Transcript of Media Teleconference on the International Monetary Fund's 2010 Article IV Consultation with the PhilippinesWith Vivek Arora, Assistant Director of the Asia and Pacific Department and Mission Chief for the Philippines
Tuesday, March 1, 2011
MS. WONG: Everyone, good afternoon. I’m Daisy Wong of the IMF External Relations Department. Thanks for joining the call on the Article IV Consultation of the Philippines. May I now introduce our speaker today. He is Mr. Vivek Arora. He’s Assistant Director at the IMF’s Asia and Pacific Department and Mission Chief for the Philippines. May I begin with having Vivek to say a few words on the Philippine economy.
MR. ARORA: Thank you, Daisy, and hello everybody. We published today the document for the 2010 Article IV Consultation with the Philippines. Just a word of introduction before we turn to the questions and answers: I think you’ve seen already the Public Information Notice, so just to highlight a few points. The Consultation this year occurred in an overall very positive environment in the Philippines. The Philippines has emerged well from the global financial crisis.
In terms of the economic situation: the economy grew by 7.3 percent in 2010, which is the highest growth rate that the Philippines has had in the last 34 years. The balance of payments has been strong, with reserves rising to high levels on the basis of remittances, exports, sovereign bond proceeds, and other capital inflows. Overall, we see the environment -- the positive environment -- that now exists as a window of opportunity to move ahead with key reforms. The government’s focus on improving the investment climate and improving governance should strengthen confidence and help growth prospects.
In terms of the outlook, we view the near-term outlook as being basically favorable. We expect growth to be around 5 percent in 2011 and in the medium term. Just two points to make on the 5 percent growth outlook: One, that it’s somewhat higher than the medium-term forecast that we made a year ago when we thought that potential growth in the Philippines was around 4 percent. And secondly, the growth outlook of 5 percent in the Philippines is roughly in line with the growth outlook of the Philippines’ regional peers. In the past, Philippine growth used to lag a little bit behind regional partner countries, but now we think that the Philippines’ growth outlook is roughly in line with its regional comparator countries.
In terms of the policies, the main need now is to sustain the recovery and then to strengthen the base and the quality of sustainable growth in the medium term. Doing that will require managing carefully the exit from crisis-related stimulus policies in an external environment that is complicated by uncertainties over global growth and also by the volatility of capital flows.
In terms of the specific policies, we view monetary policy as having played a very helpful role in keeping inflation low while also fostering the recovery. It has managed the balancing act very well. Looking forward, with the outlook gap closing rapidly, our view is it may become necessary soon to start normalizing the policy stance in order to head off liquidity and inflation pressures.
In terms of fiscal policy, we support the government’s effort toward fiscal consolidation. The government has announced a plan to reduce the fiscal deficit to 2 percent of GDP by 2013. We think that’s very much a step in the right direction. It will help to provide the budget with more space to respond effectively to future shocks. The authorities’ emphasis on strengthening revenue through tax administration is also welcome. And we think that it will also be important to address some other gaps in the tax system— such as fiscal incentives, tax distortions, and excise tax reforms— in order to make sure that the revenue base is sufficiently strong to allow for adequate social and infrastructure spending in the medium term and also to help the government achieve its objective of fiscal consolidation.
In this context, the 2011 budget is very welcome, both because it takes a first step in this direction of fiscal consolidation and because it will appropriately reorient spending toward the social sector.
Let me stop with those brief remarks and ask for your questions. Thank you.
MS. WONG: Before we take questions, may I remind all of you the documents on the OMBC and the content of this conference call are under embargo until 5:00 p.m. Washington, DC time today. So please let us know if you have any questions now.
QUESTIONER: I have a very quick number to check with you. You said that growth last year was 7.3 percent because I see 7 percent elsewhere.
MR. ARORA: The final number for 2010 was 7.3 percent and that’s the fastest growth rate since 1976. In the staff report we had a forecast of 7 percent, so basically the outturn was slightly better, slightly stronger, than we projected.
QUESTIONER: The report is almost a bit dated now. It’s January 18. Given what’s been happening since then -- global increase in commodity prices, energy, other central banks raising rates, is the assessment of the Staff Report exactly the same or is the need to increase rates even more urgent?
MR. ARORA: I think the assessment in the Staff Report is broadly the same in the month or so since the staff report was written. There are three broad developments to highlight: One is that economic activity remains robust so the GDP growth later released after the Staff Report was written -- as I just said, 7.3 percent—was a little stronger than we expected. The balance of payments has remained strong. Export growth in December rose to about 25 percent. And international reserves continue to rise rapidly. They went up to $63.6 billion in January. So there was strong growth and a strong balance of payments. And then inflation also rose in January. The CPI inflation rate rose to 3.5 percent year on year in January. That was mainly driven by food and, as you mentioned, energy prices. Energy prices in turn were influenced quite a lot by higher global prices. Overall we do think that inflation pressures have gone up over the last couple of months, and that probably reinforces the case for normalizing the monetary stance sooner rather than later. The central bank did have a monetary board meeting on February 10 at which it gave a signal that it was ready to act in response to inflation risks. So the bottom line is that I think we see developments in the last few weeks as moving very much in the direction of the Staff Report.
QUESTIONER: I just wanted to follow up on an earlier question. Other central banks, Asian central banks, have already started raising rates. Is there a case for arguing that they’re a little bit behind the curve on raising rates? And secondly, can you clarify exactly why there’s a moderation in the growth rate from 7 to 5 percent next year? Thanks.
MR. ARORA: Okay, maybe the second question first. The moderation is a purely cyclical moderation. Growth fell to very low levels in 2009 to only 1 percent. So you would expect that in the period of the recovery, growth would be quite rapid. That’s basically what we saw in 2010. And then once the output gap is closed and the cycle is over, you then expect growth to moderate towards its trend or long-term level, which we estimate at about 5 percent. So it’s a very normal kind of growth trajectory for last year and this year. And the only point I highlight is that the moderation to 5 percent actually entails a faster trend growth in the medium term than we were expecting before. A year ago, we expected that growth would settle at 4 percent for the medium term. We now expect it to settle at 5 percent.
In terms of the tightening cycle, we do see a need for the central bank to start normalizing monetary policy in order to head off risks to inflation. We do not particularly think that they need to track exactly what other central banks in the region have done because each country’s inflation dynamics are different. So in the Philippines, it’s been the case that the inflation trends, as well as inflation expectations, in the last few months have been very mild. So we think policy has basically been on the right track so far. But it’s just that going forward there is a need to start to normalize the monetary stance. I think it will have to be at a pace dictated by inflation dynamics specifically in the Philippines though.
QUESTIONER: I wanted to ask about the issues on the growth. So, therefore, you’ve raised your forecast, right? Would that be correct? From 4 to 5 percent?
MR. ARORA: Yes, and just let me give you the timeline. The last Article IV was a year ago. That was January 2010 and we forecasted 4 percent as the medium-term growth outlook. Then we had the WEO, the World Economic Outlook, last October where we were forecasting 4.5, and now we have 5. The short answer is “yes.”
QUESTIONER: And then you seemed to have concerns regarding asset bubbles -- do you think there’s a risk of overheating in the economy?
MR. ARORA: I think if we had to make a call on what we highlighted, the main concern would be more on the inflation side than on the asset bubble side. On the asset bubbles, as we point out in the report, there had been rapid growth of equity prices in 2010, but based on standard metrics like the P/E ratio and so, those don’t seem out of line with historical trends. The other candidate for bubbles is usually the property market, but that also has been relatively benign. So we don’t see those as a major concern.
On inflation, as I’ve said, the trends have been very moderate last year, which probably is what prompted the central bank, the BSP, to hold off on the tightening cycle. Inflation expectations have also been moderate. But looking forward, because of the accommodative financial conditions, we see more of a concern on inflation.
QUESTIONER: And inflation’s so high because the rice price hasn’t risen as quickly this time around as in 2008.
MR. ARORA: Sorry? Are you asking why the inflation is low?
QUESTIONER: I mean the inflation because the rice price is quite a big factor in the Philippines. And this time around with huge price increases, rice has not gone up as much as it did in 2008. Is that why inflation is not picking up as high or as fast as it is in other countries in the region?
MR. ARORA: It may be one factor, but the main thing I would say is that in January, we did see a rise in inflation. So the inflation rate -- if you want to be specific about numbers -- rose from 3 percent in December to 3.5 percent in January. And on a year-on-year basis, that increase was driven mainly by food and by energy. And food prices were affected by domestic weather disruptions, and then on the other hand energy as we discussed before was affected by higher global prices. So I think a combination of factors kept inflation down in previous months, but now we’re seeing food and energy prices going up and that’s driving up headline inflation. The concern there would not be just headline inflation, which is driven by food and energy, but one also needs to pay attention to core inflation, which takes out the effects of food, energy, and other volatile items. Core inflation is a little bit harder to read because actually on a year-on-year basis it slowed in January, on a month-on-month basis-- which is probably more accurate indicator of the trends-- it actually picked up slightly.
QUESTIONER: I’ve seen all your documents talking about raising the tax effort. What exactly are you talking about?
MR. ARORA: That’s a good question. That’s basically the ratio of tax revenue to GDP.
QUESTIONER: So you’re talking about raising taxes?
MR. ARORA: No. The ratio of tax revenue to GDP reflects tax administration and tax collection. It also reflects tax policy, and the efficiency of the overall tax system. What we pay attention to in the policy discussions is how to raise the overall tax effort. And that’s the context in which the government first targets tax administration and tax collection.
QUESTIONER: I see. Can I also ask another question… I think there’d be some difference between what you guys think about how fast you withdraw the fiscal stimulus and what the authorities are thinking. Or do you think you’re on the same page on that?
MR. ARORA: There are two things to say. One is that the intention to initiate a fiscal consolidation is a very welcome one and goes in the right direction. I think we’re very much on the same page in terms of the direction of the policy. The second is that in terms of where the public debt would end up under the consolidation plan, we have a concern that by 2013, notwithstanding the authorities’ best efforts, the public debt would still be relatively high. So there’s a case looking beyond that into the medium term to try and reduce debt further still.
QUESTIONER: Okay. I understand now. All right. Good, thank you very much.
MR. ARORA: Thank you.
MS. WONG: If there are no more questions, then I would like to conclude the call here. So, again, thanks very much for dialing into this conference call. And materials will be embargoed until 5:00 p.m. Okay, thanks very much.