## cr18287 - 4.8 percent year to date and above the inflation target band of 2−4 percent, led by adjustments in

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### Recent developments, growth, inflation, and external account
- Real GDP growth:
  - 6.7 percent in 2017 and 6.3 percent in 2018:H1, y/y, led by strong public investment.
- Inflation dynamics:
  - Inflation rose to 5.7 percent (y/y) in July 2018.
  - Averaging 4.5 percent year to date and above the inflation target band of 2−4 percent.
  - Drivers: adjustments in excise taxes, the rise in global oil prices, the weaker peso, and above-trend growth.
- Employment and wages:
  - Investment-led growth and sustained supply pressures have likely raised employment and renewed wage demand pressures.
- Current account:
  - Following surpluses before 2016, the current account deficit widened to 0.8 percent of GDP in 2017, driven mainly by imports of capital goods, oil, and raw materials, reflecting strong investment growth.

### Outlook and medium-term projections
- Real GDP projections:
  - 2018: 6.5 percent.
  - 2019: 6.7 percent.
  - Medium term: projected at just under 7 percent; specific projection noted as 6.9 percent as implementation of structural reforms promotes investment and innovation.
- Inflation projections:
  - Projected above the 4 percent upper target bound in 2018.
  - Projected to stay in the upper half of the target band (3–4 percent) during 2019–2020.
- Output gap and external financing:
  - Output expected to stay above potential in 2018−2020.
  - Current account deficit expected to widen to 1.5 percent of GDP in 2018, driven by continued rise of capital goods imports, mostly financed by FDI.
- Risks:
  - Downside risks: rising inflation, continued rapid credit growth, higher U.S. interest rates and U.S. dollar, volatile capital flows, higher oil prices, intensification of global trade tension, and overheating.
  - Upside: fiscal incentive for streamlining and liberalizing foreign investment, if approved and implemented, could boost productivity over the medium term and strengthen investor confidence.

### Authorities’ views and outlook
- Growth:
  - Authorities projected "7−8 percent" growth over the medium-term driven by strong private consumption, higher public spending in infrastructure and social programs, resurgence in manufacturing, and growing FDI and tourism.
  - They saw limited evidence of overheating based on inflation dynamics, output, liquidity, and credit conditions.
- External sector and exchange rate:
  - Peso depreciated almost "6.0 percent" in January–July against the U.S. dollar and about "4.5 percent" in nominal effective terms.
  - Gross reserves were "US$76.7 billion" as of July 2018 and equivalent to "192 percent" of the IMF’s reserve adequacy metric for 2017; authorities view reserves as ample and exchange rate flexibility as important.
- Policy risk assessment:
  - Authorities noted potential impacts from global trade tensions on investment sentiment and global growth uncertainty but expected buffers from intraregional trade, domestic demand, and robust external payments position.

### Fiscal policy, public finances, and recommendations
- Fiscal stance and performance (national government, percent of GDP):
  - Overall balance: -1.5 (2013), -0.6 (2014), -1.4 (2015), -2.4 (2016), -2.2 (2017), projected -2.8 (2018), -3.2 (2019).
  - Revenue and grants: 14.8 (2013), 15.1 (2014), 15.4 (2015), 15.2 (2016), 15.6 (2017), projected 16.0 (2018), 16.2 (2019).
  - Total expenditure and net lending: 16.3 (2013), 15.7 (2014), 16.8 (2015), 17.6 (2016), 17.9 (2017), projected 18.8 (2018), 19.4 (2019).
  - General government gross debt: 45.7 (2013), 42.1 (2014), 41.5 (2015), 39.0 (2016), 39.9 (2017), projected 39.5 (2018), 38.9 (2019).
- Main policy recommendations:
  - Adopt a neutral fiscal stance over 2018–2019; continue pro-growth infrastructure investment and social spending while containing nonpriority spending.
  - Streamline tax incentive system; enhance the VAT refund system; strengthen international taxation; complement reforms with enhanced social protection.
  - Carefully select and manage infrastructure projects to maximize growth impact.
  - Replace the rice import quota system with a tariff-based system while supporting small farmers; promote competition by opening new sectors to foreign investment; improve the business environment; invest in human capital and labor market reforms; modernize the bank secrecy legal framework.

### Monetary policy and market measures
- Monetary policy stance:
  - BSP raised the policy rate by "100 bps" to "4 percent" in 2018.
  - Staff estimates the real policy rate to be close to "zero percent" as of August 2018, "1−2 percentage points" below the neutral real interest rate, implying need for further tightening.
  - BSP should look to tighten monetary policy further; the exact pace should depend on evolving external and domestic conditions.
- Exchange rate and operations:
  - Exchange rate flexibility should continue to support adaptation to external shocks; limit FX intervention to address disorderly market conditions.
  - Two bank reserve requirement cuts in 2018 lowered ratio to "18" from "20 percent"; further cuts on hold until inflation expectations are more firmly anchored.
- Other measures:
  - Welcome launch of national retail payment systems and progress with domestic capital market and FX liberalization reforms.
  - Monitor supply- and demand-side pressures carefully.
  - Directors supported BSP’s plan to introduce a countercyclical buffer for banks and recommended closing data gaps on NBFIs and conglomerates.

### Financial sector and macrofinancial stability
- Credit and intermediation:
  - Bank credit continues to outpace economic growth; credit growth has slowed recently but the credit-to-GDP gap has widened, approaching early warning levels.
  - Financial intermediation by NBFIs is small but has grown rapidly.
- Banking sector buffers:
  - Banks display high capitalization, stable nonperforming loans, and low exposure to external and FX-denominated financing.
  - System CAR: 14.5 percent on a solo basis and 15.1 percent on a consolidated basis.
  - NPLs at end June 2018: 1.3 percent.
- Macroprudential and supervisory recommendations:
  - Introduce and set CCyB above zero given rapid credit growth and credit-to-GDP gap.
  - Close data gaps on NFCs and NBFIs; introduce SRF for OFCs.
  - Enhance reporting (Electronic Information Sharing project) and granular templates for real estate and project finance.
  - Proposed BSP charter amendments to strengthen data access and legal powers.
  - Additional BSP measures: DEBT, BII, Net Stable Funding Ratio, REST with "25 percent" write-off limits.

### Key statistics (selected exact figures)
- GDP and prices:
  - Real GDP: 7.1 (2013), 6.1 (2014), 6.1 (2015), 6.9 (2016), 6.7 (2017), 6.5 (2018 proj.), 6.7 (2019 proj.).
  - Consumer prices (period average, 2012 basket): 2.6 (2013), 3.6 (2014), 0.7 (2015), 1.3 (2016), 2.9 (2017), 4.9 (2018 proj.), 3.9 (2019 proj.).
  - Consumer prices (end of period, 2012 basket): 3.8 (2013), 1.9 (2014), 0.7 (2015), 2.2 (2016), 2.9 (2017), 5.2 (2018 proj.), 3.6 (2019 proj.).
- Labor market:
  - Unemployment rate: 7.1 (2013), 6.8 (2014), 6.3 (2015), 5.4 (2016), 5.7 (2017), 5.5 (2018 proj.), 5.4 (2019 proj.).
  - Underemployment rate: 19.3 (2013), 18.4 (2014), 18.5 (2015), 18.3 (2016), 16.1 (2017).
- Credit and monetary:
  - 3-month PHIREF rate (end of period): -0.4 (2013), 1.8 (2014), 2.7 (2015), 2.0 (2016), 3.3 (2017), 4.0 (2018).
  - Credit to the private sector (percent of GDP): 35.9 (2013), 39.2 (2014), 41.8 (2015), 44.7 (2016), 47.8 (2017), projected 51.5 (2018), 53.8 (2019).
  - Credit to the private sector (percent change): 17.2 (2013), 19.6 (2014), 12.4 (2015), 16.4 (2016), 16.6 (2017), projected 20.0 (2018), 15.8 (2019).
- External sector and reserves:
  - Current account balance (percent of GDP): 4.2 (2013), 3.8 (2014), 2.5 (2015), -0.4 (2016), -0.8 (2017), projected -1.5 (2018), -1.5 (2019).
  - FDI, net (percent of GDP): 0.0 (2013), 0.4 (2014), 0.0 (2015), -1.9 (2016), -2.6 (2017), projected -2.5 (2018), -2.3 (2019).
  - Gross reserves (US$ billions): 83.2 (2013), 79.5 (2014), 80.7 (2015), 80.7 (2016), 81.6 (2017), projected 76.3 (2018), 73.9 (2019).
  - Total external debt (percent of GDP): 28.9 (2013), 27.3 (2014), 26.5 (2015), 24.5 (2016), 23.3 (2017), projected 21.3 (2018), 19.5 (2019).
- Exchange rate:
  - Peso per U.S. dollar (period average): 42.4 (2013), 44.4 (2014), 45.5 (2015), 47.5 (2016), 50.4 (2017), 53.4 (2018).

### Authorities’ fiscal plans and staff assessment
- Authorities plan deficits:
  - From "2.2 percent of GDP" in 2017 to "3 percent" in 2018 and "3.2 percent" in 2019 (implying fiscal impulse of "0.5 percent" and "0.2 percent").
  - IMF staff projects a lower deficit of "2.8 percent" in 2018 given implementation constraints.
  - As of June 2018, the deficit stood at "1.1 percent" of projected 2018 GDP against the authorities’ target of "1.5 percent".
- Tax incentives and reform:
  - Current incentives cost an estimated "over 2 percent of GDP" and are provided under more than 220 laws and 14 investment promotion agencies.
  - Package 2 of tax reform: streamline tax incentives while gradually reducing the CIT rate from "30" to "25 percent"; any CIT cut should be conditional on proportionate fiscal incentive consolidation.
  - Enhance VAT refund system; limit interest payment deductions to a specified percentage of EBITDA; strengthen transfer pricing enforcement.
- Social protection and public investment management:
  - Expand social protection by reallocating from nonpriority spending; prioritize conditional cash transfers and improve targeting via national identification system.
  - Public expenditure management priorities: project selection/prioritization, periodic review of ongoing projects, contingent liability management, oversight over PPPs.

### Inflation analysis and monetary framework modernization
- Inflation decomposition (July 2018 vs 2017 average y/y):
  - Headline: "5.7" vs "2.9" (Difference "2.8", Contribution "2.8").
  - Food, Beverages and Tobacco: "7.8" vs "3.3" (Difference "4.5", Contribution "1.8").
  - Gas, fuel and lubricants: "20.5" vs "10.2" (Difference "10.3", Contribution "0.5").
  - Core goods: "1.8" vs "1.7" (Difference "0.1", Contribution "0.0").
  - Core services: "3.5" vs "1.7" (Difference "1.8", Contribution "0.5").
- Core inflation and momentum:
  - Core inflation rose to 3.0 percent (y/y) as of July 2018.
  - Core services inflation picked up substantially since late 2017, indicating partly demand-driven pressures.
- Monetary operations (IRC and next steps):
  - Interest rate corridor (IRC) adopted in 2016: 100-basis-point-wide IRC with RRP in the middle.
  - Next operational priorities: increase frequency of OMOs; catalyze repo market development; change BSP repo operations; gradually reduce reserve requirements and lengthen reserves maintenance period to 2−4 weeks.

### AML/CFT framework and legal reforms
- Improvements:
  - Amended legislation now covers casinos; casinos must report single casino transactions above PHP5 million to the financial intelligence unit.
- Remaining weaknesses:
  - AML/CFT framework could be strengthened by amending the bank secrecy law.
  - Making tax evasion a predicate crime is recommended.
  - Relaxation of bank secrecy law and enhanced CDD for domestic PEPs will help improve tax compliance and anti-corruption.

### Structural reforms and digital strategy
- Priority reforms:
  - Replace rice import quota system with tariff-based system, accompanied by support for small farmers.
  - Shorten FINL, implement Ease of Doing Business Law and Philippine Competition Act, streamline procedures to support private investment.
  - Financial inclusion: create central registry for movable assets to expand eligible collateral for SME credit access.
- Digital Strategy (Box 5) highlights:
  - Four strategic pillars: transparent government; internet opportunities for all; investing in people—digital literacy; ICT industry and business innovation.
  - National Broadband Plan and National Government Portal; a congress-approved bill for a national identification system signed into law.
  - BSP target: raise electronic transactions from 1 percent to 20 percent by 2020; launched PESONet and InstaPay.
  - BSP sandbox for fintech; National Cybersecurity Plan; efforts to break telecom duopoly.

### External Sector Assessment and external debt sustainability
- NIIP and external positions:
  - NIIP was −14 percent of GDP by end-2017; external assets 54 percent of GDP; external liabilities 68 percent of GDP.
  - Reserves accounted for about half of external assets.
- Current account assessment:
  - CA norm (benchmark EBA model): −0.6 percent of GDP, standard error 1.4 percent.
  - Staff-estimated CA norm range: between -2.0 and 0.8 percent of GDP.
  - Cyclically-adjusted balance: -1.0 percent of GDP.
  - CA gap midpoint: −0.4 percent of GDP; CA gap range: between -1.8 and 1.0 percent of GDP.
- REER and competitiveness:
  - Peso depreciated by 4.1 percent in real effective terms in 2017 and 5.7 percent in nominal effective terms in 2017.
  - REER assessed broadly in line with fundamentals; a CA gap between −1.8 and 1.0 percent of GDP corresponds to a REER gap between -5 and 8 percent.
- Reserves and FX intervention:
  - Gross reserves: about US$81.6 billion at end-2017; US$76.7 billion by July 2018; US$77.8 billion at end-August 2018.
  - Reserves at end-2017: about eight months of imports, or about 204 percent of IMF reserve adequacy metric; assessment unchanged by 2018 development.
- External debt sustainability (key findings and baseline projections):
  - Baseline external debt-to-GDP ratio expected to fall to 14.3 percent of GDP in 2023 from 23.3 percent in 2017.
  - Baseline external debt (percent of GDP): 2017: 23.3; 2018: 21.3; 2019: 19.5; 2020: 17.9; 2021: 16.6; 2022: 15.4; 2023: 14.3.
  - Change in external debt (annual, percent of GDP): 2018: -2.0; 2019: -1.8; 2020: -1.6; 2021: -1.3; 2022: -1.3; 2023: -1.1.
  - Identified external debt-creating flows (percent of GDP, annual) and components (current account, net non-debt capital inflows, automatic debt dynamics) detailed in the staff tables.
  - External debt-to-exports and gross external financing needs projected and stress-tested; gross external financing need (US$ billions): 2018: 25.1; 2019: 25.1; 2020: 24.9; 2021: 25.5; 2022: 26.4; 2023: 27.4.
  - Scenario: one-time depreciation of 30 percent in 2019 would temporarily raise the debt ratio by 9 percentage points but still reduce it below the 2017 level by 2023.
- Policy implications:
  - External debt sustainable under baseline and a range of shocks, but continued monitoring of external financing needs is important.

### Data, statistics, and surveillance
- SRF and OFCs:
  - Authorities submitted test SRF-data for several types of OFCs; SRF expected to be introduced by end-2016.
- Data adequacy:
  - Data provision broadly adequate for surveillance with shortcomings; NSCB rebasing and SNA 2008 implementation ongoing.
  - CPI rebased to 2012 weights in March 2018; BPM6 and IIP compilation completed in 2014.
  - Coverage challenges due to nontraditional channels and FCDU reporting exemptions.
  - Authorities report all 12 core FSIs and selected encouraged FSIs quarterly.
  - Philippines subscribed to the SDDS in August 1996; data ROSC published in August 2004.
- Selected data timeliness and quality notes (latest observations and reception dates provided in staff table).

### Staff appraisal and recommendations (paragraphs 34–40 summary)
- Macro outlook:
  - Real GDP projected to grow strongly in 2018 and 2019, supported by domestic demand; medium-term outlook favorable but poverty and inequality remain elevated.
- Policy mix recommended:
  - Neutral fiscal stance over 2018–2019 with implied overall deficit targets of 2.4 percent in 2018 and 2.5 percent in 2019 (staff baseline 2.8 and 3.2 percent).
  - Further monetary tightening to anchor inflation expectations; BSP’s recent rate increases appropriate and further action welcomed.
  - Maintain exchange rate flexibility; limit FX intervention to prevent disorderly markets.
  - Continue macroprudential measures and close data gaps on NBFIs and conglomerates.
  - Structural priorities: amendments to the BSP Charter, streamlining tax incentives, modernizing bank secrecy law, opening sectors to foreign investment, improving business environment.
- Consultation cycle:
  - Next Article IV consultations recommended on the standard 12-month cycle.

*International Monetary Fund — Philippines: Staff Report for the 2018 Article IV Consultation (August 28, 2018).*

### 4.8 percent year to date and above the inflation target band of 2−4 percent, led by adjustments in

### cr18287 - 4.8 percent year to date and above the inflation target band of 2−4 percent, led by adjustments in

### Recent developments, growth, inflation, and external account
- Real GDP growth: 6.7 percent in 2017 and 6.3 percent in 2018:H1, y/y, led by strong public investment.
- Inflation dynamics:
  - Inflation rose to 5.7 percent (y/y) in July 2018.
  - Averaging 4.5 percent year to date and above the inflation target band of 2−4 percent.
  - Drivers: adjustments in excise taxes, the rise in global oil prices, the weaker peso, and above-trend growth.
- Employment and wages:
  - Investment-led growth and sustained supply pressures have likely raised employment and renewed wage demand pressures.
- Current account:
  - Following surpluses before 2016, the current account deficit widened to 0.8 percent of GDP in 2017, driven mainly by imports of capital goods, oil, and raw materials, reflecting strong investment growth.

### Outlook and medium-term projections
- Real GDP projections:
  - 2018: 6.5 percent.
  - 2019: 6.7 percent.
  - Medium term: projected at just under 7 percent; specific projection noted as 6.9 percent as implementation of structural reforms promotes investment and innovation.
- Inflation projections:
  - Projected above the 4 percent upper target bound in 2018.
  - Projected to stay in the upper half of the target band (3–4 percent) during 2019–2020.
- Output gap and external financing:
  - Output expected to stay above potential in 2018−2020.
  - Current account deficit expected to widen to 1.5 percent of GDP in 2018, driven by continued rise of capital goods imports, mostly financed by FDI.
- Risks:
  - Downside risks: rising inflation, continued rapid credit growth, higher U.S. interest rates and U.S. dollar, volatile capital flows, higher oil prices, intensification of global trade tension, and overheating.
  - Upside: fiscal incentive for streamlining and liberalizing foreign investment, if approved and implemented, could boost productivity over the medium term and strengthen investor confidence.

### Financial sector and macrofinancial stability
- Bank credit and financial intermediation:
  - Bank credit continues to outpace economic growth.
  - While credit growth has slowed recently, the credit-to-GDP gap has widened, approaching early warning levels.
  - Financial intermediation by NBFIs is small but has grown rapidly in recent years.
- Banking sector buffers and policy actions:
  - Banks display high capitalization and stable nonperforming loans, and low exposure to external and FX-denominated financing.
  - Authorities (BSP) actions and recommendations:
    - Recent monetary tightening since May raised the policy rate to 4 percent.
    - BSP decisions to increase the policy rate and announced readiness to take further actions to safeguard price stability.
    - BSP delayed bank reserve requirement cuts until inflation expectations are more firmly anchored.
    - Directors supported BSP’s plan to introduce a countercyclical buffer for banks and recommended closing data gaps on NBFIs and conglomerates.
    - Directors encouraged approval of the amendments to the BSP charter.

### Fiscal policy, public finances, and recommendations
- Fiscal stance and performance:
  - National government overall balance (percent of GDP): -1.5 (2013), -0.6 (2014), -1.4 (2015), -2.4 (2016), -2.2 (2017), projected -2.8 (2018), -3.2 (2019).
  - Revenue and grants (percent of GDP): 14.8 (2013), 15.1 (2014), 15.4 (2015), 15.2 (2016), 15.6 (2017), projected 16.0 (2018), 16.2 (2019).
  - Total expenditure and net lending (percent of GDP): 16.3 (2013), 15.7 (2014), 16.8 (2015), 17.6 (2016), 17.9 (2017), projected 18.8 (2018), 19.4 (2019).
  - General government gross debt (percent of GDP): 45.7 (2013), 42.1 (2014), 41.5 (2015), 39.0 (2016), 39.9 (2017), projected 39.5 (2018), 38.9 (2019).
- Main policy recommendations (summary):
  - A neutral fiscal stance over 2018–2019 to balance growth and stability objectives; continue to support pro-growth infrastructure investment and social spending while containing nonpriority spending.
  - Streamline tax incentive system to be more effective in achieving national policy goals and generate economy-wide productivity gains; enhance the VAT refund system; strengthen the international taxation framework; complement reforms with enhanced social protection.
  - Carefully select and manage infrastructure projects to maximize impact on growth.
  - Continue reform efforts: replace the rice import quota system with a tariff-based system while supporting small farmers; promote competition by opening new sectors to foreign investment; improve the business environment through better infrastructure; create more and better jobs through investment in human capital and labor market reforms; modernize the bank secrecy legal framework.

### Monetary policy recommendations and market measures
- Monetary policy stance:
  - BSP should look to tighten monetary policy further; the exact pace should depend on evolving external and domestic conditions.
  - Exchange rate flexibility should continue to support adaptation to external shocks; limit FX intervention to address disorderly market conditions.
- Other measures:
  - Welcome launch of national retail payment systems and progress with domestic capital market and FX liberalization reforms.
  - Monitor supply- and demand-side pressures carefully.

### Key statistics (selected exact figures from table and text)
- GDP and prices:
  - Real GDP: 7.1 (2013), 6.1 (2014), 6.1 (2015), 6.9 (2016), 6.7 (2017), 6.5 (2018 proj.), 6.7 (2019 proj.).
  - Consumer prices (period average, 2012 basket): 2.6 (2013), 3.6 (2014), 0.7 (2015), 1.3 (2016), 2.9 (2017), 4.9 (2018 proj.), 3.9 (2019 proj.).
  - Consumer prices (end of period, 2012 basket): 3.8 (2013), 1.9 (2014), 0.7 (2015), 2.2 (2016), 2.9 (2017), 5.2 (2018 proj.), 3.6 (2019 proj.).
- Labor market:
  - Unemployment rate (percent of labor force): 7.1 (2013), 6.8 (2014), 6.3 (2015), 5.4 (2016), 5.7 (2017), 5.5 (2018 proj.), 5.4 (2019 proj.).
  - Underemployment rate (percent of employed persons): 19.3 (2013), 18.4 (2014), 18.5 (2015), 18.3 (2016), 16.1 (2017).
- Credit and monetary:
  - 3-month PHIREF rate (percent, end of period): -0.4 (2013), 1.8 (2014), 2.7 (2015), 2.0 (2016), 3.3 (2017), 4.0 (2018).
  - Credit to the private sector (percent of GDP): 35.9 (2013), 39.2 (2014), 41.8 (2015), 44.7 (2016), 47.8 (2017), projected 51.5 (2018), 53.8 (2019).
  - Credit to the private sector (percent change): 17.2 (2013), 19.6 (2014), 12.4 (2015), 16.4 (2016), 16.6 (2017), projected 20.0 (2018), 15.8 (2019).
- External sector and reserves:
  - Current account balance (percent of GDP): 4.2 (2013), 3.8 (2014), 2.5 (2015), -0.4 (2016), -0.8 (2017), projected -1.5 (2018), -1.5 (2019).
  - FDI, net (percent of GDP): 0.0 (2013), 0.4 (2014), 0.0 (2015), -1.9 (2016), -2.6 (2017), projected -2.5 (2018), -2.3 (2019).
  - Gross reserves (US$ billions): 83.2 (2013), 79.5 (2014), 80.7 (2015), 80.7 (2016), 81.6 (2017), projected 76.3 (2018), 73.9 (2019).
  - Total external debt (percent of GDP): 28.9 (2013), 27.3 (2014), 26.5 (2015), 24.5 (2016), 23.3 (2017), projected 21.3 (2018), 19.5 (2019).
- Exchange rate:
  - Peso per U.S. dollar (period average): 42.4 (2013), 44.4 (2014), 45.5 (2015), 47.5 (2016), 50.4 (2017), 53.4 (2018).

*International Monetary Fund — Philippines: Staff Report for the 2018 Article IV Consultation (August 28, 2018).*

### 2.0 and 0.8 percent of GDP, driven by demographics and strong growth potential. The real effective

### cr18287 - 2.0 and 0.8 percent of GDP, driven by demographics and strong growth potential. The real effective

### Authorities’ views and outlook
- Growth:
  - Authorities projected "7−8 percent" growth over the medium-term driven by strong private consumption, higher public spending in infrastructure and social programs, resurgence in manufacturing, and growing FDI and tourism.
  - They saw limited evidence of overheating based on inflation dynamics, output, liquidity, and credit conditions.
- External sector and exchange rate:
  - Recent widening of the CAD attributed to imports of capital goods, raw materials and intermediate/manufactured goods related to infrastructure and strong domestic demand.
  - Peso depreciated almost "6.0 percent" in January–July against the U.S. dollar and about "4.5 percent" in nominal effective terms.
  - Gross reserves were "US$76.7 billion" as of July 2018 and equivalent to "192 percent" of the IMF’s reserve adequacy metric for 2017; authorities view reserves as ample and exchange rate flexibility as important.
- Policy risk assessment:
  - Authorities noted potential impacts from global trade tensions on investment sentiment and global growth uncertainty but expected buffers from intraregional trade, domestic demand, and robust external payments position.

### Policy issues — overview
- Main recommendation: adjust the policy mix to address rising domestic and external imbalances by:
  - Further monetary tightening to protect price stability and preserve market confidence.
  - Shifting to a neutral fiscal stance centered on priority infrastructure and social spending.
  - Maintaining exchange rate flexibility as a shock absorber.
  - Using macroprudential measures to safeguard financial stability.

### Fiscal policy — supporting inclusive growth while safeguarding stability
- Current and projected deficits:
  - Authorities plan to raise the deficit from "2.2 percent of GDP" in 2017 to "3 percent" in 2018 and "3.2 percent" in 2019, implying a fiscal impulse of "0.5 percent" and "0.2 percent", respectively.
  - IMF staff projects a lower deficit of "2.8 percent" in 2018 given implementation constraints.
  - As of June 2018, the deficit stood at "1.1 percent" of projected 2018 GDP against the authorities’ target of "1.5 percent".
- Fiscal space and debt:
  - General government gross debt fell to "40 percent of GDP" in 2017 from "52.4 percent" in 2007.
  - Gross financing and long-term adjustment needs assessed as low; reliance on external financing poses a moderate risk.
- Neutral fiscal stance recommendation:
  - A neutral stance over 2018–2019 implying deficits of "2.4 percent" in 2018 and "2.5 percent" in 2019 would support pro-growth infrastructure investment while limiting overheating risks.
  - Measures to achieve neutrality: intensify revenue efforts and contain nonpriority spending (e.g., new public hiring, non-urgent capital projects); further reduction in nonpriority spending if global conditions tighten; expand social protection spending as needed.
- Tax incentive and administration reforms:
  - Current incentives cost an estimated "over 2 percent of GDP" and are provided under more than 220 laws and 14 investment promotion agencies with limited central control.
  - Package 2 of tax reform: streamline tax incentives while gradually reducing the corporate income tax (CIT) rate from "30" to "25 percent"; any CIT cut should be conditional on proportionate fiscal incentive consolidation.
  - Enhance VAT refund system via administrative capacity building and piloting a risk-based approach for VAT refunds.
  - Strengthen international taxation: limit interest payment deductions to a specified percentage of EBITDA and strengthen transfer pricing enforcement.
- Social protection and public investment management:
  - Room to gradually expand social protection by reallocating from nonpriority spending; prioritize conditional cash transfers and improve targeting via national identification system.
  - Public expenditure management priorities: project selection/prioritization, periodic review of ongoing projects, contingent liability management, oversight over PPPs; IMF Public Investment Management Assessment has identified reform areas.

### Monetary and exchange rate policy — tackling inflation, modernizing operations, and maintaining flexibility
- Inflation dynamics:
  - Headline inflation decomposition (2018 July y/y vs 2017 average y/y):
    - Headline: "5.7" vs "2.9" (Difference "2.8", Contribution "2.8")
    - Food, Beverages and Tobacco: "7.8" vs "3.3" (Difference "4.5", Contribution "1.8")
    - Gas, fuel and lubricants: "20.5" vs "10.2" (Difference "10.3", Contribution "0.5")
    - Core goods: "1.8" vs "1.7" (Difference "0.1", Contribution "0.0")
    - Core services: "3.5" vs "1.7" (Difference "1.8", Contribution "0.5")
  - Core services inflation picked up substantially since late 2017; risk of unanchored inflation expectations has risen; government bond yield curve steepened.
- Monetary stance and recommendations:
  - BSP raised the policy rate by "100 bps" to "4 percent" in 2018; staff assesses monetary policy remains accommodative.
  - Staff estimates the real policy rate to be close to "zero percent" as of August 2018, "1−2 percentage points" below the neutral real interest rate, implying need for further tightening.
  - Higher rates will mitigate inflation risks from expected fiscal stimulus, weaker currency, and help anchor inflation expectations; pace depends on evolving conditions.
- Exchange rate policy and operations:
  - Exchange rate flexibility should continue; foreign exchange intervention limited to avoid disorderly conditions given ample reserves.
  - BSP progress: implementing interest corridor system (IRC); continued fine-tuning of monetary operations supported.
  - Two bank reserve requirement cuts in 2018 lowered ratio to "18" from "20 percent"; largely sterilized by BSP term deposit auctions; further cuts on hold until inflation expectations anchored.
- Authorities’ stance:
  - BSP agrees higher inflation mainly supply-driven; recent tightening aimed at anchoring expectations and tempering second-round effects.
  - Main risks: additional upward adjustments of minimum wages, transport fares, and electricity rates.
  - Authorities committed to actions to ensure the 2019 inflation target is attained and to improve IRC and monetary operations.

### Financial stability — addressing systemic risks
- System soundness and vulnerabilities:
  - Financial system dominated by well-capitalized banks; corporate leverage for listed firms (debt-to-asset) rose to "21.4 percent" in 2016.
  - Historic low borrowing costs fueled credit growth and asset price inflation; credit growth slowed in 2018 but expected to accelerate with private investment.
- Data gaps and monitoring:
  - Large data gaps for NFCs and NBFIs outside BSP perimeter hamper surveillance.
  - Electronic Information Sharing project launched in May to centralize reports including audited financial statements of top 1,000 corporations.
  - More granular reporting templates for real estate and project finance to aid surveillance of credit concentrations.
- Legal and macroprudential measures:
  - Proposed amendments to the BSP charter should be a priority to grant BSP authority to obtain data from any person including NFCs, capitalize the BSP, provide legal protection for staff, and allow issuance of BSP instruments.
  - BSP macroprudential actions: revised liquidity risk guidelines, targeted policies to stem excessive credit growth in sectors, adoption of Net Stable Funding Ratio, real estate stress test (REST) with "25 percent" write-off limits, planned CCyB framework initially set at "zero".
  - Staff assessment: CCyB will need to be set above zero considering rapid credit growth and credit-to-GDP gap approaching early warning levels.
  - Additional BSP measures: Debt-to-Earnings-of-Borrowers’ Test (DEBT) and Borrowers Interconnectedness Index (BII).
- Authorities’ views:
  - Authorities view bank credit exposure as supported by growing economy and emphasize macroprudential tools, governance, risk management, and stress testing (REST, DEBT) aligned with Basel III reforms (minimum leverage ratio, enhanced liquidity, D-SIB framework, Capital Conservation Buffer as CET1 requirement).
  - Communication on CCyB being strengthened to secure adoption.

### Structural reforms to support inclusive growth
- Priority reform areas supported by staff:
  - Replace rice import quota system with tariff-based system to reduce domestic rice prices; accompany with support for affected small farmers (training, crop substitution).
  - Shorten the foreign investment negative list (FINL), implement the Ease of Doing Business Law and the Philippine Competition Act, streamline procedures and cut permit processing time to support private investment.
  - Financial inclusion: create a central registry for movable assets to expand eligible collateral and improve SME credit access.
- Labor market and human capital:
  - Modernize labor regulations: eliminate repeated use of temporary contracts while providing labor market flexibility (simplify procedures and reduce pecuniary costs for laying off regular workers).
  - Invest more in education, training, and ICT infrastructure to leverage digital technologies; enhance cybersecurity.
  - Nationwide digital identification system and retail payment systems are supportive; authorities’ digital strategy aligned with these priorities.

*International Monetary Fund — excerpt from cr18287*

### 32.      Important challenges remain in the AML/CFT framework, despite recent

### 32.      Important challenges remain in the AML/CFT framework, despite recent improvements

### AML/CFT framework — findings and recommended legal changes
- Amended legislation now covers casinos:
  - Casinos are required to perform customer identification and meet record-keeping obligations.
  - Casinos must report to the financial intelligence unit all single casino transactions above PHP5 million.
- Identified remaining weaknesses:
  - The AML/CFT framework could be strengthened by amending the bank secrecy law.
  - Making tax evasion a predicate crime is recommended.
- Additional measures to improve outcomes:
  - Relaxation of bank secrecy law and enhanced customer due diligence measures for domestic politically exposed persons (PEPs) will help improve tax compliance and anti-corruption.

### Authorities’ views (paragraph 33)
- Progress and commitments:
  - Authorities highlighted significant progress in promoting inclusive growth and reaffirmed commitment to accelerate reforms.
- Foreign investment and trade policy:
  - Restrictions on foreign investment have been significantly eased in recent years.
  - Authorities plan to further shorten the FINL through executive orders and legislations.
  - Priority seen in shifting to a tariff-based rice import system to promote lower domestic prices and improve access to rice by poor households.
  - Proposed legislation states that proceeds from tariffs will be utilized to provide additional resources to farmers to enhance productivity and competitiveness.
- Financial sector and inclusion:
  - Need to further develop domestic capital markets to better support the national infrastructure initiative.
  - Ongoing initiatives to leverage digital technologies to promote financial inclusion and address potential disruptions to BPOs.
- Governance and anti-corruption:
  - Noted recent anti-corruption efforts, including approval of the Ease of Doing Business Law and creation of the Presidential Anti-Corruption Commission.
  - Legislative initiatives to ease bank secrecy for tax compliance verification.

### Staff appraisal — macro outlook and policy recommendations (paragraphs 34–40)
- Macro outlook and risks:
  - Real GDP is projected to grow strongly in 2018 and 2019, supported by domestic demand.
  - Short-term risks have risen, including inflation and overheating risks, and greater external uncertainty.
  - Medium-term economic outlook remains favorable, while poverty and inequality remain elevated.
- Fiscal policy recommendation:
  - Adopt a neutral fiscal stance over 2018–2019.
  - Implied overall deficit targets: 2.4 percent in 2018 and 2.5 percent of GDP in 2019 (compared to staff’s current baseline of 2.8 and 3.2 percent).
  - Rationale: support pro-growth infrastructure investment without overburdening monetary policy and while containing inflationary pressures.
  - Policy levers: raise tax revenues and reallocate spending from nonpriority programs to support public investment and social spending.
- Monetary policy recommendation:
  - Further monetary policy tightening to anchor inflation expectations is needed; pace should be conditional on domestic and external developments.
  - BSP’s recent decisions to increase the policy rate three times this year were appropriate.
  - With policy rates still well below neutral, staff welcomes BSP’s readiness to take further action to safeguard price stability and its decision to delay bank reserve requirement cuts until inflationary expectations are more firmly anchored.
- Exchange rate and external policy:
  - Exchange rate flexibility should continue to support adaptation to external shocks.
  - Foreign exchange intervention should be limited to preventing disorderly market conditions.
  - External position assessed to be broadly in line with fundamentals and desirable policies.
- Financial stability and macroprudential policy:
  - Macroprudential measures, backed by sound financial surveillance, should continue to safeguard financial stability against systemic risks, including those related to conglomerate structures and real estate.
  - Implementation of the CCyB should aim at maintaining appropriate flow of credit through the cycle.
  - Need to close data gaps on NBFIs and conglomerates.
- Structural reform priorities:
  - Amendments to the BSP Charter.
  - Streamlining tax incentives.
  - Modernizing the bank secrecy legal framework.
  - Promoting competition by opening new sectors to foreign investment.
  - Further improving the business environment through better infrastructure, labor regulations, and strengthened governance.
- Consultation cycle recommendation:
  - Next Article IV consultations recommended on the standard 12-month cycle.

### Box 1 — Distributional Effects of TRAIN: key scenario assumptions and results
- Scenario assumptions:
  - Two illustrative spending scenarios analyzed: “Infrastructure” and “Unproductive Redistribution”.
  - Annual TRAIN revenue assumed to amount to 0.6 percent of GDP — 1.5 percent gain from consumption tax increases, net of 0.8 percent of GDP revenue loss from personal income tax reduction.
  - Model: DSGE framework with three sectors—services, manufacturing, and an informal one not subject to taxation—calibrated to Philippine economy tax composition and consumption inequality (GINI index).
- Infrastructure scenario results:
  - All households better off, especially the poor.
  - Infrastructure investment increases output and reduces prices in the long run as productive capacity expands.
  - Lowers poverty by boosting average real consumption of the lowest household quintile.
  - Consumption inequality worsens marginally; wealth inequality improves as poor households accumulate more wealth.
- Unproductive Redistribution scenario results:
  - Revenue redistributed equally as lump-sum transfers.
  - Lowers investment with virtually unchanged output, engendering higher prices in the long term.
  - Poverty reduction less than in the infrastructure scenario.
- Policy implication:
  - Targeted public investment in physical and human capital (e.g., conditional cash transfer program, farm-to-market roads, water and sanitation) is recommended to achieve larger impacts on poverty and inequality.

### Box 2 — Inflation momentum and decomposition: key statistics and interpretation
- Headline inflation:
  - Headline inflation rose to 5.7 percent (y/y) in July 2018 from an average of 2.9 percent (y/y) in 2017.
  - Goods inflation (58 percent of the CPI basket) accelerated from 3.6 percent (y/y) in December 2017 to 7.2 percent (y/y) in July 2018.
- Drivers:
  - Higher (supply-driven) excise taxes on auto, fuel, tobacco, and sweetened beverages.
  - Higher global oil and gas prices.
  - Challenges in managing rice inventories.
  - Energy and food were main contributors; non-energy goods inflation driven mainly by domestic factors.
- Core inflation:
  - Core inflation rose to 3.0 percent (y/y) as of July 2018.
  - Core measured month-to-month (annualized): moderated in 2018:Q2 (2.4 percent) relative to Q1 (4.8 percent), then picked up in July (5.5 percent).
  - Core goods: 1.4 percent (y/y) in December 2017 to 1.8 percent (y/y) in July 2018.
  - Core services: 1.7 percent (y/y) in Dec 2017 to 3.5 percent (y/y) in July 2018.
- Interpretation:
  - Higher core services inflation suggests inflationary pressures are partly demand-driven and have spread beyond supply-side items.
  - Continued monitoring warranted given pickup in July.

### Box 3 — Neutral Real Interest Rates (NRIR): estimates and implications
- Actual real rates: on a declining path since early 2000s, with temporary increases and occasional negative episodes.
- Structural-based NRIR estimates:
  - Increased slightly in the past few years, falling within the 1−2 percent range.
  - Estimated neutral rates above actual rates indicate a broadly loose monetary stance since the global financial crisis.
- Alternate estimate:
  - HP univariate filtering points to NRIR estimates declining from 4 to 0.1 percent during 2000−2017.
- Data and methods notes:
  - Real interest rate = annualized nominal policy rates minus inflation expectations.
  - Policy rates use weighted average of BSP policy rates (RRP, TDF, ODF).
  - Expected inflation uses BSP Business Expectations Survey from 2013, and actual inflation before 2013.
  - Structural methodology references Laubach and Williams (LW, 2003).

### Box 4 — Progress in modernizing the monetary policy framework: operational changes and next steps
- Interest rate corridor (IRC) system adopted in 2016:
  - 100-basis-point-wide IRC: overnight deposit (floor), overnight lending (ceiling), and RRP rate in the middle.
  - Aim: Improve monetary policy transmission and money market development.
- Late 2017 developments:
  - BSP OMOs pushed market rates into the upper half of the IRC.
  - BSP absorbed liquidity using regular Term Deposit Facility (TDF).
  - Interbank market became more active as structural excess liquidity reduced.
- Next operational priorities:
  - Increase frequency of OMOs.
  - Catalyze repo market development and upgrade settlement infrastructure for repo transactions.
  - Develop more indicators of repo activities.
  - Change BSP repo operations in its RRP facility, potentially offering overnight RRP via variable-rate auctions to boost price discovery.
  - Gradually reduce reserve requirements, liquidity conditions permitting, and lengthen reserves maintenance period to 2−4 weeks.

*Source: IMF staff report (cr18287) — Philippines*

### Box 5. Digital Strategy in the Philippines

### Box 5. Digital Strategy in the Philippines

### Strategic pillars and enabling plans
- The government identifies four strategic pillars to transition to a digital economy:
  - transparent government and efficient services delivery;
  - internet opportunities for all people;
  - investing in people—digital literacy for all;
  - ICT industry and business innovation for national development.
- A National Broadband Plan has been formulated to guide the development of information infrastructure.

### E‑government projects and identification systems
- The National Government Portal is a key e‑governance project to centralize web‑based government information, aiming to eliminate multiple systems and reduce the need to visit government offices.
- A congress‑approved bill to establish a national identification system has been signed into law by the President; once implemented, it would improve service delivery through better targeting of government services.
- The government is establishing an e‑invoicing system to facilitate payments and tax administration.

### Digitalization of the financial sector and financial inclusion
- The Bangko Sentral ng Pilipinas (BSP) has set a target to raise the share of electronic transactions from the present 1 percent to 20 percent by 2020.
- To support this target, the BSP launched two automated clearing houses under the National Retail Payments System:
  - “PESONet”;
  - “InstaPay” (largely aimed at SMEs and individuals to improve financial inclusion).

### Skills, labor market impacts, and telecom competition
- Automation based on artificial intelligence is widely seen as a threat to low‑skill, manual, and routine work, especially within the BPO industry.
- The government is working with the BPO industry to upgrade skills of BPO workforces, focusing on training and retooling to help the industry move up the value chain and remain competitive.
- The government recognizes weaknesses in digital infrastructure and is attempting to introduce a third telecom player to break the current duopoly in the sector.

### Regulatory reforms and cybersecurity
- The BSP has adopted a sandbox approach to regulating fintech firms to encourage digital innovation.
- A National Cybersecurity Plan has been formulated.
- The government is promoting digital literacy through training and information outreach.

*Source: Box 5. Digital Strategy in the Philippines, cr18287*

### Appendix II. External Sector Assessment

### Appendix II. External Sector Assessment

### Foreign Asset and Liability Position
- NIIP was −14 percent of GDP by end-2017, broadly unchanged from −13 percent of GDP in 2013.
- External assets were 54 percent of GDP; external liabilities were 68 percent of GDP.
- Reserves held by the BSP accounted for about half of total external assets.
- Key components of external liabilities:
  - FDI liabilities: 25 percent of GDP.
  - Portfolio investment: 28 percent of GDP.
- Government external debt: about 10 percent of GDP.
- Assessment: The structure of the external balance sheet—large share of FDI liabilities and ample reserves—entails relatively low vulnerabilities.

### Current Account
- Background:
  - Current account balance declined from an average of 3.2 percent of GDP during 2010−2015 to −0.4 percent of GDP in 2016 and −0.8 percent of GDP in 2017.
  - Decline largely explained by widening deficits for trade in goods linked to higher demand from strong investment growth.
- Assessment and normative estimates:
  - CA norm (benchmark EBA model): −0.6 percent of GDP, with a standard error of 1.4 percent of GDP.
  - Staff-estimated CA norm range (considering standard error): between -2.0 and 0.8 percent of GDP.
  - Cyclically-adjusted balance: -1.0 percent of GDP.
  - CA gap midpoint (cyclically-adjusted balance minus midpoint of CA norm): −0.4 percent of GDP.
  - CA gap range: between -1.8 and 1.0 percent of GDP.
  - Policy gap: −0.4 percent of GDP (positive policy gap from fiscal policy more than offset by fast credit growth that brought the credit-to-GDP ratio above trend).

### Real Exchange Rate (REER)
- Background:
  - Peso depreciated by 4.1 percent in real effective terms in 2017.
  - Peso depreciated by 5.7 percent in nominal effective terms in 2017.
  - Depreciation reflects floating peso acting as shock absorber amid widening CAD and realized/expected U.S. interest rate hikes.
- Assessment:
  - REER was broadly in line with fundamentals and desirable policy settings.
  - Using standard trade elasticities, a CA gap between −1.8 and 1.0 percent of GDP corresponds to a REER gap between -5 and 8 percent.
  - REER norms from the EBA REER-Index and REER-Level model were about 5 ppt and 11 ppt weaker than the actual REER in 2017, respectively; deviations largely driven by unexplained residuals, so overall assessment based on the CA model.
- Recent movement:
  - REER depreciated by 1.2 percent in the first seven months of 2018; this development does not warrant a change of assessment.

### Capital and Financial Accounts
- Background:
  - Net FDI inflows increased from around zero before 2015 to 2.6 percent of GDP in 2017.
  - Portfolio and other investments registered net outflows in 2017 due to increasing overseas investment by residents and portfolio rebalancing amid U.S. interest rate hikes.
  - Financial account balance turned negative to −0.7 percent of GDP (i.e., net inflows) from 0.1 percent of GDP in 2016.
- Assessment:
  - As a small open economy, the Philippines is exposed to external shocks such as increases in U.S. interest rates.
  - Given large foreign reserves and a flexible exchange rate regime, vulnerabilities are limited.

### FX Intervention and Reserves Level
- Background:
  - Exchange rate classification: floating; peso value determined in interbank foreign exchange market.
  - BSP intervenes in spot and forward markets to smooth short-term volatilities; intervention data not available.
  - Gross reserves: about US$81.6 billion (about 26 percent of GDP) at end-2017; fell to US$76.7 billion by July 2018, largely reflecting widening trade deficit and portfolio outflows.
- Assessment:
  - Reserves as of end-2017 were about eight months of imports, or about 204 percent of the IMF’s reserve adequacy metric.
  - Both approaches indicate reserves level is ample.
  - The 2018 development does not change the assessment.

### Technical Notes
- Technical Note 1:
  - CA norm assessed using refined EBA-CA model, improving accounting for demographics and credit growth and data measurement.
  - For the Philippines, the refined model yields a better fit (smaller regression residual) and a higher CA norm than previous versions because it estimates a smaller impact of productivity level and expected output growth (both factors tend to lower the Philippines’ CA norm).
- Technical Note 2:
  - Revised EBA-CA model uses share of prime savers (ages 45−64) as a determinant.
  - Life expectancy in the Philippines (and five other countries) is lower than in other sample countries, making this variable less valid.
  - A revised EBA model redefining prime savers as population from 40 to 59 yields a CA norm in 2017 of about −1.9 percent of GDP.
  - Although the two models yield different CA norm and CA gaps, differences do not change the overall assessment that the external position in 2017 was in line with fundamentals under desirable policy settings.

### Appendix III excerpt — Public and External Debt Sustainability (selected highlights)
- General government gross debt: 40 percent of GDP as of end-2017.
- Baseline projection: debt-to-GDP ratio projected to decline to 36.5 percent in 2023.
- Public debt vulnerabilities: most vulnerable to a growth shock, followed by real interest rate and exchange rate shocks.
- External debt: 23.3 percent of GDP as of end-2017; projected to fall to 14.3 percent in 2023 but vulnerable to large depreciation or current account deterioration.
- Baseline macro assumptions:
  - Real GDP growth projected to gradually rise to 6.9 percent per annum in 2023.
  - Inflation returning to 3 percent.
  - National government deficit reaching 3 percent of GDP in 2020 and remaining at this level until 2023.
  - 2018 current account deficit projected to expand to 1.5 percent of GDP and stabilize at 1.3 percent of GDP in 2023.
- Debt dynamics:
  - Gross financing needs projected around 4.0−4.5 percent of GDP in 2019−2023 under baseline.
  - Debt composition expected stable with relatively low share of foreign currency-denominated debt.
- Scenario comparisons:
  - Historical scenario leads to faster reduction in debt and gross financing needs than staff baseline.
  - Constant primary balance scenario: gross financing needs would gradually rise to 6.4 percent of GDP in 2023 compared to 4.4 percent in the baseline; debt ratio would still fall more than the baseline.
  - Under a growth shock, debt ratio would fail to decline, reaching 39.6 percent of GDP in 2023.

*Source: Appendix II. External Sector Assessment (cr18287).*

### 4.      Total external debt in the Philippines is also sustainable. The baseline external debt-to-

### 4.      Total external debt in the Philippines is also sustainable. The baseline external debt-to-

### Key findings
- Baseline external debt-to-GDP ratio is expected to fall to 14.3 percent of GDP in 2023, from 23.3 percent in 2017.
- The historical scenario suggests staff’s baseline is conservative.
- Debt dynamics appear resilient to various shocks including to interest rates, growth, and the current account.
- A one-time depreciation of 30 percent in 2019 would temporarily raise the debt ratio by 9 percentage points, but still reduce it below the 2017 level by 2023.

### Baseline projections (external debt, percent of GDP)
- 2013: 28.9
- 2014: 27.3
- 2015: 26.5
- 2016: 24.5
- 2017: 23.3
- 2018: 21.3
- 2019: 19.5
- 2020: 17.9
- 2021: 16.6
- 2022: 15.4
- 2023: 14.3

### Change in external debt (annual, percent of GDP)
- 2013: -3.1
- 2014: -1.6
- 2015: -0.8
- 2016: -1.9
- 2017: -1.2
- 2018: -2.0
- 2019: -1.8
- 2020: -1.6
- 2021: -1.3
- 2022: -1.3
- 2023: -1.1

### Identified external debt-creating flows (percent of GDP, annual)
- 2013: -6.8
- 2014: -5.1
- 2015: -3.0
- 2016: -2.6
- 2017: -2.6
- 2018: -2.2
- 2019: -2.1
- 2020: -2.1
- 2021: -1.9
- 2022: -1.7
- 2023: -1.4

### Components of identified external debt-creating flows (percent of GDP, annual)
- Current account deficit, excluding interest payments:
  - 2013: -5.3
  - 2014: -4.8
  - 2015: -3.4
  - 2016: -0.5
  - 2017: 0.0
  - 2018: 0.8
  - 2019: 0.8
  - 2020: 0.7
  - 2021: 0.7
  - 2022: 0.8
  - 2023: 0.9
- Net non-debt creating capital inflows (negative):
  - 2013: 0.0
  - 2014: -0.1
  - 2015: 0.2
  - 2016: -2.0
  - 2017: -2.7
  - 2018: -2.2
  - 2019: -2.3
  - 2020: -2.2
  - 2021: -2.0
  - 2022: -1.9
  - 2023: -1.7
- Automatic debt dynamics:
  - 2013: -1.5
  - 2014: -0.3
  - 2015: 0.1
  - 2016: -0.2
  - 2017: 0.1
  - 2018: -0.7
  - 2019: -0.7
  - 2020: -0.6
  - 2021: -0.6
  - 2022: -0.5
  - 2023: -0.5

### Contributions to automatic debt dynamics (percent of GDP, annual)
- Contribution from nominal interest rate:
  - 2013: 1.1
  - 2014: 1.0
  - 2015: 0.9
  - 2016: 0.8
  - 2017: 0.8
  - 2018: 0.7
  - 2019: 0.7
  - 2020: 0.6
  - 2021: 0.5
  - 2022: 0.5
  - 2023: 0.5
- Contribution from real GDP growth:
  - 2013: -2.1
  - 2014: -1.7
  - 2015: -1.6
  - 2016: -1.7
  - 2017: -1.6
  - 2018: -1.4
  - 2019: -1.3
  - 2020: -1.2
  - 2021: -1.1
  - 2022: -1.0
  - 2023: -1.0

### External debt vulnerability indicators
- External debt-to-exports ratio (in percent):
  - 2013: 115.7
  - 2014: 103.1
  - 2015: 107.2
  - 2016: 101.1
  - 2017: 87.2
  - 2018: 77.7
  - 2019: 71.5
  - 2020: 66.1
  - 2021: 61.8
  - 2022: 57.8
  - 2023: 53.7
- Gross external financing need (in billions of US dollars):
  - 2013: 9.7
  - 2014: 9.7
  - 2015: 12.0
  - 2016: 20.9
  - 2017: 21.6
  - 2018: 25.1
  - 2019: 25.1
  - 2020: 24.9
  - 2021: 25.5
  - 2022: 26.4
  - 2023: 27.4
- Gross external financing need (in percent of GDP):
  - 2013: 3.6
  - 2014: 3.4
  - 2015: 4.1
  - 2016: 6.9
  - 2017: 6.9
  - 2018: 7.5
  - 2019: 7.0
  - 2020: 6.3
  - 2021: 5.9
  - 2022: 5.6
  - 2023: 5.3

### Scenario and stress-test notes
- Shocks analyzed include permanent one-half standard deviation shocks to real interest rate, growth rate, and current account balance (individual shocks are permanent one-half standard deviation shocks).
- Combined shocks and a one-time real depreciation shock of 30 percent (one-time real depreciation of 30 percent occurs in 2010 in the stress test depiction) were considered.
- Under the 30 percent one-time depreciation scenario (applied in stress testing), the debt ratio rises temporarily (figure caption notes a 30 percent depreciation increases debt ratio by 9 percentage points in the narrative).
- Historical scenarios use ten-year historical averages to project debt dynamics five years ahead; a scenario with key variables at their historical averages is presented.

### Key macroeconomic assumptions underlying the baseline (selected)
- Real GDP growth (in percent): 2013: 7.1; 2014: 6.1; 2015: 6.1; 2016: 6.9; 2017: 6.7; 2018: 5.6; 2019: 2.0; 2020: 6.5; 2021: 6.7; 2022: 6.7; 2023: 6.8; 2018–2023 projection endpoint: 6.9
- Nominal external interest rate (in percent): 2013: 3.7; 2014: 3.5; 2015: 3.3; 2016: 3.3; 2017: 3.4; 2018: 3.7; 2019: 0.4; 2020: 3.4; 2021: 3.4; 2022: 3.3; 2023: 3.3; 2023 value shown as 3.2 in table
- GDP deflator in US dollars (change in percent): 2013: 1.5; 2014: -1.4; 2015: -3.0; 2016: -2.6; 2017: -3.6; 2018: 2.2; 2019: 6.0; 2020: 0.2; 2021: 1.0; 2022: 2.4; 2023: 2.1; projection endpoint 3.0

### DSA visual and composition highlights
- Public sector gross debt and financing needs are shown in accompanying DSAs (figures AIII.1–AIII.3) with decomposition by maturity (short-term vs. medium and long-term) and by currency (local currency-denominated vs. foreign currency-denominated).
- Public sector gross debt (general government) projections in the public DSA show decline from 47.9 percent of GDP in 2016 to 36.5 percent in 2023 under the baseline (figure table entries).
- General government gross financing needs projected around 4.2–4.8 percent of GDP across projection years (exact annual values illustrated in the public DSA table).

### Policy-relevant implications
- Baseline projections and stress tests indicate external debt sustainability under a range of shocks, including substantial one-time currency depreciations.
- Continued monitoring of external financing needs is important given gross external financing need levels (in billions of US dollars and percent of GDP) projected to remain elevated through 2023.
- Maintaining favorable macroeconomic conditions (real GDP growth and manageable nominal interest rates) supports declining external debt ratios under the baseline and historical scenarios.

*Source: IMF staff.*

### introduction of the standardized report form (SRF) for other financial corporations (OFCs). The

### cr18287 - introduction of the standardized report form (SRF) for other financial corporations (OFCs)

### SRF for Other Financial Corporations (OFCs) and Resident Representation
- The authorities have submitted test SRF-data for several types of OFCs, which have been reviewed by STA.
- It is expected that the SRF will be introduced by end-2016.
- A Resident Representative has been stationed in Manila since January 1984.
- Mr. Yongzheng Yang has been the Resident Representative for the Philippines since September 2017.

### Relations with Other International Financial Institutions
- World Bank: http://financesapp.worldbank.org/en/countries/Philippines/.
- Asian Development Bank: https://www.adb.org/sites/default/files/publication/27790/phi-2017.pdf.

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of August 20, 2018)
- General: Data provision to the Fund has some shortcomings but is broadly adequate for surveillance.
- National accounts:
  - NSCB rebased national accounts from 1985 to 2000 under a World Bank-funded project.
  - Continuing efforts to rebase from 2000 to 2012 and fully implement the System of National Accounts, 2008; expected to be released in the near future.
  - Ongoing improvements targeted at:
    - the accuracy of the GDP volume measures;
    - the coverage of the public corporations sector;
    - the accuracy of the quarterly GDP data;
    - the adoption of benchmark techniques to reconcile quarterly and annual national accounts estimates.
  - NSCB participating in IMF Statistics Department’s Project on the Implementation of the System of National Accounts and the International Comparison Program (three-year technical assistance project, funded by the Government of Japan).
- Price statistics:
  - In March 2018, the National Statistics Office introduced a rebased consumer price index (CPI) using weights based on the 2012 Family Income and Expenditure Survey.
  - 2013 Commodity and Outlet Survey data used to augment provincial market baskets.
  - Methodological change: adoption of the “chained” method to allow timely addition and removal of items.
  - CPI classified according to COICOP.
- External sector statistics:
  - BSP completed BOP compilation based on BPM6 in March 2014 and IIP in September 2014.
  - New data sources introduced: Cross-Border Transactions Survey and administrative-based reporting systems.
  - Coverage challenges remain due to nontraditional channels and reporting exemptions (FCDUs account for about 70−75 percent of foreign exchange settlements and are exempt from reporting because of strict banking secrecy rules).
- Monetary and financial statistics:
  - Authorities report monthly monetary statistics for the central bank with a lag of more than one-month and for other depository corporations with a lag of more than two months, using standardized report forms for IFS publication.
  - Effort underway to improve timeliness; most recent central bank data submitted with a one-month lag.
  - Joint effort between the Insurance Commission, SEC, GOCs, BSP to gather data and publish the OFCs Survey is ongoing.
  - A monetary and financial statistics mission is planned for FY19 to advance work on OFCs data.
- Financial Soundness Indicators:
  - Authorities report all 12 core FSIs, 9 of the 13 encouraged FSIs for deposit takers, and 2 FSIs for real estate markets on a quarterly basis with one quarter lag for posting on the IMF’s FSI website.
- Government finance statistics:
  - Provision broadly adequate for surveillance for the budgetary central government in GFSM 2014 format.
  - Major improvements needed: expand sector coverage beyond the budgetary central government and report financial balance sheet.
- Data standards and quality:
  - Philippines subscribed to the SDDS in August 1996.
  - A data ROSC was published in August 2004.

### Table of Common Indicators Required for Surveillance (As of August 14, 2018) — Selected data frequency and quality notes
- Exchange rates: Latest observation 8/14/2018; Date received 8/14/2018; Frequency: D; Data quality—Methodological Soundness: O; Accuracy and Reliability: O.
- International reserve assets and reserve liabilities of the monetary authorities: Latest observation 7/2018; Date received 8/2018; Frequency: M; Data quality—Methodological Soundness: LO; Accuracy and Reliability: LO.
- Reserve/base money: Latest observation 6/8/2018; Date received 7/2/2018; Frequency: D (reserve/base money) / W (reporting); Data quality entries include O, LO, LO, LNO and LO, O, O, O, LO.
- Broad money: Latest observation 6/2018; Date received 8/2018; Frequency: M; Data quality unspecified here.
- Consumer price index: Latest observation 7/2018; Date received 8/2018; Frequency: M; Data quality—Methodological Soundness: O, O, O, O; Accuracy and Reliability: O, LO, O, LO, LO.
- GDP/GNP: Latest observation Q2:2018; Date received 8/2018; Frequency: Q; Data quality—Methodological Soundness: LO, LO, O, LO; Accuracy and Reliability: LNO, LNO, O, LO, O.
- Gross external debt and International investment position: Latest observation Q1:2018; Date received 6/2018; Frequency: Q; Data quality—Methodological Soundness: O; Accuracy and Reliability: O.
- (Footnotes define frequency codes and quality assessment codes O, LO, LNO, NO.)

### Statement by IMF Staff Representative on Philippines (September 17, 2018) — Key updates
- Headline CPI inflation:
  - picked up to 6.4 percent (y/y) in August from 5.7 percent in July.
  - year-to-date average: 4.8 percent (y/y).
- Core CPI inflation:
  - rose to 4.8 percent (y/y) in August from 4.5 percent in July.
  - year-to-date average: 3.7 percent (y/y).
- Exchange rate, asset prices and yields since end-July:
  - peso depreciated by 1.8 percent against the U.S. dollar.
  - equity prices fell by 1.0 percent.
  - 10-year government bond yield rose by 93 basis points.
- Year-to-date movements:
  - peso has depreciated by 7.8 percent.
  - equity prices fell by 12.9 percent.
  - 10-year government bond yield rose by 177 basis points.
- Gross international reserves:
  - increased from US$76.7 billion at end-July to US$77.8 billion at end-August.

### Statement by Ms. Edna C. Villa, Alternate Executive Director (September 17, 2018)
- Authorities thanked the IMF team for candid and constructive engagement.
- Authorities noted generally positive assessment and variance in views on overheating risk and timing of policy adjustments.
- Authorities welcomed staff analytical work, including effects of TRAIN-1 and disaggregation of supply-side and demand-side inflation impulses.
- Authorities will consider staff analysis as they refine policies amid heightened global uncertainty.

### Recent Macroeconomic Developments
- Real GDP growth:
  - 6.7 percent in 2017.
  - 6.3 percent in H12018.
  - 78 consecutive quarters of positive economic growth.
- Demand and supply drivers:
  - Growth increasingly fueled by investments; private and public consumption sustained.
  - Strong manufacturing and construction are key supply-side drivers.
- Fiscal performance:
  - Revenues exceeded target by 8.1 percent in H12018.
  - Revenues from TRAIN-1 exceeded projections by nearly 12 percent.
- Inflation:
  - First eight months average: 4.8 percent (yoy), above government target range of 2-4 percent for the year.
  - Main drivers: supply-side factors (rising international oil prices, higher excise taxes, weather-related supply disruptions).
  - Authorities undertaking immediate measures to mitigate supply bottlenecks for rice and key products and escalating reforms (e.g., rice tariffication bill).
- Exchange rate and external competitiveness:
  - Peso depreciated 6.6 percent in the first eight months of the year but maintained external price competitiveness against trading partner baskets.
  - Depreciation influenced by capital outflows linked to tighter global financial conditions and nearing Fed rate hikes.
  - Depreciation driven mainly by increased dollar requirements from:
    - sustained rise in demand for imported goods (capital goods; intermediate and raw materials; consumer goods);
    - residents’ increasing direct and portfolio investments abroad;
    - debt prepayments by government and private corporations including inter-company loan payments.
  - GIR at end August 2018: US$77.8 billion, adequate for more than 7.5 months’ import cover; GIR to be funded by steady BPO revenues and overseas workers’ remittances.
- Banking system and credit:
  - System CAR: 14.5 percent on a solo basis and 15.1 percent on a consolidated basis.
  - NPLs at end June 2018: 1.3 percent (well below pre-GFC level of 4 percent).
  - Credit growth: 19.6 percent, directed towards major production sectors.

### Outlook, Risks and Strategic Policy Directions
- Authorities’ growth outlook:
  - Expect sustained robust economic growth driven by higher public infrastructure spending (“Build, build, build”), resurgence in manufacturing, and growing foreign investments and tourism.
  - Authorities will review their projection of 7–8 percent medium-term growth; staff projections are less optimistic.
- Staff concern:
  - Maintaining fiscal stimulus at planned 3.0 percent and 3.2 percent in 2018 and 2019, respectively, combined with strong private investment and consumption, could feed into price and current account pressures.

A. Fiscal Policy
- Authorities maintain expansionary fiscal policy as programmed to prioritize infrastructure and social spending.
- Good revenue performance under TRAIN-1 expected to be sustained to build buffers.
- PIMA technical assistance acknowledged to guide public investment reforms.
- For 2020 to 2022, the deficit target will revert to 3 percent of GDP.
- Debt-to-GDP ratio projected to fall from 42.1 percent in 2017 to 38.6 percent in 2022.
- Financing program will continue to favor domestic borrowings; proactive liability management has decreased the debt burden on the budget.

B. Monetary Policy
- Authorities share staff view that external environment complicates monetary policy.
- BSP initially judged policy rate increase unnecessary given supply-driven inflation and transitory forecasts for 2019.
- Sustained peso pressure, TRAIN-1 impacts, and broadening price rises prompted BSP to raise policy rate by a cumulative 100-basis points between May and August.
- With August inflation at 6.4 percent, BSP committed to weigh further monetary action at its next policy meeting and signaled readiness to undertake follow-through action to safeguard the 2019 inflation target.
- BSP will continue to enhance monetary policy operations with Fund technical assistance and push for BSP Charter amendments to strengthen its mandate.

C. Financial System Stability and Inclusion Policies
- Authorities welcome staff assessment that the financial system is sound and BSP’s macroprudential policies are appropriate.
- Planned BSP regulatory measures include:
  - refinements to stress tests;
  - introduction of a Debt-to-Earnings of Borrowers’ Test (DEBT);
  - introduction of the Borrowers’ Interconnected Index (BII);
  - adoption of a countercyclical capital buffer (CCyB).
- BSP supports responsible fintech innovation with refined regulations:
  - updated framework for money service businesses to enhance customer due diligence;
  - framework for regulating virtual currency exchanges;
  - collaboration with co-regulators and the private sector on pioneering technologies.
- Regtech pilots undertaken to strengthen risk-based regulatory and supervisory activities (handling consumer complaints and improving supervisory reporting).

D. Structural Reform Policy
- Authorities’ policy thrusts include:
  - Further liberalizing investment by shortening the list of foreign investments subject to restrictions via executive orders and legislation.
  - Sustaining TRAIN-1 implementation, which increased disposable income of 99 percent of the working population and is expected to lift one million Filipinos from poverty each year.
  - Rationalizing fiscal incentives and reducing CIT under TRAIN-2 (pending in Congress) to create a level playing field and attract new entrants.
  - Further developing the domestic capital market to support digital technology for financial inclusion while ensuring cyber security risks are manageable.

*Source: cr18287 - introduction of the standardized report form (SRF) for other financial corporations (OFCs).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18287.pdf_