Press Release No. 15/238

Press Release: Statement at the Conclusion of the 2015 Article IV Consultation Mission to the Philippines

May 26, 2015

An International Monetary Fund (IMF) 2015 Article IV Consultation mission led by Chikahisa Sumi visited Manila during May 14−26. The mission met with the Governor of the Bangko Sentral ng Pilipinas, the Secretaries of Finance, Budget and Management, and the National Economic and Development Authority, senior government officials, private sector representatives, and the financial community in Manila and Cebu.

At the conclusion of the visit, Mr. Sumi issued the following statement:

“The outlook for the Philippine economy remains favorable despite uneven and generally weaker global growth prospects. Real GDP is projected to grow by 6.7 percent in 2015, as lower commodity prices lift household consumption and improved budget execution raises public spending. Net exports are projected to soften due to sluggish trading partner growth and real exchange rate appreciation. Growth is projected at 6.3 percent in 2016 as the one-off fiscal impulse and oil price stimulus in 2015 are expected to wane. Lower import prices should help keep inflation in the lower half of the target band, picking up in 2016 as oil prices rise. The current account surplus is expected to exceed 5.0 percent of GDP in 2015 due to lower oil prices and continued inflows from business process outsourcing (BPO) and remittances.

“Risks to the outlook stem from both external and domestic sources. An upside risk is a stronger lift to demand from lower commodity prices. On the downside, disruptive asset price shifts due to asynchronous monetary policies in advanced economies are a risk, but the Philippines’ strong fundamentals should provide the necessary cushion. On the domestic front, any resurgence of strong credit and construction growth could give rise to financial stability risk. Continued weak budget execution could also slow down improvements in infrastructure. Finally, there is a downside risk associated with El Niño conditions leading to a poor harvest and a rapid run-up in food prices. The Philippine authorities have undertaken preemptive measures and continue to be prepared to respond as needed with suitable policies should any of these risk scenarios materialize, given the Philippine economy’s strong fundamentals and ample policy space.

“Fiscal policy should focus on supporting infrastructure investment and inclusive growth. The 2015 budget envisages returning to the government’s medium-term deficit target of 2 percent of GDP by increasing public infrastructure spending and implementing much-needed typhoon Yolanda reconstruction and social spending. Implementation of the robust pipeline of Public Private Partnership projects should also contribute to the enhancement of infrastructure supported by amendments to the “build operate and transfer” Act and Right-of-Way Act. More generally, improvements in the quality of public spending should be institutionalized through the enactment of the proposed public financial management bill that would also strengthen the efficiency of disbursements.

“To support a higher level of budgetary spending on infrastructure and social needs over the medium term, additional fiscal revenue would need to be raised. In this respect, the mission strongly encourages a comprehensive tax reform package that is net revenue enhancing, and urges the authorities to avoid any tax package that would entail a net revenue loss, such as the recommended lowering of personal tax rates without the concomitant rationalization of exemptions/incentives and/or rise in fuel excise taxes. The mission also supports the Department of Finance’s efforts to allow the tax authorities' access to bank deposit information and make tax evasion a predicate crime to improve the efficiency and equity of revenue collection.

“The stance of monetary policy is currently appropriate following last year’s preemptive tightening. Any rapid food price increases due to El Niño-related drought should be addressed preemptively by promptly increasing food imports and such should not justify monetary tightening unless second round effects were to appear. A broad-based acceleration of credit growth and/or a rise in inflation forecast above the upper end of the target band due to higher demand would signal a need for a review of current monetary policy stance. The BSP’s proactive approach to oversight of the financial sector to address micro and sectoral risks is also welcome. We support the proposed amendments to the BSP charter to enhance its effectiveness by authorizing, among others, higher capitalization, exemption from income tax, the issuance of its own bills and enhancing its supervisory powers.

“Despite strong growth and improvements in various areas over the last few years, the country has the potential to do even better and build a more inclusive society with reduced poverty, particularly in the context of ASEAN economic integration. This path to greater broad-based prosperity depends crucially on stepping up investment, including in infrastructure and its young people, thereby creating much-needed employment opportunities for the fast-growing population. Boosting productive investment will require renewed emphasis on structural reforms, including further opening up the economy to increased competition, strengthening public finance management, and implementing an ambitious and inclusive financial development strategy that provides greater access to financing for SMEs and the population at large. To support job creation and poverty reduction, we strongly encourage the authorities to resolve the uncertainties with the use of agricultural land titles as collateral for bank loans, improve urban and regional connectivity, reform the National Food Authority and ease quantitative restrictions on rice imports, and reduce skill mismatches through expanded education (kindergarten to 12th grade) and apprenticeship programs.”