Statement by an IMF Staff Mission to the Philippines

Press Release No. 06/174
August 2, 2006

The following statement was issued on August 2 in Manila by an International Monetary Fund (IMF) staff mission:

"An IMF mission visited Manila during July 21-August 2, 2006 to hold post program monitoring discussions with the authorities. The findings will be relayed to the IMF's Executive Board in early October but a preliminary assessment is as follows.

"The landmark VAT reform is producing results, with government revenues on target through the first semester. The increased revenues will be used to reduce public debt, and to finance infrastructure and social services. Expenditures through the first semester were less than anticipated and there is scope to raise productive capital and other priority spending during the remainder of the year, while continuing to meet the deficit target. This will allow full realization of the benefits of VAT reform and devote resources towards much-needed public infrastructure.

"The mission welcomes the authorities' commitment to sustain the reform momentum in the period ahead. Despite adverse external events, such as the surge in international oil prices, the authorities have stayed the course on reforms. This has strengthened market perception and helped the Philippines cope well with the recent period of global market volatility. Sustaining the reform momentum will help the economy tackle future challenges presented by the external environment.

"The economy has performed well. Despite higher oil prices, growth is expected to remain resilient at about 5 percent this year and to rise to about 5½ percent in 2007 once private investment starts to pick up. A rising growth trajectory is needed to substantially raise living standards and decisively reduce poverty.

"The national government deficit is expected to decline in 2006 and possibly undershoot the authorities' target of P 125 billion. An improvement is also expected in the public sector deficit. Looking ahead, balancing the budget while increasing spending on infrastructure will require a further strengthening of revenue collection. This underscores the importance of full and speedy implementation of tax administration reforms underway. New revenue-raising measures, such as a rationalization of tax incentives, may also be needed for durable fiscal adjustment achieved by raising revenues rather than compressing productive expenditures. At the same time, careful monitoring of other parts of the public sector, such as government-owned and controlled corporations, will help avoid any undermining of the fiscal consolidation efforts by national government.

"Inflation has begun to decelerate. Second round effects from past supply side factors, such as the surge in oil prices and the VAT reform, appear limited, and underlying inflation has begun to trend down according to a range of indicators. The mission expects inflation to average 6.7 percent this year and come down further to within the BSP's target range by the second half of next year. Upside risks to the inflation forecast stem from additional rises in oil prices and further emerging market volatility that could weaken the peso. On the other hand, inflation could be lower than forecast if the peso strengthens further due to continuing reforms.

"The mission welcomes positive developments in the financial sector including sales of non-performing assets, bank consolidation, and the switch to new international financial reporting standards. Passage of legislative initiatives to further develop capital markets, such as the Credit Information System Act and the Corporate Recovery Act, would be welcome.

"In the power sector, National Power Corporation's cash deficit has narrowed substantially as a result of past increases in generation tariffs and lower interest expense following the debt transfer to government. The wholesale electricity spot market (WESM) commenced operations in June, promising to bring down the overall cost of electricity through competition. However, the privatization process has encountered repeated delays. The mission hopes that the upcoming Transco rebidding will be successful since the conclusion of a large power deal could play an important role in catalyzing other private investment."



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