IMF Executive Board Concludes 2010 Article IV Consultation with the Philippines

Public Information Notice (PIN) No. 11/28
March 1, 2011

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with the Philippines is also available.

On February 18, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with the Philippines.1


After slowing during the global financial crisis, economic growth recovered strongly during 2010. The recovery has been helped by supportive macroeconomic policies as well as strong private demand. The smooth transition to a new Administration in July 2010 and the government’s focus on improving governance have strengthened investor confidence. The external surplus continued to grow in 2010, underpinned by both the current and financial account. Financial conditions remain accommodative, partly reflecting external inflows, although asset bubbles have not been a concern so far. Notwithstanding the strong recovery, fiscal revenue fell short of budget targets in January–September.

The near-term outlook is generally positive. Growth reached 7.3 percent in 2010 and is projected to moderate in 2011 to a still robust 5 percent. Inflation has been moderate and inflation expectations well anchored, although pressures may start to build during the coming quarters as demand closes in on the economy’s supply potential. The balance of payments is projected to remain in surplus as remittances and export diversification support the current account balance and the Philippines continues to attract capital inflows, which may be largely structural in nature.

Risks to the outlook are broadly balanced. The positive economic sentiment in the country may boost private investment more than expected. However, renewed shocks to global growth and financial markets would affect Philippine exports and remittances.

Monetary policy responded well to the crisis and has helped foster the recovery. A 200-basis-point cut in policy rates during December 2008–July 2009, and additional crisis-related liquidity support measures, helped to cushion the economy against the downturn. With the recovery underway, the Bangko Sentral ng Pilipinas (BSP) appropriately started to unwind its liquidity support measures since early 2010. In July, it extended through 2014 the 3-5 percent inflation target for 2011.

The authorities have relied on the traditional toolkit for managing external inflows in recent years. They have sought to strike a balance between the various elements in the toolkit. The authorities further liberalized controls on capital outflows in October, have had in place for some years macro-prudential measures that have worked well, tried to repay external debt ahead of schedule, and have avoided capital controls. The exchange rate has appreciated, although by somewhat less than in neighboring economies, and reserves have risen to high levels.

Fiscal consolidation is needed in order to create more fiscal space for the budget to be able to respond effectively to future shocks. Consolidation would improve medium-term growth prospects by lowering sovereign risk and enhancing investment and it would reduce the share of debt service in government expenditure. It would also help in managing the macroeconomic impact of external inflows. Against this background, the authorities intend to reduce the national government deficit to 2 percent of GDP from 2013. The main elements of the authorities’ fiscal strategy are a greater tax effort, a reorientation of expenditure towards social sectors and infrastructure, and a debt management strategy that reduces the reliance on external debt and lengthens the maturity structure.

The Philippine financial sector withstood the crisis well, and has been sound and stable in recent quarters. The sector was relatively unaffected by the global market turbulence last year.

Executive Board Assessment

Executive Directors commended the authorities for skillful macroeconomic management, leading to a robust economic recovery and improved consumer and investor confidence. The economic outlook is generally favorable, with sustained growth and a strong external position. A key policy challenge is to preserve macroeconomic stability while enhancing medium-term growth. Meeting this challenge will require a careful exit from stimulus policies in a complicated external environment, and further reforms to promote investment.

Directors noted that monetary policy had succeeded in keeping inflation low while fostering the recovery, and welcomed the gradual unwinding of liquidity support. Given a potential buildup of price pressures in the near term, they encouraged the authorities to stand ready to tighten the monetary stance to head off inflation risks.

Directors underscored the need for an appropriate mix of policy tools to manage capital inflows, while facilitating productive use of these inflows. They supported the central bank’s policy of allowing the exchange rate to adjust to market pressures and limiting intervention to smoothing operations. With the exchange rate broadly in line with fundamentals and reserves comfortable, greater exchange rate flexibility could be considered in response to additional inflows. Directors took note of the authorities’ intention to further liberalize foreign exchange regulations and avoid capital controls.

Directors welcomed the planned gradual withdrawal of fiscal stimulus and the focus on medium-term consolidation, which would create space for priority investment. Noting the relatively high public debt, they encouraged the authorities to consider accelerating the pace of debt reduction. Directors noted that achieving the deficit targets and increasing social and infrastructure spending will require substantial revenue efforts, including broadening the tax base and strengthening tax administration. They recommended early actions to reform excise taxes, rationalize fiscal incentives, and address gaps in the value added tax, complemented by reforms to strengthen the budgetary framework and control of the civil service wage bill.

Directors noted that the financial sector withstood the crisis well, with high banks’ capital adequacy ratios and improving profitability. Going forward, they emphasized the need to monitor key sources of vulnerability closely, particularly concentration and interest rate risks. While asset prices have not been a concern so far, they warrant attention in an environment of rising capital inflows. Directors looked forward to an early approval of the amendments to the central bank law, increasing legal powers and protection for the supervisory authorities, and further progress in strengthening the AML/CFT (anti-money laundering and combating the financing of terrorism) framework.

Directors stressed that promoting private investment and addressing impediments to job creation and productivity are crucial for raising potential growth. They agreed that the public-private partnership program can play an important part in this regard, and encouraged careful evaluation of projects that takes appropriate account of fiscal risks. Directors also welcomed the preparation of the Medium-Term Philippine Development Plan, and ongoing efforts to improve the business climate and infrastructure, and to deepen capital markets.

Philippines: Selected Economic Indicators, 2007–11
  2007 2008 2009 2010


2011 1/

Growth and prices (percent change)


Real GDP

7.1 3.7 1.1 7.0



CPI (annual average)

2.8 9.3 3.2 3.8



Public finances (percent of GDP)


National government balance (authorities' definition)

-0.2 -0.9 -3.9 -3.8



National government balance (IMF definition) 2/

-1.7 -1.5 -4.0 -3.8



Total revenue and grants

15.8 15.8 14.6 14.5



Total expenditure

17.4 17.3 18.6 18.4



Non-financial public sector balance 3/

0.2 -0.3 -3.4 -2.6


Non-financial public sector debt

61.0 60.7 60.7 58.0


Monetary sector (percent change, end of period)


Broad money (M3)

10.6 15.6 8.3 7.7 4/

Interest rate (91-day treasury bill, end of period, in percent) 5/

4.2 5.8 4.3 1.8 6/

Credit to the private sector

8.5 16.8 8.1 10.1 4/

External sector


Current account (percent of GDP)

4.9 2.2 5.5 5.4   4.3

Reserves, adjusted (US$ billions) 7/

33.8 35.9 44.2 62.9   78.4

Reserves/short-term liabilities, adjusted 8/

240.5 284.4 389.1 498.6   595.4

Pesos per U.S. dollar

46.1 44.5 47.6 45.2 9/ ...

Sources: Philippine authorities; IMF staff projections.

1/ Public finance projections reflect the 2011 budget.

2/ Excludes privatization receipts and includes deficit from restructuring of the central bank (Central Bank Board of Liquidators).

3/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.

4/ October 2010 (year-on-year).

5/Secondary market rate.

6/ November 2010.

7/Adjusted for gold and securities pledged as collateral against short-term liabilities.

8/Short-term liabilities include medium- and long-term debt due in the following year.

9/ Average for January to November 2010.

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. 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:


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