, or if significant downside risks to growth materialize, monetary policy tightening would need to be recalibrated. Clear communication about inflation and the BSP’s policy intentions can help reduce uncertainty and improve policy transmission.
Higher downside risks to growth and rising interest rates warrant close monitoring of financial stability risks. Despite some improvement in profitability and debt servicing capacity, the pandemic has increased risks in NFCs, which may face renewed challenges with rising interest rates.
These risks can be amplified through “mixed” conglomerate structures that include NFCs and financial institutions, and in sectors with a relatively high debt burden. To enhance resilience, the BSP’s capacity to conduct financial stability risk assessments and the bank resolution framework should be strengthened. In addition, with the recovery underway, regulatory forbearance measures should be allowed to lapse as scheduled.
Enhanced AML/CFT effectiveness is critical to support a swift and successful exit from the FATF list. Key items under the Philippines AML/CFT Action Plan include risk‑based AML/CFT supervision of high‑risk sectors, and access to beneficial ownership information by competent authorities. Separately, prioritizing amendments to the bank secrecy law will enhance the BSP’s supervisory powers, strengthen AML/CFT effectiveness and reduce vulnerabilities to corruption.
Fiscal consolidation over the medium‑term should be underpinned by stronger revenue mobilization and cost‑effective government spending. While the near‑term fiscal stance is appropriate, an accelerated pace of consolidation in the medium‑term would allow the government to signal its intent to put debt on a firmly downward trajectory. There is ample scope to enhance revenue mobilization, which can underpin a faster medium‑term fiscal consolidation, while securing resources for the authorities’ social and development plans. Augmenting the medium‑term fiscal program with explicit fiscal anchors and a medium‑term revenue strategy would further support fiscal credibility and debt sustainability.
The coordinated use of fiscal, monetary, and exchange rate policies can help alleviate policy tradeoffs under downside risk scenarios. Monetary policy should be the first line of defense against persistent inflationary pressures. Under a scenario of disruptive market conditions and tightening FX liquidity, the use of FXI can mitigate a sharp and disorderly exchange rate depreciation, alleviate inflation, and reduce some of the pressure on monetary policy. If growth falls below the baseline, fiscal policy can be deployed to support the economy by slowing the pace of fiscal consolidation, though this could come at the cost of higher inflation and interest rates, and a higher debt burden over the medium‑term.
Ambitious development goals call for further reforms to raise productivity, boost competitiveness, and enhance social development. Infrastructure and education gaps that have been made worse by the pandemic should be addressed as a priority. Recently passed legislations which aim to attract FDI are welcome, but effective implementation will be key. Ratification of the Regional Comprehensive Economic Partnership (RCEP) Agreement would facilitate access to imports and stimulate export diversification. Efforts to enhance food security and strengthen agricultural performance should focus on raising productivity and promoting new investments in the sector. Further progress in digitalization and better harnessing the benefits of a digital economy will also support growth and social objectives and strengthen governance.
Climate change policies will benefit from an integrated strategy that includes a carbon pricing scheme, innovative private sector financing, and support from development partners. The authorities are committed to addressing the impacts of climate change and greening the economy. In this regard, financing the Nationally Determined Contribution (NDC) target will benefit from the introduction of carbon pricing, developing policies to address its distributional implications, and accelerating efforts to incentivize green financing. With limited government resources, additional financial support from development partners and the private sector is essential to attract foreign investors, increase the share of renewables in the energy mix, and develop climate‑resilient infrastructure.
[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.
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Table 1. Philippines: Selected Economic Indicators, 2019–2024 |
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2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Proj. |
Proj. |
Proj. |
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|
(Annual percentage change, unless otherwise indicated) |
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|
National account |
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|
Real GDP |
6.1 |
-9.5 |
5.7 |
6.5 |
5.0 |
6.0 |
|
Consumption |
6.3 |
-5.3 |
4.7 |
7.4 |
6.5 |
6.5 |
|
Private |
5.9 |
-8.0 |
4.2 |
7.5 |
6.2 |
6.3 |
|
Public |
9.1 |
10.5 |
7.1 |
6.7 |
7.8 |
7.5 |
|
Gross fixed capital formation |
3.9 |
-27.3 |
9.9 |
17.2 |
9.9 |
10.3 |
|
Final domestic demand |
5.7 |
-10.5 |
5.7 |
9.4 |
7.3 |
7.3 |
|
Net exports (contribution to growth) |
-0.2 |
4.0 |
-2.4 |
-4.6 |
-3.2 |
-2.5 |
|
Real GDP per capita |
4.6 |
-10.7 |
4.3 |
5.1 |
3.7 |
4.7 |
|
Output gap (percent, +=above potential) |
-0.1 |
-8.5 |
-3.2 |
-0.1 |
0.0 |
0.0 |
|
Labor market |
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|
Unemployment rate (percent of labor force) |
5.1 |
10.4 |
7.8 |
5.7 |
5.4 |
5.1 |
|
Underemployment rate (percent of employed persons) |
13.8 |
16.2 |
15.9 |
14.3 |
… |
… |
|
Employment |
1.9 |
-6.1 |
11.7 |
4.9 |
2.4 |
1.6 |
|
Price |
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|
Consumer prices (period average) |
2.4 |
2.4 |
3.9 |
5.3 |
4.3 |
3.1 |
|
Consumer prices (end of period) |
2.4 |
3.3 |
3.1 |
5.8 |
3.7 |
3.0 |
|
Core consumer prices (period average) |
3.4 |
3.4 |
3.0 |
… |
… |
… |
|
Residential real estate (Q4/Q4) |
10.4 |
0.8 |
4.9 |
… |
… |
… |
|
Money and credit (end of period) |
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|
3-month PHIREF rate (in percent) 1/ |
3.1 |
1.3 |
1.5 |
… |
… |
… |
|
Claims on private sector (in percent of GDP) |
48.0 |
52.0 |
49.9 |
49.9 |
51.1 |
52.4 |
|
Claims on private sector |
7.8 |
-0.2 |
3.8 |
11.6 |
11.4 |
12.3 |
|
Monetary base |
-3.0 |
5.1 |
5.8 |
15.9 |
9.4 |
10.3 |
|
Broad money |
9.8 |
8.7 |
8.0 |
11.0 |
9.9 |
9.7 |
|
Public finances (in percent of GDP) |
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|
National government overall balance 2/ |
-3.4 |
-7.6 |
-8.6 |
-7.6 |
-6.1 |
-5.2 |
|
Revenue and grants |
16.1 |
15.9 |
15.5 |
15.2 |
15.4 |
15.8 |
|
Total expenditure and net lending |
19.5 |
23.5 |
24.1 |
22.8 |
21.6 |
20.9 |
|
General government gross debt |
37.0 |
51.6 |
57.0 |
59.2 |
60.9 |
60.8 |
|
Balance of payments (in percent of GDP) |
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|
Current account balance |
-0.8 |
3.2 |
-1.5 |
-5.0 |
-4.1 |
-3.6 |
|
FDI, net |
-1.4 |
-0.9 |
-2.5 |
-2.0 |
-2.0 |
-2.0 |
|
Total external debt |
22.2 |
27.2 |
27.0 |
26.6 |
26.4 |
25.8 |
|
Gross reserves |
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|
Gross reserves (US$ billions) |
87.8 |
110.1 |
108.8 |
94.1 |
88.7 |
83.9 |
|
Gross reserves (percent of short-term debt, remaining maturity) |
396.5 |
524.6 |
522.8 |
446.0 |
402.1 |
361.8 |
|
Memorandum items: |
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|
Nominal GDP (US$ billions) |
376.8 |
361.8 |
394.1 |
402.2 |
426.2 |
459.9 |
|
Nominal GDP per capita (US$) |
3,512 |
3,326 |
3,576 |
3,602 |
3,769 |
4,015 |
|
GDP (in billions of pesos) |
19,518 |
17,952 |
19,411 |
21,690 |
23,597 |
25,798 |
|
Real effective exchange rate (2010=100) |
105.4 |
111.2 |
111.1 |
… |
… |
… |
|
Peso per U.S. dollar (period average) |
51.8 |
49.6 |
49.3 |
… |
… |
… |
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Sources: Philippine authorities; World Bank; and IMF staff estimates and projections. |
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1/ Benchmark rate for the peso floating leg of a 3-month interest rate swap. |
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2/ IMF definition. Excludes privatization receipts and includes deficit from restructuring of the previous Central Bank-Board of Liquidators. |
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