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Philippines and the IMF

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Explanatory Note for Amendment to Public Information Notice (PIN) No. 1/63

The IMF today [August 3, 2001] published an amendment to the PIN on the Philippines issued on July 9, 2001, to correct the ratio of foreign reserves to short-term debt on a residual maturity basis. The amendment excludes gold-backed loans from short-term debt, to be consistent with the exclusion of the proceeds of these loans from official reserves. As a result, the ratio of foreign reserves to short-term debt on a residual maturity basis reported for end-May 2001 is amended from 94 percent to 118 percent.

Public Information Notice (PIN) No. 01/63
July 9, 2001
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Post-Program Discussion on the Philippines

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 15, 2001, the Executive Board of the International Monetary Fund (IMF) concluded a Post-Program Monitoring discussion on the Philippines based on information available through that date.1


In January 2001, President Macapagal-Arroyo came to power, inheriting a challenging economic situation. The outlook for growth is uncertain, exports are weakening, the health of the banking system has deteriorated, and the fiscal deficit is sizeable. However, inflation has been contained and foreign reserves remain largely intact.

Moderate growth is expected this year, but the downside risks are significant. IMF staff project 3 percent GDP growth for 2001, based on a modest pickup in domestic demand (due to improved confidence). The main downside risks stem from weakening global demand for electronics exports and the budget deficit, where higher-than-targeted domestic financing could put upward pressure on interest rates.

Inflation is expected to moderate. IMF staff and the authorities project that inflation will fall from 6.7 percent (y/y) in April to about 5 percent by end year, reflecting the stabilization of the peso and low capacity utilization. The improved inflation outlook has enabled the Bangko Sentral ng Pilipinas (BSP) to cut policy interest rates by 600 basis points since December, to 9 percent.

The external position has weakened. Export growth turned negative in early 2001 (minus 4 percent in March (y/y)), due to a sharp drop of electronics shipments, which comprise 60 percent of total exports. However, the current account is expected to remain in surplus because of weak import demand. Staff estimate the ratio of foreign reserves to short-term debt on a residual maturity basis to have increased to 118 percent.

While most banks report adequate capital, the health of the banking system has weakened somewhat. The nonperforming asset ratio increased to 25 percent in March,2 reflecting the impact of the October-January political and financial market turmoil, while the reported aggregate capital adequacy ratio (CAR) for commercial banks fell below 16 percent in January.

The authorities have adopted a National Government (NG) deficit target for 2001 of 4½ percent of GNP on a cash basis. The target is little changed from the 2000 outcome, but this largely reflects the need to repay arrears accumulated in 2000. On a commitments basis, the fiscal adjustment amounts to 1 1/3 percent of GNP (from a deficit of 5.5 percent of GNP in 2000 to 4.2 percent of GNP in 2001), to be achieved mainly by compressing expenditure. Further spending cuts are in train to allow a small supplementary budget, mainly for a government employee salary increase.

The NG budget deficit was within the target for the first four months. Annualized revenue was 0.3 percent of GNP below target, but the authorities kept the (annualized) deficit almost 1 percent of GNP within the target by containing expenditure, mainly with temporary measures.

Executive Board Assessment

Executive Directors welcomed the completion of the first Post-Program Monitoring discussion on the Philippines and agreed with the thrust of the staff appraisal. They observed that the new government has inherited a challenging economic situation, with heightened vulnerabilities in the fiscal, banking, and external sectors. In particular, Directors noted the sizable budget deficit and decline in government revenue in recent years, the remaining weaknesses in the banking sector, and the decline in exports due to weakening foreign demand.

In light of this, Directors strongly supported the government's economic strategy centered on fiscal discipline, good governance, market-oriented reform, and poverty reduction. Early and concrete action in these areas will reduce the country's vulnerabilities and, thereby, improve investor confidence, which is indispensable for financing, investment, and growth.

Directors emphasized, in particular, that further steps will be needed to put the public finances on a sound footing. They welcomed the authorities' success in containing the deficit in the first four months of the year, stressing the importance of meeting the deficit target for the full year, given the high public debt and the financing constraints. Many Directors noted that this may require immediate tax measures, if significant revenue slippages would emerge, while some others saw room for further cuts in non-priority spending.

Directors welcomed government efforts to strengthen tax administration, although they noted that they may not likely yield a sufficient increase in medium-term revenue. Accordingly, they looked forward to the early introduction of a strong package of tax measures to achieve the authorities' twin medium-term goals of balancing the budget and increasing spending on infrastructure and human development.

Directors urged speedy action to further strengthen the banking system. In particular, they emphasized the need to provide the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corporation with additional authority, so that problem banks can be dealt with and rehabilitated expeditiously. Directors cautioned that the resolution of problems in private banks should not aggravate the fiscal problems or encourage moral hazard. They commended the authorities' determination to encourage banks instead to resolve impaired assets themselves, including by selling them to other purely private entities. Directors welcomed the authorities' decision to participate in the Financial Sector Assessment Program, which will help identify potential problems and the actions needed to correct them.

Directors supported the current monetary and exchange rate policy stance. They agreed with the authorities that further cuts in interest rates should await a moderation of the inflation outlook, while continued peso flexibility and avoiding a decline in reserves will be key to reducing external vulnerability. Directors added that these buffers could usefully be reinforced by expanding the debt monitoring system to cover short-term debt rollovers, as was done in some other Asian countries. As regards the shift toward an inflation targeting framework, while several Directors suggested that care should be taken to ensure that the key elements necessary for this approach to be effective are firmly in place, the authorities' intention to introduce inflation targeting was welcomed.

Directors were encouraged by the progress made on the authorities' ambitious structural reform agenda. In particular, they welcomed the recent passage of the electric industry reform legislation, which will open up the power sector to competition and foreign investment, and privatize the National Power Corporation. Directors stressed the need to build on this achievement by putting in place the remaining agenda, including trade liberalization and governance improvements, so as to further boost investor confidence and achieve higher growth.

Philippines: Selected Economic Indicators

  1997 1998 1999 2000

Growth and prices (in percent change)        
GNP growth 5.3 0.4 3.7 4.2
GDP growth 5.2 -0.6 3.3 3.9
CPI inflation (average) 5.9 9.7 6.6 4.3
CPI inflation (end period) 7.3 10.3 4.2 6.6
Public finances (in percent of GNP)        
National government balance 1/ -0.7 -2.6 -4.1 -4.4
Total revenues 19.1 16.7 15.4 14.8
Total expenditures and net lending 19.9 19.3 19.6 19.1
Underlying consolidated public sector balance 1/ -1.4 -3.1 -3.3 -4.6
Money and credit (in percent change)        
Broad money 20.9 7.4 19.3 4.6
Bank credit to private sector 28.7 -3.0 -1.2 8.1
Interest rate (91-day Treasury bill, end period, in percent) 18.0 13.4 8.9 12.9
Balance of payments (in percent of GNP)        
Trade balance -13.0 0.0 6.2 8.8
Current account balance -5.1 2.2 9.5 11.8
Gross official reserves        
Adjusted, in months of imports 2/ 3/ 2.3 3.1 4.5 4.1
Adjusted, in percent of short-term liabilities 4/ 55.7 70.6 125.3 113.9

Sources: The Philippine authorities; IMF staff estimates.

1/ IMF definition. Excludes privatization receipts of the National Government, and includes
the net deficit from the 1993 restructuring the central bank.    
2/ Adjusted for gold and securities pledged as collateral against short-term liabilities.
3/ In months of imports of following year's goods and services.    
4/ Short-term liabilities include medium- and long-term public and private sector debt due in the following year, excluding gold-backed loans, the proceeds of which are also excluded from reserves.

1 Post-Program Monitoring provides for frequent consultations between the Fund and members whose arrangements have expired but who continue to have Fund credit outstanding. Particular focus is placed in these consultations on policies that have a bearing on external viability.
2 Non-performing assets are defined as non-performing loans plus foreclosed assets as a ratio of total loans and foreclosed assets.


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