## 1phlea2020001 — 6.3 percent in 2020, underpinned by government spending acceleration and the recent monetary ## Source details **Canonical URL:** [1phlea2020001 — 6.3 percent in 2020, underpinned by government spending acceleration and the recent monetary](https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1phlea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1phlea2020001.pdf.json) --- ### Recent performance and near-term outlook - Real GDP growth: - 2019: projected to reach 5.7 percent (baseline) - 2020: projected at 6.3 percent, driven by government spending acceleration and recent monetary policy easing - Inflation: - Projected at 2.5 percent by end-2019 - Projected at 3.0 percent by end-2020 (also noted as rising to the mid-point of the 2–4 percent inflation target range in 2020) - Current account: - 2019: current account deficit expected to narrow to -1.6 percent of GDP - 2020: current account deficit projected to widen to -2.3 percent of GDP as investment picks up - Output gap: - A small negative output gap emerged in 2019:H1; projected to narrow in 2020 and close by 2021 - Medium-term: - With reforms and infrastructure push, private investment projected to accelerate, supporting higher medium-term growth of around 6.5 percent ### Key risks to the outlook - Downside risks: - Augmented trade tensions and shifts in global financial conditions could weaken exports and investment - Natural disasters and climate change pose significant risks (Philippines categorized among the world’s most vulnerable countries to climate change) - Renewed tightening of global financial conditions could increase capital flow volatility - Upside possibility: - Relocation of global value chains and improved trade relations could strengthen export position if supported by reforms and infrastructure improvements ### Policy assessment and guidance - Macroeconomic policy stance: - Current settings (moderate fiscal stimulus planned for 2020 and monetary easing since mid-2019) are appropriate to keep the economy close to balance under the baseline - Authorities have policy space to adopt a more expansionary stance if downside risks materialize - If adverse scenarios materialize, fiscal stimulus should be prioritized toward public capital and social spending programs - The Bangko Sentral ng Pilipinas (BSP) has substantial space to lower its policy rate if downside surprises materialize - External sector and exchange rate: - 2019 external position assessed as broadly in line with medium-term fundamentals and desirable policy settings (based on preliminary estimates) - Recent rise in portfolio and other volatile capital inflows amid declining household saving should be monitored closely - The exchange rate should remain a primary shock absorber; publishing FX intervention data could be considered with appropriate lags and aggregation - Macroprudential policy: - Proactive response recommended if risks from high credit growth reemerge - BSP should timely activate the Countercyclical capital buffer (CCyB) if broad-based rapid credit growth returns - Develop targeted macroprudential measures (e.g., loan-to-value and debt-to-income caps) and tighten them if credit risks are sector-specific (for example, real estate) - Update the macroprudential toolkit to facilitate timely responses - Public investment and governance: - Enhance public investment management, promote greater competition, and allow easier public access to procurement information to enable timely and cost-effective implementation and reduce corruption incidence - Planned tax incentive reform should aim to make the regime more accountable and effective in encouraging investment and job creation ### Structural reform priorities - Recent landmark laws enacted: rice tariffication, a national digital ID, ease of doing business reforms, and BSP charter amendments - Government objective: raise infrastructure investment to over 6 percent of GDP by 2022 (priority flagship projects revised based on feasibility and cost-benefit considerations) - Further reforms and implementation needed: - Strengthen public administration capacity - Continue ease of doing business reforms - Further liberalize foreign direct investment (FDI) - Broaden poverty reduction efforts - Mobilize more resources for climate change adaptation and mitigation - Robustly implement the AML/CFT regime - Ease the stringent bank secrecy law ### Executive Board Assessment (concluding 2019 Article IV consultation) - Endorsement of staff appraisal: Philippine economy remains a strong performer but faces downside risks to the outlook - Prudent policies and structural reforms supported activity and macro stability over the past decade - Macro policies are attuned to the outlook; authorities retain space to respond with more expansionary policies if needed - Emphasis on prioritizing public capital and social spending in fiscal stimulus under adverse scenarios, and on BSP’s ability to lower policy rates if required - Recommendation for bolder implementation of structural reforms to ensure benefits materialize ### Selected economic indicators (annual percentage change or percent of GDP as indicated) - Real GDP: 2015: 6.1; 2016: 6.9; 2017: 6.7; 2018: 6.2; 2019: 5.7; 2020: 6.3 - Consumption: 2015: 6.5; 2016: 7.4; 2017: 5.9; 2018: 6.5; 2019: 6.5; 2020: 6.6 - Private consumption: 2015: 6.3; 2016: 7.1; 2017: 5.9; 2018: 5.6; 2019: 5.9; 2020: 6.2 - Public consumption: 2015: 7.6; 2016: 9.0; 2017: 6.2; 2018: 13.0; 2019: 10.0; 2020: 9.3 - Gross fixed capital formation: 2015: 16.9; 2016: 26.1; 2017: 9.4; 2018: 12.9; 2019: 5.3; 2020: 15.6 - Domestic demand: 2015: 8.7; 2016: 11.7; 2017: 6.8; 2018: 8.2; 2019: 6.1; 2020: 9.1 - Net exports (contribution to growth): 2015: -3.1; 2016: -4.9; 2017: -0.7; 2018: -2.8; 2019: -1.1; 2020: -3.8 - Real GDP per capita: 2015: 4.3; 2016: 5.1; 2017: 5.0; 2018: 4.6; 2019: 4.0; 2020: 4.6 - Output gap (percent, +=above potential): 2015: -0.3; 2016: 0.1; 2017: 0.4; 2018: 0.2; 2019: -0.2; 2020: -0.1 - Unemployment rate (percent of labor force): 2015: 6.3; 2016: 5.5; 2017: 5.7; 2018: 5.3; 2019: 5.2; 2020: 5.1 - Underemployment rate (percent of employed persons): 2015: 18.6; 2016: 18.3; 2017: 16.1; 2018: 16.4; 2019: 14.0; 2020: ... - Employment (percent change): 2015: 2.8; 2016: 4.7; 2017: -1.6; 2018: 2.0; 2019: 2.4; 2020: 2.5 - Consumer prices (period average, 2012 basket): 2015: 0.7; 2016: 1.3; 2017: 2.9; 2018: 5.2; 2019: 2.5; 2020: 2.6 - Consumer prices (end of period, 2012 basket): 2015: 0.7; 2016: 2.2; 2017: 2.9; 2018: 5.1; 2019: 2.5; 2020: 3.0 - Core consumer prices (period average, 2012 basket): 2015: 1.1; 2016: 1.5; 2017: 2.5; 2018: 4.1; 2019: 3.2; 2020: ... - 3-month PHIREF rate (percent, end of period): 2015: 2.7; 2016: 2.0; 2017: 3.3; 2018: 6.5; 2019: 3.1; 2020: ... - Claims on private sector (percent of GDP): 2015: 41.8; 2016: 44.8; 2017: 47.8; 2018: 49.9; 2019: 50.7; 2020: 52.6 - Claims on private sector (percent change): 2015: 12.4; 2016: 16.4; 2017: 16.4; 2018: 15.1; 2019: 8.6; 2020: 13.2 - National government overall balance (IMF definition): 2015: -0.9; 2016: -2.4; 2017: -2.2; 2018: -3.3; 2019: -2.7; 2020: -3.2 - Revenue and grants (percent of GDP): 2015: 15.8; 2016: 15.2; 2017: 15.6; 2018: 16.3; 2019: 16.5; 2020: 16.7 - Total expenditure and net lending (percent of GDP): 2015: 16.7; 2016: 17.6; 2017: 17.9; 2018: 19.6; 2019: 19.2; 2020: 19.9 - General government gross debt (percent of GDP): 2015: 41.5; 2016: 39.0; 2017: 39.9; 2018: 38.9; 2019: 38.9; 2020: 38.9 - Current account balance (percent of GDP): 2015: 2.5; 2016: -0.4; 2017: -0.7; 2018: -2.6; 2019: -1.6; 2020: -2.3 - FDI, net (percent of GDP): 2015: 0.0; 2016: -1.9; 2017: -2.2; 2018: -1.8; 2019: -1.4; 2020: -1.4 - Gross reserves (US$ billions): 2015: 80.7; 2016: 80.7; 2017: 81.6; 2018: 79.2; 2019: 85.6; 2020: 85.0 - Gross reserves (percent of short-term debt, residual maturity): 2015: 409.5; 2016: 418.2; 2017: 419.3; 2018: 369.7; 2019: 402.2; 2020: 385.0 - Total external debt (percent of GDP): 2015: 26.5; 2016: 24.5; 2017: 23.3; 2018: 23.9; 2019: 23.6; 2020: 22.4 - Nominal GDP (US$ billions): 2015: 292.8; 2016: 304.9; 2017: 313.6; 2018: 330.9; 2019: 365.0; 2020: 399.7 - Nominal GDP per capita (US$): 2015: 2,883; 2016: 2,953; 2017: 2,989; 2018: 3,104; 2019: 3,370; 2020: 3,632 - GDP (in billions of pesos): 2015: 13,322; 2016: 14,480; 2017: 15,808; 2018: 17,426; 2019: 18,614; 2020: 20,302 - Real effective exchange rate (2005=100): 2015: 111.4; 2016: 108.2; 2017: 103.4; 2018: 100.5; 2019: ...; 2020: ... - Peso per U.S. dollar (period average): 2015: 45.5; 2016: 47.5; 2017: 50.4; 2018: 52.7; 2019: 51.8; 2020: ... *Source: Philippines—Staff Report for the 2019 Article IV Consultation (IMF).* --- ### 9 — The authorities expect growth to remain at 6 percent or above, and to be rising in the medium term ### Growth outlook and near-term drivers - Authorities expect growth to remain at 6 percent or above, and to be rising in the medium term - Authorities project growth of 6½ percent in 2020 and 6½ to 7 percent in the medium term, based on faster spending increases and rapid reform implementation - IMF staff concur that ongoing increases in government spending, especially on infrastructure projects, and recent monetary policy easing will be the main near-term growth drivers ### Downside risks to the outlook - External risks: weak global demand conditions and prolonged global growth weakness - Domestic risks: potential outbreak of African Swine Fever (impacting food prices and rural incomes); power disruptions; delays in implementation of infrastructure projects; delays in passing pending reform bills - Spillovers from U.S.–China trade tensions assessed as small so far due to limited integration in China-related value chains - With a sharper-than-expected downturn, the current expansionary macroeconomic stance could require a more expansionary response ### Fiscal policy: stance, targets, and sustainability - Annual fiscal deficit target increased from 3 percent to GDP to 3.2 percent for 2020–2022 - Public debt-to-GDP ratio is projected to remain broadly stable at just below 40 percent under the baseline - Gross financing and long-term adjustment needs are characterized as low by standards used in debt sustainability analysis for emerging market economies - The 3.2 percent deficit target over 2020–2022 provides for additional public capital and pro-poor social programs - Medium-term anchor: a deficit target of about 3 percent would remain a sustainable anchor for fiscal policy - Policy recommendations: - Accommodate additional social spending (conditional cash transfer expansion, land reform, agricultural productivity, basic education, universal health care) within the fiscal envelope - Use savings from pending military pension reform (raising retirement age; introducing mandatory pension contributions) and spending discipline (including public sector wages) to finance priorities ### Public investment management and procurement - Public infrastructure investment scaled up from an average of 3 percent of GDP during 2011–2016 to 5.1 percent in 2018; authorities plan to boost investment to over 6 percent of GDP by 2022 - Recommendations: - Improve project appraisals by requiring upfront identification of risk mitigation measures and publishing appraisal analyses to solicit public comments - With adequate fiscal risk management, increase private sector participation in infrastructure (including updating legal framework to include all forms of PPPs, e.g., joint ventures) - Public procurement issues and recommendations: - Legal framework exists for transparent competitive procurement, but many tenders result in a single bidder - Impose stricter sanctions on anti-competitive practices, allow greater foreign participation to ease capacity constraints, and make procurement information more easily accessible ### Tax reform and revenue mobilization - First package of the Comprehensive Tax Reform Program implemented in 2018 (excise tax increases and VAT base broadening) - Revenue-raising priorities: improve tax administration and revenue collection; further increases in excise taxes on e-cigarette and alcohol products - Pending tax incentive reform bill in Congress aims to streamline oversight and design of extensive tax incentive regime to improve accountability and effectiveness in encouraging investment and job creation - Rationale: higher infrastructure investment will require some increase in tax revenue with a medium-term budget deficit anchor around 3 percent of GDP ### Authorities’ fiscal views - Authorities reaffirm commitment to prudent fiscal policy while increasing infrastructure and social spending - Intend to raise general government infrastructure spending to over 6 percent of GDP by 2022 (from 5.1 percent in 2018) - Reported actions: revised priority flagship projects list (feasibility and cost-benefit driven), increased resources for right-of-way resolution and resettlement facilitation - Reservations: limited qualified bidders constrain procurement competition; caution about greater reliance on PPPs due to long delivery times and difficulty designing balanced risk-sharing agreements - Social protection: commitment to support rice farmers affected by rice tariffication, including income support measures in addition to the Rice Competitiveness Enhancement Fund ### Monetary and exchange rate policies - BSP policy rate cuts in 2019 totaled 75 bps cumulatively; after cuts, the rate is now close to levels consistent with achieving inflation objectives - IMF staff assessment: monetary policy stance is now close to neutral and consistent with BSP achieving its inflation objectives under the baseline outlook - BSP has space to lower policy rate under a downside scenario, though constrained by higher risk aversion or tightening external financing conditions - Operational framework modernization: - Corridor system aligns short-term market rates with the policy rate - Move to Basel III liquidity requirements reduces the RRR’s relevance as a monetary instrument - Lowering the RRR could reinforce the policy rate as primary instrument and reduce intermediation costs; RRR reduction should consider credit conditions and may require sterilization of liquidity impact - Reserve maintenance period could be extended from one week to 2−4 weeks - New BSP Charter allows issuance of BSP securities and refinement of operational targets - Exchange rate policy: authorities generally allow market-determined exchange rate; recommendation to continue and use FX intervention only to avoid disorderly market conditions - Consideration: publishing FX intervention data with appropriate lags and aggregation could enhance transparency, though authorities were skeptical of further disclosure ### External position and vulnerabilities - Preliminary 2019 estimates: cyclically-adjusted current account deficit estimated at 1.7 percent of GDP, close to estimated current account norm of a deficit of 2.1 percent - Increased reliance on portfolio and other volatile capital inflows amid lower household saving increases exposure to global financial markets; related vulnerabilities should be monitored closely ### Macroprudential policy and financial sector vulnerabilities - Banking system capital adequacy: - 2019:H1 consolidated banking system capital adequacy ratio stood above 15 percent (BSP minimum 10 percent) - Credit growth history and composition: - Peak credit growth close to 20 percent in 2017–2018, qualifying as a near-credit boom by some metrics - High bank credit growth largely driven by real estate sector loans; credit to real estate accounts for the largest share in total loans outstanding (about 18 percent) - Corporate sector vulnerabilities: - Median leverage in representative sample of Philippine firms (debt-to-assets) was among the highest in the region as of end-2018 - Average share of FX debt relatively higher at 17 percent, especially among large firms - Stress tests indicate firms’ balance sheets can absorb large shocks in the short term, but data gaps (corporate interlinkages) limit systemic assessments - Credit growth outlook: - Credit growth expected to increase moderately under the baseline - Risks of a sharper increase will likely rise with a pickup in economic growth and government investment plans - New market segments (small business and consumer credit) could develop rapidly; space constraints in Metro Manila could push real estate prices and leverage higher - Macroprudential policy recommendations: - Update macroprudential toolkit proactively - Consider timely activation of the countercyclical capital buffer (CCyB) if broad-based rapid credit growth reemerges (CCyB adopted but not activated) - Prefer targeted measures if risks are sector-specific (real estate-related risks most relevant) - Consider introducing loan-to-value (LTV) and debt-to-income (DTI) caps to target housing-related loan demand directly and timely - 2020 FSAP will review the macroprudential framework, instruments, past practice, and systemic risk monitoring *Source: 1phlea2020001 - 9. The authorities expect growth to remain at 6 percent or above, and to be rising in the medium term (IMF).* --- ### 28 — The authorities assess systemic financial stability risks to be low and see limited risks of high credit growth reemerging ### Financial stability assessment and macroprudential stance - Authorities view systemic financial stability risks as low and see limited risks of high credit growth in the near term - Some evidence of a near-credit boom during 2017–18 noted, but authorities emphasized model dependence of that assessment - Authorities project baseline credit growth in the next few years at "low two-digit levels" - Authorities agree mortgage collateral value limits could be complemented by a more general LTV and DTI approach - Authorities and staff share the view that timely activation of the CCyB is important for effective, forward-looking systemic financial risk management; activation would require judgment based on a range of identified indicators of excess credit - Authorities noted that financial stability risks and credit growth would also rise under a synchronized global slowdown that would affect growth and corporate profits in the Philippines ### Structural reforms, digitalization, and implementation capacity - Recent reform bills enacted into law include rice tariffication, a national digital ID, the ease of doing business, and BSP charter amendments - Additional reform bills are with Congress or under preparation and seem to have good prospects for passage given the outcome of the May 2019 midterm election - Successful delivery of reforms will require enhancing implementation capacity of the public administration - Digitalization priorities: - Reduce paper-based government operations to lower governance and corruption risks and raise efficiency - Continue digitalization across cross-border trade, tax administration, and public financial management - National digital ID system expected to support targeting of social spending, financial inclusion, and greater transactional efficiency; authorities plan to start rolling out the national digital ID system in 2020 - Anti-Red Tape Authority established to implement administrative and regulatory efficiency reforms, including one-stop shops, e-platforms, standardization of licensing procedures, and regulatory transparency ### Competition, trade, and climate-related policy - Remaining obstacles: - Relatively high barriers to FDI—described as among the most stringent in the region - Procedural hurdles to international trade that hamper domestic competition - Policy rationale: lowering these obstacles could stimulate investment and facilitate absorption of frontier technologies amid global supply chain reconfiguration - Climate change: - Philippines proactive on financial preparedness for natural disasters, green financing, and government budgeting for climate change - More resources and incentives for climate change adaptation and mitigation are needed to induce investment and changes in emission patterns - National government coordinated with the World Bank to issue its first Catastrophe Bonds - Local government units’ adaptation projects are being received, evaluated, and financed through the People’s Survival Fund ### Anti-money laundering (AML) and anti-corruption - AML law amended to cover casinos and an expanded list of predicate crimes; Anti-Money Laundering Council (AMLC) effectiveness strengthened via increased staffing - Asia/Pacific Group (APG) Mutual Evaluation Report (MER) notes the AML/CFT framework and implementation require major improvements to avoid risk of inclusion on FATF list of jurisdictions with serious AML/CFT deficiencies - Recommended improvements: - Add tax evasion to the list of predicate crimes - Intensify customer due diligence for politically exposed persons - Intensify risk-based supervision of the gaming sector - Relax stringent banking secrecy law - Establish a robust beneficial ownership registry to support AMLC efforts and combat tax evasion and corruption - Authorities restructured the Anti-Money Laundering Council and increased staffing in response to the 2019 MER by the APG - The Council has taken measures to meet recommended AML Act implementation actions within the one-year window afforded by the APG - Legislative priorities: amendments to the Bank Deposit Secrecy Law and the Anti-Money Laundering Act to comply with international standards ### Staff appraisal, risks, and policy recommendations - Economic assessment: - Philippine economy is a strong performer despite recent headwinds - Real GDP growth regained momentum in the second half of 2019 and is projected to firm up further in 2020, underpinned by government spending acceleration and recent monetary easing - Risks to the outlook are tilted to the downside due to global trade tensions, shifts in global financial conditions, and natural disasters - Macroeconomic policy stance: - Moderate fiscal stimulus planned for 2020 and monetary policy easing since mid-2019 are consistent with returning to capacity growth and achieving inflation objectives in the baseline - The Philippines has policy space to adopt a more expansionary stance if downside risks materialize - Under adverse scenarios fiscal stimulus should be prioritized toward public capital and social spending programs - The BSP has substantial space to lower its policy rate if downside surprises materialize - External sector: - 2019 external position, based on preliminary estimates, is assessed to be broadly in line with medium-term fundamentals and desirable policies - Recent rise in portfolio and other volatile capital inflows amid declining household saving should be monitored closely - Exchange rate should remain a primary shock absorber against external shocks - Publishing FX intervention data could be considered, with appropriate lags and aggregation to guard against market sensitivities - Infrastructure and public investment: - Closing the infrastructure gap requires further reform efforts, enhanced public investment management, greater competition, and easier public access to procurement information - Planned tax incentive reform should make the regime more accountable and effective in encouraging investment and job creation - Macroprudential recommendations: - BSP should timely activate the CCyB if risks of broad-based rapid credit growth reemerge - Develop targeted macroprudential measures, such as loan-to-value (LTV) and debt-to-income (DTI) caps - Tighten targeted measures if high credit growth risks are more sector-specific—for example, in the real estate sector - Structural reform priorities: - Strengthen capacity of public administration - Advance ease of doing business reforms - Continue infrastructure push - Further lift restrictions on foreign direct investment - Broaden scope of poverty reduction efforts - Mobilize more resources for climate change adaptation and mitigation - Robustly implement the AML/CFT regime and ease the stringent bank secrecy law - Consultation cycle recommendation: - It is recommended that the next Article IV consultations take place on the standard 12-month cycle *IMF staff summary based on the Philippines Article IV consultation chapter.* --- ### Box 1 — Fintech Innovation in the Philippines ### Adoption and demand drivers - Fintech services are being adopted rapidly - Potential demand drivers: - internet penetration is 72 percent - mobile phone penetration is 124 percent - only 32 percent of adults have a formal bank account - National Digital ID initiative expected to be rolled out in mid-2020 and is anticipated to strengthen financial inclusion and potentially fintech, conditional on relevant architecture and processes ### Market entrants and services - Big tech and platform firms entered financial services, particularly payments: - Grab, Go-Jek and Oriente offer mobile payments and credit - Facebook offers payment services through its platform, in cooperation with mobile money operators - Several international remittance providers use innovative methods for channeling remittance flows into the country ### Regulatory response and infrastructure support - BSP actions: - Adopted a “Test-and-Learn” approach to the regulation of new services and clarified policies related to fintech innovation - Strengthened regulatory and supervisory framework to address fintech risks, such as cyber risk (see BSP (2017), “Circular 982,” and BSP (2018), “Circular 1019”) - Supported infrastructure through InstaPay and PesoNet automated clearing house under the National Retail Payment System - Institutional coordination: - Financial Sector Forum (BSP, SEC, Insurance Commission, Philippine Deposit Corporation) coordinates regulatory responses ### Enablers and constraints - Telecommunications infrastructure lags most compared to other countries in the region - Entry of a third telecommunication player launching operations in 2020 expected to foster competition and add capacity - Population financial literacy is low; need for financial education and strengthened consumer protection - Fintech start-ups face capital and labor constraints - Established banking players have typically been slow in embracing fintech innovation ### Policy challenges and risks - Fintech models not yet tested in an economic downturn - Greater reliance on digital technologies may introduce financial integrity, operational, and cyber risks - Global stablecoin proposals could be disruptive in the Philippines given large remittances and high use of social media - Suggested directions: - Continue and deepen supervisory and regulatory frameworks addressing cyber risk and financial integrity - Strengthen consumer protection and financial education - Support infrastructure upgrades in telecommunications and payments systems *Prepared by Jon Frost (Bank for International Settlements, BIS) and Jermy Prenio (BIS).* ### 6.3 percent in 2020, underpinned by government spending acceleration and the recent monetary ### 1phlea2020001 - 6.3 percent in 2020, underpinned by government spending acceleration and the recent monetary ### Recent performance and near-term outlook - Real GDP growth: - 2019: projected to reach 5.7 percent (baseline) - 2020: projected at 6.3 percent, driven by government spending acceleration and recent monetary policy easing - Inflation: - Projected at 2.5 percent by end-2019 - Projected at 3.0 percent by end-2020 (also noted as rising to the mid-point of the 2–4 percent inflation target range in 2020) - Current account: - 2019: current account deficit expected to narrow to -1.6 percent of GDP - 2020: current account deficit projected to widen to -2.3 percent of GDP as investment picks up - Output gap: - A small negative output gap emerged in 2019:H1; projected to narrow in 2020 and close by 2021 - Medium-term: - With reforms and infrastructure push, private investment projected to accelerate, supporting higher medium-term growth of around 6.5 percent ### Key risks to the outlook - Downside risks dominate: - Augmented trade tensions and shifts in global financial conditions could weaken exports and investment - Natural disasters and climate change pose significant risks (Philippines categorized among the world’s most vulnerable countries to climate change) - Renewed tightening of global financial conditions could increase capital flow volatility - Upside possibility: - Relocation of global value chains and improved trade relations could provide opportunities to strengthen export position if supported by reforms and infrastructure improvements ### Policy assessment and guidance - Macroeconomic policy stance: - Current settings (moderate fiscal stimulus planned for 2020 and monetary easing since mid-2019) are appropriate to keep the economy close to balance under the baseline - Authorities have policy space to adopt a more expansionary stance if downside risks materialize - If adverse scenarios materialize, fiscal stimulus should be prioritized toward public capital and social spending programs - The Bangko Sentral ng Pilipinas (BSP) has substantial space to lower its policy rate if downside surprises materialize - External sector and exchange rate: - 2019 external position assessed as broadly in line with medium-term fundamentals and desirable policy settings (based on preliminary estimates) - Recent rise in portfolio and other volatile capital inflows amid declining household saving should be monitored closely - The exchange rate should remain a primary shock absorber; publishing FX intervention data could be considered with appropriate lags and aggregation - Macroprudential policy: - Proactive response recommended if risks from high credit growth reemerge - BSP should timely activate the Countercyclical capital buffer (CCyB) if broad-based rapid credit growth returns - Develop targeted macroprudential measures (e.g., loan-to-value and debt-to-income caps) and tighten them if credit risks are sector-specific (for example, real estate) - Update the macroprudential toolkit to facilitate timely responses - Public investment and governance: - Closing the infrastructure gap requires enhancing public investment management, promoting greater competition, and allowing easier public access to procurement information to enable timely and cost-effective implementation and reduce corruption incidence - Planned tax incentive reform should aim to make the regime more accountable and effective in encouraging investment and job creation ### Structural reform priorities - Recent landmark laws enacted: rice tariffication, a national digital ID, ease of doing business reforms, and BSP charter amendments - Government objective: raise infrastructure investment to over 6 percent of GDP by 2022 (priority flagship projects revised based on feasibility and cost-benefit considerations) - Further reforms and implementation needed to sustain momentum: - Strengthen public administration capacity - Continue ease of doing business reforms - Further liberalize foreign direct investment (FDI) - Broaden poverty reduction efforts - Mobilize more resources for climate change adaptation and mitigation - Robustly implement the AML/CFT regime - Ease the stringent bank secrecy law ### Executive Board Assessment (concluding 2019 Article IV consultation) - Endorsement of staff appraisal: Philippine economy remains a strong performer but faces downside risks to the outlook - Prudent policies and structural reforms supported activity and macro stability over the past decade - Macro policies are attuned to the outlook; authorities retain space to respond with more expansionary policies if needed - Emphasis on prioritizing public capital and social spending in fiscal stimulus under adverse scenarios, and on BSP’s ability to lower policy rates if required - Recommendation for bolder implementation of structural reforms to ensure benefits materialize ### Selected economic indicators (annual percentage change or percent of GDP as indicated) - Real GDP: 2015: 6.1; 2016: 6.9; 2017: 6.7; 2018: 6.2; 2019: 5.7; 2020: 6.3 - Consumption: 2015: 6.5; 2016: 7.4; 2017: 5.9; 2018: 6.5; 2019: 6.5; 2020: 6.6 - Private consumption: 2015: 6.3; 2016: 7.1; 2017: 5.9; 2018: 5.6; 2019: 5.9; 2020: 6.2 - Public consumption: 2015: 7.6; 2016: 9.0; 2017: 6.2; 2018: 13.0; 2019: 10.0; 2020: 9.3 - Gross fixed capital formation: 2015: 16.9; 2016: 26.1; 2017: 9.4; 2018: 12.9; 2019: 5.3; 2020: 15.6 - Domestic demand: 2015: 8.7; 2016: 11.7; 2017: 6.8; 2018: 8.2; 2019: 6.1; 2020: 9.1 - Net exports (contribution to growth): 2015: -3.1; 2016: -4.9; 2017: -0.7; 2018: -2.8; 2019: -1.1; 2020: -3.8 - Real GDP per capita: 2015: 4.3; 2016: 5.1; 2017: 5.0; 2018: 4.6; 2019: 4.0; 2020: 4.6 - Output gap (percent, +=above potential): 2015: -0.3; 2016: 0.1; 2017: 0.4; 2018: 0.2; 2019: -0.2; 2020: -0.1 - Unemployment rate (percent of labor force): 2015: 6.3; 2016: 5.5; 2017: 5.7; 2018: 5.3; 2019: 5.2; 2020: 5.1 - Underemployment rate (percent of employed persons): 2015: 18.6; 2016: 18.3; 2017: 16.1; 2018: 16.4; 2019: 14.0; 2020: ... - Employment (percent change): 2015: 2.8; 2016: 4.7; 2017: -1.6; 2018: 2.0; 2019: 2.4; 2020: 2.5 - Consumer prices (period average, 2012 basket): 2015: 0.7; 2016: 1.3; 2017: 2.9; 2018: 5.2; 2019: 2.5; 2020: 2.6 - Consumer prices (end of period, 2012 basket): 2015: 0.7; 2016: 2.2; 2017: 2.9; 2018: 5.1; 2019: 2.5; 2020: 3.0 - Core consumer prices (period average, 2012 basket): 2015: 1.1; 2016: 1.5; 2017: 2.5; 2018: 4.1; 2019: 3.2; 2020: ... - 3-month PHIREF rate (percent, end of period): 2015: 2.7; 2016: 2.0; 2017: 3.3; 2018: 6.5; 2019: 3.1; 2020: ... - Claims on private sector (percent of GDP): 2015: 41.8; 2016: 44.8; 2017: 47.8; 2018: 49.9; 2019: 50.7; 2020: 52.6 - Claims on private sector (percent change): 2015: 12.4; 2016: 16.4; 2017: 16.4; 2018: 15.1; 2019: 8.6; 2020: 13.2 - National government overall balance (IMF definition): 2015: -0.9; 2016: -2.4; 2017: -2.2; 2018: -3.3; 2019: -2.7; 2020: -3.2 - Revenue and grants (percent of GDP): 2015: 15.8; 2016: 15.2; 2017: 15.6; 2018: 16.3; 2019: 16.5; 2020: 16.7 - Total expenditure and net lending (percent of GDP): 2015: 16.7; 2016: 17.6; 2017: 17.9; 2018: 19.6; 2019: 19.2; 2020: 19.9 - General government gross debt (percent of GDP): 2015: 41.5; 2016: 39.0; 2017: 39.9; 2018: 38.9; 2019: 38.9; 2020: 38.9 - Current account balance (percent of GDP): 2015: 2.5; 2016: -0.4; 2017: -0.7; 2018: -2.6; 2019: -1.6; 2020: -2.3 - FDI, net (percent of GDP): 2015: 0.0; 2016: -1.9; 2017: -2.2; 2018: -1.8; 2019: -1.4; 2020: -1.4 - Gross reserves (US$ billions): 2015: 80.7; 2016: 80.7; 2017: 81.6; 2018: 79.2; 2019: 85.6; 2020: 85.0 - Gross reserves (percent of short-term debt, residual maturity): 2015: 409.5; 2016: 418.2; 2017: 419.3; 2018: 369.7; 2019: 402.2; 2020: 385.0 - Total external debt (percent of GDP): 2015: 26.5; 2016: 24.5; 2017: 23.3; 2018: 23.9; 2019: 23.6; 2020: 22.4 - Nominal GDP (US$ billions): 2015: 292.8; 2016: 304.9; 2017: 313.6; 2018: 330.9; 2019: 365.0; 2020: 399.7 - Nominal GDP per capita (US$): 2015: 2,883; 2016: 2,953; 2017: 2,989; 2018: 3,104; 2019: 3,370; 2020: 3,632 - GDP (in billions of pesos): 2015: 13,322; 2016: 14,480; 2017: 15,808; 2018: 17,426; 2019: 18,614; 2020: 20,302 - Real effective exchange rate (2005=100): 2015: 111.4; 2016: 108.2; 2017: 103.4; 2018: 100.5; 2019: ...; 2020: ... - Peso per U.S. dollar (period average): 2015: 45.5; 2016: 47.5; 2017: 50.4; 2018: 52.7; 2019: 51.8; 2020: ... ### Mission and report details - Mission dates: November 5–18, 2019 - Report date: January 9, 2020 - Approved by: Odd Per Brekk and Rupa Duttagupta *Source: Philippines—Staff Report for the 2019 Article IV Consultation (IMF).* ### 9. The authorities expect growth to remain at 6 percent or above, and to be rising in the ### 1phlea2020001 - 9. The authorities expect growth to remain at 6 percent or above, and to be rising in the ### Growth outlook and near-term drivers - Authorities expect growth to remain at 6 percent or above, and to be rising in the medium term. - Authorities project growth of 6½ percent in 2020 and 6½ to 7 percent in the medium term, based on faster spending increases and rapid reform implementation. - IMF staff concur that ongoing increases in government spending, especially on infrastructure projects, and recent monetary policy easing will be the main near-term growth drivers. ### Downside risks to the outlook - External risks: weak global demand conditions and prolonged global growth weakness. - Domestic risks: potential outbreak of African Swine Fever (impacting food prices and rural incomes); power disruptions; delays in implementation of infrastructure projects; delays in passing pending reform bills. - Spillovers from U.S.–China trade tensions assessed as small so far due to limited integration in China-related value chains. - With a sharper-than-expected downturn, the current expansionary macroeconomic stance could require a more expansionary response. ### Fiscal policy: stance, targets, and sustainability - Annual fiscal deficit target increased from 3 percent to GDP to 3.2 percent for 2020–2022. - Public debt-to-GDP ratio is projected to remain broadly stable at just below 40 percent under the baseline. - Gross financing and long-term adjustment needs are characterized as low by standards used in debt sustainability analysis for emerging market economies. - The 3.2 percent deficit target over 2020–2022 provides for additional public capital and pro-poor social programs. - Medium-term anchor: a deficit target of about 3 percent would remain a sustainable anchor for fiscal policy. - Policy recommendations: - Accommodate additional social spending (conditional cash transfer expansion, land reform, agricultural productivity, basic education, universal health care) within the fiscal envelope. - Use savings from pending military pension reform (raising retirement age; introducing mandatory pension contributions) and spending discipline (including public sector wages) to finance priorities. ### Public investment management and procurement - Public infrastructure investment scaled up from an average of 3 percent of GDP during 2011–2016 to 5.1 percent in 2018; authorities plan to boost investment to over 6 percent of GDP by 2022. - Recommendations to enhance public investment management: - Improve project appraisals by requiring upfront identification of risk mitigation measures and publishing appraisal analyses to solicit public comments. - With adequate fiscal risk management, increase private sector participation in infrastructure (including updating legal framework to include all forms of PPPs, e.g., joint ventures). - Public procurement issues: - Legal framework exists for transparent competitive procurement, but many tenders result in a single bidder. - Recommendations: impose stricter sanctions on anti-competitive practices, allow greater foreign participation to ease capacity constraints, and make procurement information more easily accessible. ### Tax reform and revenue mobilization - The first package of the Comprehensive Tax Reform Program implemented in 2018 (excise tax increases and VAT base broadening). - Revenue-raising priorities: improve tax administration and revenue collection; further increases in excise taxes on e-cigarette and alcohol products. - Pending tax incentive reform bill in Congress aims to streamline oversight and design of extensive tax incentive regime to improve accountability and effectiveness in encouraging investment and job creation. - Rationale: higher infrastructure investment will require some increase in tax revenue with a medium-term budget deficit anchor around 3 percent of GDP. ### Authorities’ fiscal views - Authorities reaffirm commitment to prudent fiscal policy while increasing infrastructure and social spending. - Intend to raise general government infrastructure spending to over 6 percent of GDP by 2022 (from 5.1 percent in 2018). - Reported actions: revised priority flagship projects list (feasibility and cost-benefit driven), increased resources for right-of-way resolution and resettlement facilitation. - Reservations: limited qualified bidders constrain procurement competition; caution about greater reliance on PPPs due to long delivery times and difficulty designing balanced risk-sharing agreements. - Social protection: commitment to support rice farmers affected by rice tariffication, including income support measures in addition to the Rice Competitiveness Enhancement Fund. ### Monetary and exchange rate policies - BSP policy rate cuts in 2019 totaled 75 bps cumulatively; after cuts, the rate is now close to levels consistent with achieving inflation objectives. - IMF staff assessment: monetary policy stance is now close to neutral and consistent with BSP achieving its inflation objectives under the baseline outlook. - BSP has space to lower policy rate under a downside scenario, though constrained by higher risk aversion or tightening external financing conditions. - Operational framework modernization: - Corridor system aligns short-term market rates with the policy rate. - Move to Basel III liquidity requirements reduces the RRR’s relevance as a monetary instrument. - Lowering the RRR could reinforce the policy rate as primary instrument and reduce intermediation costs; RRR reduction should consider credit conditions and may require sterilization of liquidity impact. - Reserve maintenance period could be extended from one week to 2−4 weeks. - New BSP Charter allows issuance of BSP securities and refinement of operational targets. - Exchange rate policy: authorities generally allow market-determined exchange rate; recommendation to continue and use FX intervention only to avoid disorderly market conditions. - Consideration: publishing FX intervention data with appropriate lags and aggregation could enhance transparency, though authorities were skeptical of further disclosure. ### External position and vulnerabilities - Preliminary 2019 estimates: cyclically-adjusted current account deficit estimated at 1.7 percent of GDP, close to estimated current account norm of a deficit of 2.1 percent. - Increased reliance on portfolio and other volatile capital inflows amid lower household saving increases exposure to global financial markets; related vulnerabilities should be monitored closely. ### Macroprudential policy and financial sector vulnerabilities - Financial system dominated by well-capitalized banks: 2019:H1 consolidated banking system capital adequacy ratio stood above 15 percent (BSP minimum 10 percent). - Banking sector risks: potential loan quality deterioration after high credit growth episodes, external shocks, concentrated exposures among large borrowers not covered by standard large exposure limits. - Credit growth history and composition: - Peak credit growth close to 20 percent in 2017–2018, qualifying as a near-credit boom by some metrics. - High bank credit growth largely driven by real estate sector loans; credit to real estate accounts for the largest share in total loans outstanding (about 18 percent). - Corporate sector vulnerabilities: - Median leverage in representative sample of Philippine firms (debt-to-assets) was among the highest in the region as of end-2018. - Average share of FX debt relatively higher at 17 percent, especially among large firms. - Stress tests indicate firms’ balance sheets can absorb large shocks in the short term, but data gaps (corporate interlinkages) limit systemic assessments. - Credit growth outlook: - Credit growth expected to increase moderately under the baseline. - Risks of a sharper increase will likely rise with a pickup in economic growth and government investment plans. - New market segments (small business and consumer credit) could develop rapidly; space constraints in Metro Manila could push real estate prices and leverage higher. - Macroprudential policy recommendations: - Update macroprudential toolkit proactively. - Consider timely activation of the countercyclical capital buffer (CCyB) if broad-based rapid credit growth reemerges (CCyB adopted but not activated). - Prefer targeted measures if risks are sector-specific (real estate-related risks most relevant). - Consider introducing loan-to-value (LTV) and debt-to-income (DTI) caps to target housing-related loan demand directly and timely. - 2020 FSAP will review the macroprudential framework, instruments, past practice, and systemic risk monitoring. *Source: 1phlea2020001 - 9. The authorities expect growth to remain at 6 percent or above, and to be rising in the* ### 28. The authorities assess systemic financial stability risks to be low and see limited risks ### 28. The authorities assess systemic financial stability risks to be low and see limited risks of high credit growth reemerging ### Financial stability assessment and macroprudential stance - Authorities view systemic financial stability risks as low and see limited risks of high credit growth in the near term. - Some evidence of a near-credit boom during the period 2017–18 was noted, but the authorities emphasized that the assessment was model-dependent and only held in some but not all models presented by staff. - Authorities project baseline credit growth in the next few years at "low two-digit levels." - Authorities agree mortgage collateral value limits could be complemented by a more general LTV and DTI approach. - Authorities and staff share the view that timely activation of the CCyB is important for effective, forward-looking systemic financial risk management; activation would require judgment based on a range of identified indicators of excess credit. - Authorities stressed that financial stability risks and credit growth are not only linked to high economic growth and rapid financial deepening but would also rise under a synchronized global slowdown that would affect growth and corporate profits in the Philippines. ### Structural reforms, digitalization, and implementation capacity - Recent reform bills enacted into law include rice tariffication, a national digital ID, the ease of doing business, and BSP charter amendments. - Additional reform bills are with Congress or under preparation and seem to have good prospects for passage given the outcome of the May 2019 midterm election. - Successful delivery of reforms will require enhancing implementation capacity of the public administration. - Digitalization priorities: - Reduce paper-based government operations to lower governance and corruption risks and raise efficiency. - Continue digitalization across cross-border trade, tax administration, and public financial management. - National digital ID system expected to support targeting of social spending, financial inclusion, and greater transactional efficiency; authorities plan to start rolling out the national digital ID system in 2020. - Anti-Red Tape Authority established to implement administrative and regulatory efficiency reforms, including one-stop shops, e-platforms, standardization of licensing procedures, and regulatory transparency. ### Competition, trade, and climate-related policy - Recent reforms focus on infrastructure improvements and increased administrative and regulatory efficiency to reduce costs of doing business. - Remaining obstacles: - Relatively high barriers to FDI—described as among the most stringent in the region. - Procedural hurdles to international trade that hamper domestic competition. - Policy rationale: Lowering these obstacles could stimulate investment and facilitate absorption of frontier technologies amid global supply chain reconfiguration. - Climate change: - The Philippines has been proactive on financial preparedness for natural disasters, green financing, and government budgeting for climate change. - More resources and incentives for climate change adaptation and mitigation are needed to induce investment and changes in emission patterns. - Greater climate resilience would contribute to further poverty reduction. - National government coordinated with the World Bank to issue its first Catastrophe Bonds. - Local government units’ adaptation projects are being received, evaluated, and financed through the People’s Survival Fund. ### Anti-money laundering (AML) and anti-corruption - AML law amended to cover casinos and an expanded list of predicate crimes; Anti-Money Laundering Council (AMLC) effectiveness strengthened via increased staffing. - Asia/Pacific Group (APG) Mutual Evaluation Report (MER) notes the AML/CFT framework and implementation require major improvements to avoid risk of inclusion on FATF list of jurisdictions with serious AML/CFT deficiencies. - Recommended improvements: - Add tax evasion to the list of predicate crimes. - Intensify customer due diligence for politically exposed persons. - Intensify risk-based supervision of the gaming sector. - Relax stringent banking secrecy law. - Establish a robust beneficial ownership registry to support AMLC efforts and combat tax evasion and corruption. - Authorities restructured the Anti-Money Laundering Council and increased staffing in response to the 2019 MER by the APG. - The Council has taken measures to meet recommended AML Act implementation actions within the one-year window afforded by the APG. - Legislative priorities: amendments to the Bank Deposit Secrecy Law and the Anti-Money Laundering Act to comply with international standards. ### Authorities’ views (summarized) - Optimistic about reform prospects and significant progress in several areas. - Anti-Red Tape Authority established after the Ease of Doing Business law (May 2018). - Authorities intend to further ease restrictions on foreign investment, especially for public utilities. - Commitment to digitalizing government operations acknowledged, but implementation challenges exist due to reform fatigue and IT customization difficulties. - National digital ID rollout planned to begin in 2020. - Climate adaptation actions proceeding at national and local levels, including Catastrophe Bonds and People’s Survival Fund financing. - AML/CFT framework improvements underway with restructuring and staffing increases in the AMLC and legislative priorities focusing on bank secrecy and AML amendments. ### Staff appraisal, risks, and policy recommendations - Economic assessment: - Philippine economy is a strong performer despite recent headwinds. - Real GDP growth regained momentum in the second half of 2019 and is projected to firm up further in 2020, underpinned by government spending acceleration and recent monetary easing. - Risks to the outlook are tilted to the downside due to global trade tensions, shifts in global financial conditions, and natural disasters. - Macroeconomic policy stance: - Moderate fiscal stimulus planned for 2020 and monetary policy easing since mid-2019 are consistent with returning to capacity growth and achieving inflation objectives in the baseline. - The Philippines has policy space to adopt a more expansionary stance if downside risks materialize. - Under adverse scenarios fiscal stimulus should be prioritized toward public capital and social spending programs. - The BSP has substantial space to lower its policy rate if downside surprises materialize. - External sector: - 2019 external position, based on preliminary estimates, is assessed to be broadly in line with medium-term fundamentals and desirable policies. - Recent rise in portfolio and other volatile capital inflows amid declining household saving should be monitored closely. - Exchange rate should remain a primary shock absorber against external shocks. - Publishing FX intervention data could be considered, with appropriate lags and aggregation to guard against market sensitivities. - Infrastructure and public investment: - Closing the infrastructure gap requires further reform efforts, enhanced public investment management, greater competition, and easier public access to procurement information. - Planned tax incentive reform should make the regime more accountable and effective in encouraging investment and job creation. - Macroprudential recommendations: - BSP should timely activate the CCyB if risks of broad-based rapid credit growth reemerge. - Develop targeted macroprudential measures, such as loan-to-value (LTV) and debt-to-income (DTI) caps. - Tighten targeted measures if high credit growth risks are more sector-specific—for example, in the real estate sector. - Structural reform priorities to reinforce growth and inclusion: - Strengthen capacity of public administration. - Advance ease of doing business reforms. - Continue infrastructure push. - Further lift restrictions on foreign direct investment. - Broaden scope of poverty reduction efforts. - Mobilize more resources for climate change adaptation and mitigation. - Robustly implement the AML/CFT regime and ease the stringent bank secrecy law. - Consultation cycle recommendation: - It is recommended that the next Article IV consultations take place on the standard 12-month cycle. *IMF staff summary based on the Philippines Article IV consultation chapter.* ### Box 1. Fintech Innovation in the Philippines 1/ ### Box 1. Fintech Innovation in the Philippines ### Adoption and demand drivers - Fintech services are being adopted rapidly. - Potential demand for digital financial services is high given: - rapidly growing economy, - positive demographics, - low bank penetration, - high mobile and internet usage. - Key penetration statistics: - internet penetration is 72 percent, - mobile phone penetration is 124 percent, - only 32 percent of adults have a formal bank account. - National Digital ID initiative expected to be rolled out in mid-2020 and is anticipated to strengthen financial inclusion and potentially fintech, conditional on relevant architecture and processes that make the digital ID useful for basic bank accounts and online transactions. ### Market entrants and services - Big tech and platform firms have entered financial services, particularly payments: - Grab, Go-Jek and Oriente offer mobile payments and credit (e.g., to drivers on ride-hailing platforms and small businesses). - Facebook offers payment services through its platform, in cooperation with mobile money operators. - Several international remittance providers are using innovative methods for channeling remittance flows into the country. ### Regulatory response and infrastructure support - Authorities view fintech innovation as a means to strengthen financial inclusion. - Bangko Sentral ng Pilipinas (BSP) actions: - Adopted a “Test-and-Learn” approach to the regulation of new services and clarified policies related to fintech innovation. - Made efforts to strengthen the regulatory and supervisory framework to take into account risks arising from fintech, such as cyber risk (see BSP (2017), “Circular 982,” and BSP (2018), “Circular 1019”). - Supported fintech solutions on the infrastructure side, for example through the introduction of the InstaPay and PesoNet automated clearing house under the National Retail Payment System. - Institutional coordination: - The Financial Sector Forum, formed by BSP, SEC, Insurance Commission, and Philippine Deposit Corporation, coordinates regulatory responses to fintech innovations in the Philippines. ### Enablers and constraints - Telecommunications: - Telecommunications infrastructure lags most compared to other countries in the region. - Entry of a third telecommunication player, which is launching operations in 2020, is expected to foster competition and add to capacity in the sector. - Human capital and market structure: - Population financial literacy is low, highlighting the need for financial education and strengthened consumer protection as fintech take-up expands. - Fintech start-ups face capital and labor constraints. - Established banking players have typically been slow in embracing fintech innovation. ### Policy challenges and risks - While fintech can enhance financial inclusion and boost competition, it poses policy challenges: - The models employed by new fintech credit platforms have not yet been tested in an economic downturn. - Greater reliance on digital technologies may introduce new financial integrity, operational, and evolving cyber risks. - Global stablecoin proposals could be relatively more disruptive in countries like the Philippines with large remittances and a relatively high use of social media. - Suggested regulatory and policy directions implied by the assessment: - Continue and deepen supervisory and regulatory frameworks that address cyber risk and financial integrity. - Strengthen consumer protection and financial education to accompany fintech expansion. - Support infrastructure upgrades in telecommunications and payments systems to enable broader fintech adoption. *Prepared by Jon Frost (Bank for International Settlements, BIS) and Jermy Prenio (BIS).* ### 9. Assessment. The real effective exchange rate (REER) was broadly in line with the level implied ### 1phlea2020001 - 9. Assessment. The real effective exchange rate (REER) was broadly in line with the level implied ### REER Assessment - The real effective exchange rate (REER) was broadly in line with the level implied by fundamentals and desirable policy settings in 2018. - Using standard trade elasticities, a CA gap at −0.4 percent GDP was equivalent to a REER gap at 2 percent (stronger than fundamentals). - The REER appreciated by 1.8 percent in the first nine months of 2019. - Assessment: The 2019 appreciation does not warrant a change of assessment. - Note: The REER norms from the EBA REER-Index and REER-Level model were about 0.7 ppt and 6.8 ppt weaker than the actual REER in 2018.4 ### Capital and Financial Accounts - Background: - Net FDI inflows increased substantially since 2016, from around zero before 2015 to around 2 percent of GDP during 2016−2018. - On portfolio and other investments: strong regional capital outflow pressure occurred in the first three quarters of 2018, especially on equities and loans; direction reversed in the last quarter of 2018. - Portfolio and other investments registered a net capital inflow by 0.8 percent of GDP in 2018 (versus a net outflow of 1.3 percent of GDP in 2017). - During the first half of 2019, net FDI inflows decreased to US$1.8 billion (vs. US$3.7 billion in 2018:H1). - Increased portfolio and other investment inflows in 2019 helped finance the persistent current account deficit and the accumulation of foreign reserves; a bulk of the increase in portfolio and other investment inflows came from government borrowings. - Assessment: - As a small open economy, the Philippines is inevitably exposed to cross-border capital flow shocks. - Given the large amount of foreign reserves and flexible exchange rate regime, vulnerabilities are limited. - The increased role of non-FDI financing entails increased exposure to global financial market fluctuations. ### FX Intervention and Reserves Level - Background: - Exchange rate is classified as floating; the value of the Philippine peso is determined in the interbank foreign exchange market; the BSP intervenes in spot and forward markets though intervention data is not available. - Gross reserves were about US$79.2 billion (about 24 percent of GDP) at end-2018, slightly lower than end-2017 (US$81.5 billion). - During the first three quarters of 2018, reserves losses due to intervention were notable. - Gross reserves reached the trough in October (US$74.7 billion) before capital outflows reversed in the last quarter of 2018. - Gross reserves further increased to US$85.8 billion by October 2019, largely reflecting continued capital inflows in 2019. - Assessment: - Reserves as of end-2018 were about 7 months of imports, or about 193 percent of the IMF’s reserve adequacy metric. - Both approaches indicate that reserves level is ample. - Developments in 2019 do not change the assessment. - From an “ex-post” angle, the intervention during the first three quarters of 2018 appears justifiable, as it avoided a sharper depreciation of peso (6.2 percent y/y at the peak in 2018:Q3) during the high inflation episode (and capital outflow pressures eventually reversed). ### Public and External Debt Sustainability Analysis — Key Findings - General government gross debt: - Remained moderate and sustainable at 38.9 percent of GDP as of end-2018. - In the baseline scenario, projected to decline to 37.5 percent in 2024. - Most vulnerable to a growth shock, followed by real interest rate and primary balance shocks. - External debt: - External debt stood at 23.9 percent of GDP as of end-2018. - Projected to decline to 19.1 percent in 2024, though vulnerable to large depreciation or current account balance deterioration. - Baseline macro assumptions: - Real GDP growth projected to gradually rise to 6.5 percent per annum in 2024. - Inflation returning to 3 percent as productive capacity expands. - National government deficit would reach 3.2 percent of GDP in 2020 and remain at this level until 2024. - Current account deficit projected to narrow to 2 percent of GDP in 2019, widen to 2.3 percent in 2020, then stabilize at 2 percent in 2024. - Debt dynamics: - Public debt on a gradual downward path under current policies; decline led by a significant primary budget surplus. - Gross financing needs remain around 4−6 percent of GDP throughout the projection period. - Debt composition projected broadly stable with relatively low shares of short-term debt and foreign currency-denominated debt. - Alternative scenarios: - Historical and constant primary balance scenarios would show faster debt declines than staff’s baseline. - Under the constant primary balance scenario, gross financing needs would start to rise after 2021 and reach 5.5 percent of GDP in the medium term. - A growth shock would temporarily increase the debt ratio to a peak of 41.8 percent of GDP in 2021. - For external debt, a one-time depreciation of 30 percent in 2019 would temporarily raise the debt ratio to a peak of 33.4 percent of GDP in 2020, before declining to 28.5 percent in 2024. ### Integration of IMF Capacity Development Assistance and Surveillance - Background and recent CD focus: - The Fund provided considerable capacity development (CD) assistance to support the authorities’ reform agenda; the Philippines is one of the largest recipients of Fund CD resources among emerging markets. - Authorities showed strong ownership and absorb Fund CD well; progress includes ongoing tax reform, strengthened supervision framework, and introduction of an interest rate corridor (IRC) system. - Recommendations for CD focus: - Continue to support the authorities’ current reform agenda and extend to emerging priorities. - Specific priority areas: - Tax policy and administration (support tax reform policy design and implementation). - Public financial management to maximize returns from infrastructure-push spending. - Monetary operations and development of capital and FX markets to deepen and diversify funding sources. - Financial inclusion agenda to tackle poverty and inequality. - Over time, expand CD to regulatory and supervisory frameworks, central bank communication, data and reporting standards, fintech innovations, cryptocurrencies, and big data. - Integration table highlights (surveillance recommendations and CD): - Tax policy and administration: Intensify revenue effort; TA on various tax reforms and administration (e.g., VAT refund); CD planned for TA and training on international taxation. - Public expenditure management: Enhance public expenditure management; a Public Investment Management Assessment (PIMA) conducted and follow-up TA/training provided. - Monetary operations and MFS: Continue to enhance monetary operations; continuous CD since 2016 supporting IRC establishment and policy tools; MFS CD support; advanced training and an ASEAN monetary policy forum conducted/planned. - Central bank communication: TA planned for monetary policy communication for 2020; ASEAN-5 forums conducted/planned. - Financial supervision: Monitor corporate leverage and close data gaps; TA on conglomerate supervision provided and follow-up planned. - Macroeconomic analysis and forecasting: Continue to enhance capacity; online and model-based courses delivered; structured curriculum development under discussion. ### Fund Relations and Statistical Issues — Selected Facts - Fund relations: - Membership Status: Joined December 27, 1945; Article VIII. - Quota: 2,042.90 SDR Millions (100.00 percent of Quota). - IMF holdings of currency (holdings rate): 1,656.13 SDR Millions (81.07 percent). - Reserve tranche position: 387.01 SDR Millions (18.94 percent). - SDR Department net cumulative allocation: 837.96 SDR Millions (100.00 percent); Holdings 854.72 (102.00 percent). - Latest financial arrangements listed include Stand-by and EFF arrangements with approval and drawn amounts (details in source). - Exchange arrangement: - De jure arrangement classified as free floating; de facto arrangement classified as floating. - BSP intervenes in spot and forward markets to smooth undue short-term volatility; the exchange system is free of multiple currency practices and restrictions on payments/transfers for current international transactions except for security-notified restrictions. - Statistical issues and data adequacy: - Data provision broadly adequate for surveillance with shortcomings. - National accounts being rebased from 2000 to 2012 and full implementation of SNA 2008 expected soon. - CPI rebased in March 2018 using 2012 Family Income and Expenditure Survey; chained method adopted. - BSP completed BOP compilation based on BPM6 in March 2014 and IIP in September 2014. - Foreign Currency Deposit Units (FCDUs) account for about 70−75 percent of foreign exchange settlements and are exempt from reporting due to banking secrecy rules. - In October 2019, BSP started publication of the Other Financial Corporations (OFCs) Survey. - Financial Soundness Indicators: all 12 core FSIs reported quarterly with one quarter lag. - Philippines subscribed to the SDDS in August 1996; a data ROSC was published in August 2004. *International Monetary Fund — Staff Report excerpts as provided in the source content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020001.pdf_