## 1phlea2020002

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### EXPORT PERFORMANCE IN THE CONTEXT OF GLOBAL TRADE TENSIONS
- Recent evolution:
  - Exports of services increased by 7.6 percent or 0.2 percent of GDP during 2018.
  - Exports of goods increased by 0.9 percent or 1 percent of GDP during 2018.
  - In the first half of 2019, exports of goods slightly decreased by US$283 million (or almost 0.1 percent of 2018 GDP) compared to the same period in the previous year.
  - Main trade partners: United States absorbs 15.3 percent of total exports; China comprises 12.7 percent of total exports.
  - Trade balances: goods trade surplus with the United States of about US$0.2 billion; goods trade deficit with China of around US$1.1 billion.
  - First half 2019 changes (2019:H1 compared to 2018:H1): Philippines exports to the U.S. increased by US$0.6 billion; to China increased by US$0.5 billion. Mexico’s exports to the U.S. increased by US$9.7 billion; Vietnam’s exports to the U.S. increased by US$5.9 billion.
- Exposure to U.S. tariff lists (2018 tariff hikes):
  - Vietnam exported 31 percent of products listed.
  - Mexico exported 61 percent of products listed.
  - Philippines exported about 24 percent of products listed.
- Disaggregated HS-6 findings (2018:Q4 and 2019:Q1 vs same period prior year):
  - HS-854390 (parts of electrical goods): increased by 210 percent or US$434 million.
  - HS-850440 (electrical static converter), HS-880330 (parts of airplanes and helicopters), HS-420229 (handbags): each increased by more than US$50 million.
  - HS-847180 (data processing machines), HS-903082 (instruments for measuring/checking semiconductor devices), HS-940530 (lighting sets): grew more than 5,000 percent, growth values range US$8 million to US$11 million.
  - Goods not on tariff lists such as HS-392490 (plastics articles) and HS-847141 (data processing machines) increased by more than 6,000 percent or by around US$40 million.
- Exports to China and retaliation lists:
  - Only a few Philippine export goods are on China’s retaliation tariff lists; only HS-853690 (electrical apparatus) and HS-740400 (copper) exceed US$5 million in value.
  - Some listed goods decreased in the last two quarters (HS-853690, HS-160414 fish preparations, HS-702000 glass articles).
  - Other listed goods increased by 13 percent to 94 percent or between US$0.4 million to US$3 million (HS-740400, HS-732690 iron or steel, HS-391590 plastic).
  - Non-retaliation-list exports to China with value over US$5 million improved (example: HS-847170 data processing storage units increased by US$75 million; HS-854390 electrical machine and apparatus increased by US$132 million).
- Comparative performance:
  - No clear aggregate evidence that the Philippines benefitted substantially from U.S. tariff sanctions on China or China’s retaliatory tariffs.
  - Vietnam’s exports to the U.S. performed better than similar Philippine exports in most tariff-affected categories; Mexico outperformed the Philippines in many high- and medium-tech goods.
  - Exception: “Digital Processing Units” — Philippine exports increased by almost US$450 million in 2019:H1 vs about US$25 million for Vietnam.

### EXPORT STRUCTURE, COMPARATIVE ADVANTAGE, AND GVC PARTICIPATION
- Export composition and sophistication:
  - High-technology industries contribute 52 percent of total goods exports.
  - Medium-high technology products cover about another 20 percent of total goods exports.
  - Revealed comparative advantage (RCA index >1) in high-technology industries.
  - Export market position: share of global goods exports increased since 2013 but remains below 2000 level and is the lowest among ASEAN-4.
  - Exports are more concentrated in destinations and products relative to other Asian emerging markets.
  - Economic Complexity Index (ECI) indicates capacity to produce diverse goods, though per capita income remains lower than some countries with similar ECI.
- GVC participation:
  - Backward participation (foreign value added in domestic exports) has declined over time.
  - Forward participation (domestically produced intermediates used in third countries) has remained broadly stable.
  - Overall GVC participation is low relative to many ASEAN peers.
  - Implication: low GVC participation helps explain limited negative impact from trade tensions but also limits potential gains from trade diversion.

### POLICY IMPLICATIONS (EXPORTS & GVCS)
- Structural reforms recommended to capture trade diversion and GVC reallocation:
  - Reduce barriers to FDI.
  - Reduce barriers to international trade.
  - Improve the ease of doing business to enable fuller market competition and better exploit the Philippines’ young, educated, and growing population.
- Strengthen participation in GVCs to capture productivity gains from knowledge spillovers, technology transfers, cost savings, and employment growth linked to higher technological intensity.

### VULNERABILITY TO CLIMATE CHANGE AND NATURAL DISASTERS
- Vulnerability rankings and exposure:
  - UN 2016 World Risk Index: Philippines ranked third most vulnerable in terms of natural hazard risk.
  - 2019 INFORM Global Risk Index: Philippines ranked most susceptible to climate change and natural hazards.
  - Global Climate Risk Index 2019: Philippines ranked fifth most vulnerable to climate change-induced natural calamities and fourth most affected by extreme weather events for the period 1998−2017.
  - Study found 47 percent of the population is exposed to climate hazards (earthquakes, tsunami, floods, tropical cyclones and drought).
  - Time interval between severe natural disasters (impact ≥5 percent of total population or ≥1 percent of GDP): median and average about two years; maximum five years; minimum one year — shorter than any other ASEAN country.
- Economic impacts:
  - From 2011−2018: 72 storms affected about 68 million people with total estimated damage of US$15 billion.
  - PDNA estimate: average total damage and losses from, and recovery needs after, a natural disaster ≈ 2.7 percent of GDP.
  - Typhoon Yolanda (November 8, 2013) impacts: 6,201 people killed; 1,785 remain missing; 4.1 million displaced; 1.1 million houses damaged or destroyed; 14 million people impacted (more than 14 percent of the population); affected region accounted for 17½ percent of GDP and included 31 percent of population; official estimate of damage and loss US$13 billion (about 5 percent of GDP); government earmarked P 120 billion (1 percent of GDP) for reconstruction spending in 2014.
  - World Bank (2017) estimate: average annual asset loss of US$3.5 billion because of typhoons and earthquakes.
  - From 2006−2013: 75 disasters caused US$3.8 billion in accumulated damage and losses to agriculture; agriculture contributes 12 percent to GDP.
  - USAID (2017): For every 1°C increase over average temperatures when above 30°C, rice, wheat and corn yields likely decline by 10 percent.
  - IFPRI (2016) projects net negative impact on agriculture ≈ P 26 billion per year through 2050.

### DEBT SUSTAINABILITY UNDER NATURAL DISASTER SHOCKS
- Baseline projection: debt-to-GDP ratio projected to decline to 37.6 percent in 2024.
- Extreme natural disaster shock in 2020 scenario:
  - Would raise debt-to-GDP ratio to 42 percent in that year, then decrease thereafter, reaching the pre-shock debt-to-GDP ratio level in 2024 about five years later.
- Higher-frequency extreme shock scenario (median two years interval observed during 1980−2014):
  - Under this scenario, general government gross debt projected to increase to around 43 percent of GDP in 2024.
  - Gross public debt to revenue would increase to around 203 percent.
  - Gross financing need to GDP would increase to around 13 percent.
- Implication: frequency of extreme natural disaster shocks is critical for debt dynamics.

### CLIMATE COMMITMENTS, SPENDING, AND INSTRUMENTS
- National commitments and coordination:
  - INDC: intended nationally determined contribution to reduce greenhouse gas emissions by 70 percent by 2030 on the condition of international support.
  - Ratified the UNFCCC in 1994.
  - Climate Change Commission and National Disaster Risk Reduction and Management Council coordinate climate programs.
- Public spending and fiscal instruments:
  - Government allocated 7.26 percent of total budget for climate adaptation and mitigation; only 0.2 percent was for climate mitigation.
  - Issued climate bonds since 2016; green bond issuance guidelines adopted under ASEAN Green Bonds Standards in August 2019.
  - TRAIN Act increased coal taxes from P 10 (US$0.19 cents) per metric ton in 1977−2017 to P 50 in 2018, P 100 in 2019, and P 150 (US$2.85 cents) per metric ton in 2020.
  - Coal-fired power plants contributed 50 percent to total power production in 2017.
  - Department of Energy (2018) projects additional power capacity of 8618 MW until 2025, of which 6325 MW are based on coal-fired power plants (Power Development Plan 2017−2040).
- Laws and plans:
  - Climate Change Act (2009); Disaster Risk Reduction and Management Act (2010); National Climate Change Action Plan (NCCAP) 2011−28; National Disaster Risk Reduction and Management Plan (NDRRMP) 2011−28.
- Financial resilience:
  - Disaster Risk Financing and Insurance Strategy (2015).
  - Philippine City Disaster Insurance Pool (PCDIP) and participation in Southeast Asia Disaster Risk Insurance Facility.
  - Catastrophe insurance program (US$390 million) with the World Bank to protect government assets.
- Policy recommendations:
  - Continue planning and investment for adaptation; recognize costs of disasters in macro frameworks and debt sustainability analyses.
  - Maintain prudent fiscal and financial buffers.
  - Allocate more resources for climate adaptation and mitigation, including renewable energy promotion.
  - Consider greenhouse gas emissions pricing (carbon taxes or emissions trading systems).

### INFLATION DYNAMICS, MONETARY POLICY, AND MODEL ANALYSIS (2017–2019)
- Inflation path:
  - Inflation rose from 2.9 percent at end-2017 to 6.7 percent in September 2018, then declined to 0.8 percent as of October 2019.
  - CPI increased by 5.7 percent from end-2017 to September 2018; food and energy contributed most.
  - Rice (weight 9.6 percent in CPI) increased by 10.2 percent in the first three quarters of 2018.
- Drivers of 2018 inflation rise:
  - Global oil prices: Brent rose from an average of US$54 per barrel in 2017 to US$75 per barrel in 2018:Q3.
  - Domestic food-price shocks: food prices increased by 9.3 percent (annualized) in first three quarters of 2018.
  - Excise tax hike on beverages and tobacco (January 2018).
  - Accommodative monetary policy during 2017−2018:H1: real interest rates close to or below zero percent; estimated neutral real rate 1−2 percent.
  - Stronger growth and inflation in the United States contributed.
- Disinflation (2018:Q4–2019):
  - Unwinding of domestic food price shocks (rice import quota relaxation).
  - Oil price pass-through effects produced drag on year-on-year inflation in 2019.
  - Monetary tightening: policy rates increased by 175 basis points from May 2018 to November 2018.
- Monetary policy indicators:
  - Monetary Board meets eight times a year.
  - Average bank lending rates: 6.03 percent in May 2018 → 7.02 percent in December 2018 → 7.42 percent in March 2019.
  - Credit growth to private sector decelerated from 17.4 percent (y/y) in May 2018 to 9.9 percent (y/y) in March 2019 and 7.6 percent (y/y) in June 2019.
  - Policy rate reductions in 2019: May cut 25 basis points to 4.5 percent; August to 4.25 percent; September to 4.0 percent.
- Model baseline and projections:
  - Baseline assumes Brent around US$65 per barrel next two years; food inflation moderate around 4 percent in 2020−2022.
  - Model steady-state assumes a 4 percent nominal interest rate (1 percent neutral real interest rate + 3 percent inflation).
  - Baseline projects inflation to temporarily fall below the target band then converge back to 3 percent mid-point starting in 2020 as base effects wane.
  - Model suggests a broadly neutral monetary stance with possible moderate loosening; projected interest rates around 3.5−4 percent in 2020.
- Alternative scenarios:
  - Higher domestic food inflation (catch-up to around 5 percent annually) raises headline inflation vs baseline (4−4.5 percent).
  - Higher oil prices to US$70 per barrel in 2019:Q4 and constant to 2023 would produce a generally higher inflation path vs baseline.
  - Lower U.S. growth (output levels 0.5 percentage points below baseline in 2020−21) would lower projected inflation path.
- Exchange rate contribution:
  - Peso depreciation moderately contributed to rise in inflation in 2018; counterfactual with unchanged peso/USD from end-2017 to 2019:Q2 implies y/y inflation about 0.6 percent lower at the peak.

### CREDIT GROWTH, REAL ESTATE, CONSUMER CREDIT, AND SYSTEMIC RISKS
- Credit aggregates and trends:
  - Bank credit growth decelerated from a peak of 21.1 percent in September 2017 to 10.5 percent in September 2019.
  - Credit-to-GDP ratio about 50 percent.
  - Assessment using various methodologies: early warning signs end-2014 and 2016–early 2018; moderation since end-2018 with change in credit-to-GDP ratio well below 3 percent threshold.
- Real estate credit:
  - Real estate credit contributed importantly to lending growth near 20 percent during 2014–2018.
  - Real estate loans account for 18 percent of total loans outstanding.
  - Drivers: POGO demand, dynamic BPO industry, sustained residential housing demand.
  - NPL ratios for real estate loans at record low levels as of end-2018:Q2.
  - RREPI through 2019:H1: aggregate house prices variation 0.4 percent y/y in 2019:Q2; duplexes up 12.5 percent, condominium units up 9.6 percent, townhouses up 4.3 percent, single detached/attached houses down 4.2 percent in 2019:Q2.
  - Prudential responses: Basel III LCR and NSFR, CCyB adopted (initially zero percent), Real Estate Stress Test (REST), real estate sectoral exposure limits, mortgage collateral value limits, new Report on Project Finance Exposures (June 2018), real estate lending cap at 20 percent of TLP.
- Consumer loans and credit cards:
  - Credit card receivables (CCRs) growth peaked at 26.1 percent (y/y) in 2019:Q2.
  - CCR NPLs increased by 21.4 percent in 2019:Q2 (higher than CLs and TLPs increases and higher than 18.2 percent previous quarter).
  - Rapid CCR growth with relatively high NPLs warrants closer monitoring.
- Conclusion and recommendations on macroprudential stance:
  - Systemic financial stability risks related to bank credit currently contained though sector risks (real estate) require close attention.
  - Prepare a strategy for proactive macroprudential intervention if high credit growth resumes.
  - Consider timely activation of the CCyB when broad-based rapid credit growth reemerges.
  - If risks are sector-specific, use targeted measures such as loan-to-value and debt-to-income caps.

### CORPORATE LEVERAGE, FOREIGN CURRENCY EXPOSURE, AND STRESS TESTS
- Corporate leverage key facts:
  - Sample: 164 firms over 2014−2018 (160 listed, 4 non-listed); listed sample firms account for 77 percent of PSE market capitalization (US$258 billion as of end-2018).
  - Nonfinancial corporate leverage steadily increased since 2010; median leverage increased by 2 percentage points since 2014.
  - Philippine firms’ median leverage among highest in the region as of end-2018.
  - Net debt to earnings median leverage: 265 percent.
  - Larger and “Medium” firms (40th–60th asset quintile) have average leverage above 30 percent.
  - Most leveraged sectors: utilities and mining/energy, followed by manufacturing and real estate.
  - Foreign currency debt average share end-2018: about 17 percent (2014: 19 percent).
  - Currency composition of foreign debt: 86.5 percent U.S. dollars; 2.7 percent Japanese Yen.
  - Instrument composition of foreign debt: 79.1 percent bank loans; 13.6 percent bonds and notes.
  - Debt maturity: "about three thirds" of outstanding debt with maturity of over one year as of end-2018.
- Solvency and interest burden:
  - Interest Coverage Ratio (ICR) measure: high debt-service burden defined as ICR < 2.
  - 2018: about 41 percent of firms used more than one third of EBIT for interest payments; 7 percent used more than half of EBIT for interest.
  - Earnings rose 22 percent in 2018; interest payments rose 38 percent from 2017.
  - Firms above median leverage: average ICR 2.7; below median leverage: average ICR 3.5.
  - Sectoral vulnerability: mining and energy — 14 percent of sector’s total debt held by firms with ICR < 2; utilities — 34 percent of sector’s total debt held by firms with ICR < 2; sample shares: mining and energy 5 percent of sample debt; utilities 16 percent of sample debt.
  - FX exposure: in 2018 about 84 percent of total sample debt was held by "Exposed" firms (net FX valuation loss on depreciation).
- Stress test scenarios (applied to 2018 benchmarks):
  - Scenario I (only exchange rate shock): net FX loss average increase of 182 percent from 2018 level; macro equivalent = 0.4 percent of 2018 GDP; interest expenses assumed to decline slightly on average.
  - Scenario II (combined): operating income assumed decline of 3.9 percent; net FX loss average increase of 156 percent; interest expenses assumed to decline slightly on average.
- Stress test outcomes and bank implications:
  - Share of total debt held by firms with ICR < 2: benchmark 7.1 percent; Scenario I 8.4 percent; Scenario II 11.7 percent; median 2009−2018 level 7.9 percent.
  - Assuming 10 percent of firms with ICR < 2 default: expected average gross NPL ratio among commercial and universal banks would rise to 2.7 percent under Scenario I and to 3 percent under Scenario II (comparison: end-May 2019 level 2.2 percent).
  - Philippine banks have ample capital buffers (above 15 percent of risk-weighted assets on average).
- Findings on distributional impacts:
  - Scenario I concentrates negative earnings shocks among large firms, especially utilities (largest decline in EBIT among large firms and utilities).
  - Scenario II spreads negative earnings shock more evenly across firm sizes and sectors.
- Caveats:
  - Household sector vulnerabilities not included; household distress could add pressures on banks.
  - Higher average leverage in 2018 implies potential nonlinear balance sheet impacts from negative macro shocks.
  - Tests do not assess potential negative impacts on firms’ real activities, notably investment; empirical evidence indicates negative relationship between leverage and investment.

### MACRO-FINANCIAL POLICY IMPLICATIONS (SUMMARY)
- Short-term/near-term:
  - Monitor rapidly growing consumer credit (CCRs) and high-risk sectors (real estate, POGO-related exposures).
  - Consider targeted macroprudential measures to contain sectoral leverage increases.
  - Strengthen corporate insolvency regimes to prepare for potential corporate failures.
- Medium- to long-term:
  - Promote domestic financial market development to reduce firms’ unhedged foreign currency exposure and improve access to hedging instruments.
  - Maintain prudent fiscal and financial sector policies and buffers to absorb shocks, including from natural disasters and climate risks.
  - Continue structural reforms to reduce barriers to FDI and trade, and improve ease of doing business to enable the Philippines to better capture trade diversion and GVC reallocation.

*International Monetary Fund — content unit 1phlea2020002*

### References ____________________________________________________________________________ 22

### EXPORT PERFORMANCE IN THE CONTEXT OF GLOBAL TRADE TENSIONS

### Introduction
- Philippines’ exports of goods have remained stable through the ongoing period of global trade tensions despite large shifts in global trade.
- The analysis combines high-level trade statistics (comparative advantage and GVC integration) and disaggregated HS-6 digit trade data to distinguish performance of goods on U.S.-China tariff lists versus goods not on the lists.
- Key observation: the Philippines has not benefitted much from trade diversion resulting from U.S.-China bilateral tariffs, unlike Vietnam and Mexico; constrained ease of doing business, relatively high barriers to FDI and international trade are highlighted as structural impediments.

### Recent Evolution of Exports
- Exports of services increased by 7.6 percent or 0.2 percent of GDP during 2018.
- Exports of goods increased by 0.9 percent or 1 percent of GDP during 2018.
- In the first half of 2019, exports of goods slightly decreased by US$283 million (or almost 0.1 percent of 2018 GDP) compared to the same period in the previous year.
- Main trade partners:
  - United States absorbs 15.3 percent of total exports.
  - China comprises 12.7 percent of total exports.
- Trade balances:
  - With the United States, Philippines has a goods trade surplus of about US$0.2 billion.
  - With China, Philippines has a goods trade deficit of around US$1.1 billion.
- First half 2019 changes (2019:H1 compared to 2018:H1):
  - Philippines: exports to the U.S. increased by US$0.6 billion; to China increased by US$0.5 billion.
  - Mexico: exports to the U.S. increased by US$9.7 billion.
  - Vietnam: exports to the U.S. increased by US$5.9 billion.
- Coverage of U.S. tariff lists (2018 tariff hikes):
  - Vietnam exported 31 percent of products listed.
  - Mexico exported 61 percent of products listed.
  - Philippines exported about 24 percent of products listed.

### Export Profile and Comparative Advantage
- High-technology industries constitute the main exports of the Philippines:
  - High-tech industries contribute 52 percent of total goods exports.
  - Medium-high technology products cover about another 20 percent of total goods exports.
- The Philippines has a revealed comparative advantage in high-technology industries (RCA index >1).
- Economic Complexity Index (ECI) indicates capacity to produce diverse goods, though per capita income remains lower than some countries with similar ECI (example: Indonesia).
- Export market position and diversification:
  - Philippines’ share of global goods exports increased since 2013 but remains below the 2000 level and is the lowest among ASEAN-4.
  - Export sophistication has improved but lags some ASEAN peers.
  - Exports are more concentrated in destinations and products relative to other Asian emerging markets.

### Participation in Global Value Chains (GVCs)
- Backward participation (foreign value added in domestic exports) has declined over time.
- Forward participation (domestically produced intermediate goods used in third countries) has remained broadly stable.
- Overall GVC participation is low relative to many ASEAN peers.
- Implication: low participation in global trade and GVCs helps explain limited negative impact from trade tensions but also limits potential gains from trade diversion.

### Impact of U.S.-China Trade Tensions on Philippines’ Exports
- Aggregate impact:
  - No clear aggregate evidence that Philippines benefitted substantially from U.S. tariff sanctions on China or from China’s retaliatory tariffs.
  - In affected goods groups, U.S. imports from China fell after U.S. tariff hikes; U.S. exports to China also declined after China’s retaliatory tariffs.
  - Increases in bilateral tariffs can hurt output, employment, and productivity in affected economies and bystanders.
- Disaggregated HS-6 product performance (selected findings covering 2018:Q4 and 2019:Q1 compared to same period prior year):
  - Parts of electrical goods (HS-854390) increased by 210 percent or US$434 million.
  - Electrical static converter (HS-850440), parts of airplanes and helicopters (HS-880330), handbags (HS-420229) each increased by more than US$50 million.
  - Data processing machines (HS-847180), instruments and apparatus for measuring or checking semiconductor devices (HS-903082), and lighting sets (HS-940530) grew more than 5,000 percent, with growth values ranging from US$8 million to US$11 million.
  - Goods not on the tariff lists such as plastics articles (HS-392490) and data processing machines (HS-847141) increased by more than 6,000 percent or by around US$40 million.
- Exports to China and retaliation lists:
  - Only a few Philippine export goods are on China’s retaliation tariff lists; only electrical apparatus HS-853690 and copper HS-740400 exceed US$5 million in value.
  - Some listed goods decreased in the last two quarters (electrical apparatus HS-853690, fish preparations HS-160414, glass articles HS-702000).
  - Other listed goods increased by 13 percent to 94 percent or between US$0.4 million to US$3 million (copper HS-740400, iron or steel HS-732690, plastic HS-391590).
  - Additional goods exported to China in 2018:Q4 and 2019:Q1 but not same period prior year had total value below US$5 million.
  - Non-retaliation-list exports to China with value over US$5 million improved in general (examples: data processing storage units HS-847170 increased by US$75 million; electrical machine and apparatus HS-854390 increased by US$132 million).
- Comparative disaggregated analysis versus Vietnam and Mexico (HS-6 digit, U.S. import data, monthly frequency focusing on 2019:H1):
  - Vietnam’s exports to the U.S. performed better than similar Philippine exports in most tariff-affected goods categories.
  - Philippines performed substantially better than Vietnam in one specific high-technology product category (“Digital Processing Units”), where Philippine exports increased by almost US$450 million in 2019:H1 compared to 2018:H1 versus about US$25 million for Vietnam; this appears to be an exception rather than the rule.
  - Overall, most goods are positioned below the 45-degree reference line when plotting Philippines versus Vietnam export changes, indicating smaller Philippine increases.

### Policy Implications and Recommendations
- Structural reforms to enhance ability to capture trade diversion and GVC reallocation:
  - Reduce barriers to FDI.
  - Reduce barriers to international trade.
  - Improve the ease of doing business to enable fuller market competition and better exploitation of Philippines’ young, educated, and growing population.
- Strengthen participation in GVCs to capture productivity gains from knowledge spillovers, technology transfers, cost savings, and employment growth linked to higher technological intensity.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020002.pdf*

### 14.      The Philippines exports also performed worse than many similar Mexican exports, but

### 1phlea2020002 - 14.      The Philippines exports also performed worse than many similar Mexican exports, but

### Export performance versus comparators
- The Philippines exports performed worse than many similar Mexican exports in 2019:H1, particularly in many high-tech and medium-tech goods included in the U.S. tariff lists.
- Overlap between Philippine and Mexican exports on the same goods is much lower given the large quantity of goods exported by Mexico but not Philippines to the United States (see orange triangles referenced in Figure 9).
- Comparison with Bangladesh:
  - The Philippines exports much more goods included in the U.S. tariffs list against Chinese producers than Bangladesh (orange triangles now in the vertical axis in the bottom panels of Figure 9).
  - Almost all the goods where Bangladesh displayed much higher dollar increments during 2019:H1 were low-tech textile related products.

### Disaggregated trade data implications
- Evidence suggests the Philippines was not able to scale up its exports to the United States as much as Vietnam and Mexico in many high- to medium-tech goods included in the U.S. tariff lists.
- Results are similar but do not display as large variations in most goods as shown in Figure 10.

### Structural impediments and policy-relevant observations
- The Philippines’ poor performance to scale up production could be related to the ease of doing business remaining difficult, mainly due to relatively high barriers to FDI and international trade hampering fuller market competition (see Figure 11).
- Removing these structural impediments would be key to taking advantage of the realignment of Asian value chains amid the ongoing U.S.-China trade tensions, as well as Philippines’ young, educated, and growing population.
- Footnote on Doing Business ranking and reforms:
  - The Philippines improved its ranking in the 2020 World Bank Doing Business report: it held the 124th position last year, and is now ranked as the 95th country out of 190 economies.
  - Government efforts include: fully operationalizing the National Single Window/TradeNet System and its integration into the ASEAN Single Window; relaxing restriction on foreign participation in more areas of investment; the review of existing FX policies governing trade and nontrade current account transactions, etc.

### Key trade statistics (from Table 2 excerpt)
- For US tariff hikes:
  - $16 billion: Number 560; Number 223; Percent 40; Number 239; Percent 43; Number 462; Percent 82
  - $34 billion: Number 199; Number 72; Percent 36; Number 99; Percent 50; Number 172; Percent 87
  - $200 billion: Number 3214; Number 644; Percent 20; Number 889; Percent 28; Number 1799; Percent 56
  - Average: Number 1324; Number 313; Percent 24; Number 409; Percent 31; Number 811; Percent 61

### Trade composition and GVC metrics (methodology summary)
- Diversification measured by Herfindahl-Hirschman Index (HHI) calculated as HHI = sum of squared shares of each product in total export (product diversification) or of each export destination in total export (market diversification); HHI values range between 1/N to 1 with smaller index indicating more diversified/less concentrated market.
- Revealed comparative advantage (RCA) as in Balassa (1965): RCA > 1 indicates comparative advantage; RCA index formula provided (using x_cp exports of product p by country c).
- Export products classified into five categories: High, Medium-high, Medium-low, Low Technology and Mineral Fuels (using SITC-Rev 3 at the 4 digit).
- Export sophistication: PRODY and EXPY constructed following Hausmann, Hwang and Rodrik (2007) framework with formulas:
  - PRODY_p t = ∑(RCA_c p t * Y_c t)
  - EXPY_c t = ∑((x_c p t p / Σ_p x_c p t) * PRODY_p t)
- Economic complexity index (ECI) based on Hidalgo and Hausmann (2009); ECI data from Simoes and Hidalgo (2011).
- Global value chains (GVCs) participation index distinguishes backward (use of foreign inputs in exports) and forward (use of domestic intermediates in third country exports) participation; OECD-WTO value-added trade estimates used.

### Vulnerability to climate change and natural disasters (summary)
- The Philippines is one of the countries’ most vulnerable to climate change risks and natural hazards—cyclones, landslides, floods, droughts.
- UN 2016 World Risk Index ranks the Philippines as the third most vulnerable country in terms of natural hazard risk.
- 2019 INFORM Global Risk Index ranks Philippines as the country most susceptible to climate change and natural hazards.
- Global Climate Risk Index 2019 ranks Philippines as the fifth most vulnerable to climate change-induced natural calamities, and the fourth most affected country by extreme weather events for the period 1998−2017.
- The study found that 47 percent of the country's population is exposed to climate hazards such as earthquakes, tsunami, floods, tropical cyclones and drought.
- Time interval between severe natural disasters (impact at least 5 percent of total population or 1 percent of GDP):
  - Median and average time interval about two years in the Philippines, with a maximum and minimum period of five and one year, respectively—shorter than for any other ASEAN country.

### Economic impacts of disasters (key figures and findings)
- From 2011−2018 a total of 72 storms occurred; they affected about 68 million people, with a total estimated damage of US$15 billion.
- Post-Disaster Needs Assessment (PDNA) estimated average total damage and losses from, and recovery needs to social, productive, and infrastructure sectors after a natural disaster was about 2.7 percent of GDP.
- Box 1: Typhoon Yolanda (November 8, 2013) impacts:
  - 6,201 people killed; 1,785 remain missing; 4.1 million people displaced; 1.1 million houses damaged or destroyed.
  - 14 million people (more than 14 percent of the population) impacted.
  - Affected region prior to storm accounted for 17½ percent of GDP and included 31 percent of the population (29 million people).
  - Official estimate of typhoon-related damage and loss amounts to US$13 billion (about 5 percent of GDP).
  - Government earmarked some P 120 billion (1 percent of GDP) for reconstruction spending in 2014.
- World Bank (2017) estimate: each year, the Philippines incurs an average asset loss of US$3.5 billion because of typhoons and earthquakes.
- From 2006−2013, 75 disasters—mostly cyclones, tropical storms and floods—caused US$3.8 billion in accumulated damage and losses to the agriculture sector (FAO 2015).
- Agriculture contributes 12 percent to GDP.
- USAID (2017): For every 1°C increase over average temperatures when above 30°C temperature, rice, wheat and corn yields would likely decline by 10 percent.
- International Food Policy Research Institute (2016) projects the net negative impact on the economy of climate change on agriculture to be about P 26 billion per year through 2050.

### Debt sustainability and natural disaster shock scenarios
- Baseline projection: debt-to-GDP ratio is projected to decline to 37.6 percent in 2024.
- Extreme natural disaster shock in 2020 scenario:
  - Would raise the debt to GDP ratio to 42 percent in that year, but it would decrease thereafter, reaching the pre-shock debt-to-GDP ratio level in 2024 about five years later (aligned with the maximum interval between severe storms experienced during 1980−2014).
- If the interval between extreme shocks were shorter (e.g., median two years interval observed during 1980−2014), debt ratios might not stabilize:
  - Under this extreme natural disaster shock scenario (Figure 2, red line), general government gross debt is projected to increase to around 43 percent of GDP in 2024.
  - Gross public debt to revenue would increase to around 203 percent.
  - Gross financing need to GDP would increase to around 13 percent.
- These projections illustrate the importance of the frequency of extreme natural disaster shocks for debt dynamics.

### Government initiatives and further measures
- The government has taken a number of initiatives to address climate change and natural disaster vulnerabilities; additional measures would help to further contain and/or reduce damages, and to advance climate change mitigation.
- The PDNA, Multi-donor Trust Fund, and earmarked reconstruction spending are cited as prior responses to major disasters.

*Source: IMF staff estimates and chapter content from the provided PDF.*

### 7.      Philippines has submitted, in the context of the Paris Agreement, its intended

### 1phlea2020002 - 7.      Philippines has submitted, in the context of the Paris Agreement, its intended

### Climate commitments and institutional coordination
- The Philippines submitted, in the context of the Paris Agreement, its intended nationally determined contribution (INDC) to reduce its greenhouse gas emissions by 70 percent by 2030 on the condition of international support.
- The Philippines ratified the United Nations Framework Convention on Climate Change in 1994.
- Given high vulnerability to climate change, the Climate Change Commission and National Disaster Risk Reduction and Management Council are working jointly to coordinate, monitor, and evaluate programs and actions on climate change.

### Climate-related public spending and instruments
- The government has allocated 7.26 percent of total budget for climate adaptation and mitigation, of which only 0.2 percent was for climate mitigation.
- The Philippines started issuing climate bonds in 2016; recent momentum exists despite the climate bond size remaining small.
- In August 2019, the government adopted the guidelines on green bond issuances under the ASEAN Green Bonds Standards.
- Tax Reform for Acceleration and Inclusion (TRAIN) Act (implemented in 2018) increased taxes on coal from P 10 (US$0.19 cents) per metric ton in 1977−2017, to:
  - P 50 in 2018,
  - P 100 in 2019, and
  - P 150 (US$2.85 cents) per metric ton in 2020.
- Coal-fired power plants contributed 50 percent to total power production in 2017; committed coal-based capacity increases could raise this share further in the next five years.
- Department of Energy (2018) projects additional power capacity of 8618 MW until 2025, of which 6325 MW are based on coal-fired power plants (Power Development Plan 2017−2040).
- The trend implies a need for further measures to promote renewable energy, including possibly increasing taxes on fossil fuels.

### Laws, plans, and climate expenditure management
- Key laws and plans:
  - Climate Change Act (2009) requires local government units (LGUs) to draft local climate change action plans.
  - Disaster Risk Reduction and Management Act (2010) shifted policy focus from disaster response to risk reduction and preparedness.
  - National Climate Change Action Plan (NCCAP) 2011−28 prioritizes seven key areas including food security, ecological and environmental stability, climate‐friendly industries and services, sustainable energy.
  - National Disaster Risk Reduction and Management Plan (NDRRMP) 2011−28 covers: (i) Disaster Prevention and Mitigation; (ii) Disaster Preparedness; (iii) Disaster Response; and (iv) Disaster Rehabilitation and Recovery.
- Budget and tagging:
  - In 2015, the Department of Budget and Management developed a climate change expenditure tagging system that identifies government agencies’ climate change-related expenditures.
  - The budget allocated to tagged climate-change-related expenditures has been rapidly rising, including through the national disaster reduction and management fund focused on climate-related infrastructure investment.

### Financial resilience and disaster risk financing
- The government formulated a Disaster Risk Financing and Insurance Strategy in 2015 to enhance financial resilience at national, local, and individual levels.
- The Philippine City Disaster Insurance Pool (PCDIP) has been developed to provide rapid access to early recovery financing.
- The Philippines participated in the first regional catastrophe risk pool under the Southeast Asia Disaster Risk Insurance Facility.
- Box 2 — Natural Disaster Risk Insurance:
  - A catastrophe insurance program (US$390 million) in collaboration with the World Bank was introduced to protect government assets.
  - Under the program, a government-owned insurance agency would provide protection against catastrophic risks to the national government and participating local governments; risks would be passed to private international reinsurance companies via competitive bidding with the World Bank as intermediary.
  - The program complements existing natural disaster-related reserves, contingency credit lines, and the central bank’s financial inclusion initiative.

### Policy recommendations on climate and fiscal frameworks
- Continue strategy to plan for climate change; Philippines has been pro-active in investing in adaptation and developing a national policy agenda.
- Explicitly recognize the costs of natural disasters and climate change in macroeconomic frameworks and debt sustainability analyses.
- Maintain prudent fiscal and financial sector policies and buffers to provide flexibility to absorb adverse shocks.
- More resources for climate change adaptation and mitigation are urgently needed, including for boosting production and use of renewable energy.
- Authorities could consider using greenhouse gas emissions pricing—using instruments such as carbon taxes or emissions trading systems.

### The rise and fall in inflation during 2018–19 — overview and drivers
- Inflation path:
  - Inflation rose from 2.9 percent at end-2017 to 6.7 percent in September 2018, then declined to 0.8 percent as of October 2019.
- Model and methodology:
  - A semi-structural dynamic model (a version of the IMF's "Forecasting and Policy Analysis System" (FPAS)-based model) decomposes inflation dynamics into contributions from global oil and food prices, domestic pass-through of commodity prices, monetary policy, growth and inflation in the United States, shocks to aggregate demand, and other cost-push shocks.
  - Model structure includes Phillips curves, a dynamic IS curve, uncovered interest parity, and a version of the Taylor rule; expectations are forward-looking and consistent with model projections.

### Inflation dynamics and key contributors in 2018
- The CPI increased by 5.7 percent from end-2017 to September 2018; food and energy contributed most to the rise.
- Rice, with a weight of 9.6 percent in the CPI basket, increased by 10.2 percent in the first three quarters of 2018.
- Main drivers of the 2018 inflation rise:
  - Global oil prices: Brent rose from an average of US$54 per barrel in 2017 to US$75 per barrel in 2018:Q3, directly and indirectly affecting headline inflation.
  - Domestic food-price shocks: food prices increased by 9.3 percent (annualized) in the first three quarters of 2018; disruptions to domestic rice production and inventories and the excise tax hike on beverages and tobacco (January 2018) contributed.
  - Accommodative monetary policy during 2017-2018:H1: real interest rates were close to or below zero percent during 2017 and 2018:H1; estimated neutral real rate is 1−2 percent.
  - Stronger growth and inflation in the United States contributed to inflation in the Philippines.

### Disinflation in 2018:Q4–2019: main factors
- The decline in inflation during 2018:Q4-2019:Q3 was mainly driven by:
  - Unwinding of domestic food price shocks: contributions of food-related shocks turned negative in 2019 due to decline in domestic rice prices after relaxation of rice import quotas and waning of temporary excise tax impacts.
  - Oil price pass-through: delayed pass-through of earlier oil price increases led to a larger drag on year-on-year inflation in 2019.
  - Tighter monetary policy: policy rate increases from May 2018 to November 2018 totaled 175 basis points; subsequent tightening effects contributed to disinflation, though some positive monetary-policy contribution as of 2019:Q3 reflects lagged effects of prior accommodative policy.
- Monetary policy timeline and related indicators:
  - Monetary Board meets eight times a year.
  - Policy rates increased by 175 basis points from May 2018 to November 2018.
  - Average bank lending rates rose from 6.03 percent in May 2018 to 7.02 percent in December 2018 and 7.42 percent in March 2019.
  - Credit growth to the private sector decelerated from 17.4 percent (y/y) in May 2018 to 9.9 percent (y/y) in March 2019, and 7.6 percent (y/y) in June 2019.
  - In May 2019, the BSP reduced the policy rate by 25 basis points to 4.5 percent; further cuts to 4.25 percent and 4.0 percent followed in August and September 2019, respectively.
- Nonmonetary measures deployed or planned included increasing transfers to low-income families and relaxing the quota on rice imports.

_International Monetary Fund — Philippines country chapter (content unit 1phlea2020002)_

### 12.      The depreciation of peso contributed to rise in inflation moderately during 2018. In a

### 1phlea2020002 - 12.      The depreciation of peso contributed to rise in inflation moderately during 2018. In a

### Exchange rate and recent inflation dynamics
- The depreciation of the peso contributed to a moderate rise in inflation during 2018.
- Counterfactual scenario: with unchanged peso/U.S. dollar rate from end-2017 to 2019:Q2, year-on-year inflation rates could be about 0.6 percent lower at the peak.
- Inflation had risen sharply in 2018:Q3 (7.5 percent q/q, annualized), especially food inflation (11.3 percent, q/q, annualized).

### Baseline forecast (model projections)
- Baseline assumption highlights:
  - Global oil prices (Brent) will remain around US$65 per barrel in the next two years.
  - Food inflation will remain moderate at around 4 percent in 2020−2022.
  - Policy rate will broadly follow the path implied by the model’s Taylor rule.
- Projected path:
  - Inflation rates will temporarily fall below the target band before converging back to the 3 percent mid-point of the target band.
  - Inflation rates (y/y) are projected to decline below the target band in 2019:H2 because of the negative base effect from the sharp increases earlier in 2018.
  - Starting in 2020, inflation is projected to move back to the target band as the base effect wanes.
- Model steady-state assumption:
  - The model assumes a 4 percent nominal interest rate in the steady state (1 percent neutral real interest rate plus 3 percent inflation).

### Monetary policy implications
- The model suggests a broadly neutral monetary policy stance, with the possibility of some moderate loosening, would be appropriate to achieve the inflation target within the usual one- to two-year horizon.
- Baseline projected interest rates: around 3.5−4 percent in 2020.
- Monetary policy should be data-dependent; alternative scenarios can change the appropriate stance.

### Alternative scenarios (effects on projected inflation)
- Higher domestic food inflation:
  - Prices of food items relative to the CPI basket were below trend as of 2019:Q2.
  - A "catch-up" of food prices would imply higher food inflation (around 5 percent annually) versus baseline assumption (4−4.5 percent), raising projected headline inflation.
- Higher oil prices:
  - If oil prices increase to US$70 per barrel in 2019:Q4 (from baseline around $65 per barrel) and stay constant till 2023, the projected inflation path would be generally higher than baseline.
- Lower growth in the United States:
  - Baseline uses IMF’s October 2019 WEO projection for U.S. growth.
  - Alternative: U.S. output levels in 2020−21 are 0.5 percentage points below baseline — projected inflation path would be generally lower.

### Inflation expectations in the model versus surveys (Box 1)
- The model uses "rational" (model-consistent) inflation expectations via the forward-looking Phillips curve.
- Model-consistent expectations rose sharply during 2017:Q4-2018:Q1 and started to decline in 2018:Q4, dynamics likely driven by oil prices and monetary policy.
- Model-consistent expectation is more comparable to business survey-based expectation than to consumer survey-based expectation; consumer surveys are likely more adaptive.

### Credit growth evolution and systemic risks
- Aggregate credit:
  - Bank credit growth decelerated from a peak of 21.1 percent in September 2017 to 10.5 percent in September 2019.
  - Cooling since mid-2018 was pronounced in utilities, wholesale and retail trade, transportation and real estate sectors.
  - Credit-to-GDP ratio remains relatively low at about 50 percent.
- Assessment of credit boom indicators:
  - IMF April 2011 GFSR methodology: early warning signs emerged end-2014 and 2016–early 2018; with moderation since end-2018 the change in the credit-to-GDP ratio is well below the 3 percent threshold.
  - Dell’Ariccia et al. (2012) methodology: credit booms in 1993 and 1995−96; no signal of a credit boom since then except early warnings in 2011, 2014, and 2017.
  - Mendoza and Terrones (2008) approach: no sign of credit boom since 1997−1998, but positive real credit per capita gaps during 2014−2018.
- Conclusion: credit reached near-credit boom levels between 2014 and 2018 but has moderated to trend more recently.

### Real estate credit and vulnerabilities
- Real estate lending:
  - Real estate credit contributed importantly to overall lending growth near 20 percent during 2014–2018.
  - Real estate loans now account for the largest share in total loans outstanding (18 percent).
- Drivers of demand:
  - Rise of Philippines Offshore Gaming Operators (POGO) increased demand for residential and office properties.
  - Dynamic BPO industry and sustained residential housing demand also important.
- Loan quality and prices:
  - As of end-2018:Q2, NPL ratios for real estate loans were at record low levels after a steady decline.
  - Residential loan NPL ratio remained relatively stable while commercial real estate NPL ratio continued decreasing.
  - House price increases in 2018 were broadly similar to 2017 despite slowdown in real estate credit growth.
  - Alternative price series (RREPI) through 2019:H1 indicates aggregate house prices variation was 0.4 percent y/y in 2019:Q2, with duplexes, condominium units and townhouses up by 12.5 percent, 9.6 percent and 4.3 percent respectively in 2019:Q2, and single detached/attached houses down by 4.2 percent.
- Possible nonbank financing:
  - High demand from POGO may not involve domestic bank credit, and shadow-banking activities by real estate developers could increase indirect bank exposure.
- Prudential policy response:
  - BSP measures include Basel III Liquidity and Net Stable Funding Ratios, a countercyclical capital buffer (CCyB) not yet activated, the Real Estate Stress Test (REST), real estate sectoral exposure limits, and mortgage collateral value limits.
  - A prudential measure requiring submission of a new Report on Project Finance Exposures of real estate loans was implemented in June 2018, complementing a real estate lending cap at 20 percent of TLP.

### Consumer loans and credit cards
- Credit card receivables (CCRs):
  - CCR growth accelerated to a peak of 26.1 percent (y/y) in 2019:Q2.
  - Growth in consumer loans and total bank loans slowed to rates close to 10 percent.
  - CCRs saw deterioration in loan quality, with related NPLs increasing by 21.4 percent in 2019:Q2, higher than increases in CLs and TLPs, and higher than the 18.2 percent increase recorded in the previous quarter.
- Implication: rapidly increasing CCRs with relatively high NPLs warrant closer monitoring.

### Conclusions and policy recommendations
- Current assessment:
  - Systemic financial stability risks related to bank credit are currently contained, though risks in higher-risk sectors (including real estate) warrant close attention.
  - No credit booms detected after 1990s, but early warning signals were found between 2014 and early 2018.
  - Data gaps between official data and actual lending from formal and informal institutions hinder broader systemic assessments.
- Recommended preparedness and measures:
  - Prepare a strategy for proactive macroprudential intervention in case high credit growth resumes.
  - Timely activation of the CCyB should be considered once risks of broad-based rapid credit growth reemerge.
  - If risks are sector-specific, targeted measures such as loan-to-value and debt-to-income caps would be preferable as complementary instruments to better target housing-related loan demand and address systemic risks effectively.

*Source: IMF staff (content from the provided chapter).*

### Box 1. Financial and Market Development in the Philippines (Concluded)

### Box 1. Financial and Market Development in the Philippines (Concluded)

### Construction of the Financial Development Index
- Financial Institutions — Depth indicators:
  - Private-sector credit (% of GDP)
  - Pension fund asset (% of GDP)
  - Mutual fund asset (% of GDP)
  - Insurance premiums, life and non-life (% of GDP)
- Financial Markets — Depth indicators:
  - Stock market capitalization to GDP
  - Stocks traded to GDP
  - International Debt securities government (% of GDP)
  - Total debt securities of nonfinancial corporations (% of GDP)
  - Total debt securities of financial corporation (% of GDP)
- Financial Institutions — Access indicators:
  - Branches (commercial banks) per 100,000 adults
  - ATMs per 100,000 adults
- Financial Markets — Access indicators:
  - Percent of market capitalization outside of top 10 largest companies
  - Total number of issuers of debt (domestic and external, nonfinancial corporations, and financial corporations)
- Financial Institutions — Efficiency indicators:
  - Net interest margin
  - Lending-deposits spread
  - Non-interest income to total income
  - Overhead costs to total assets
  - Return on assets
  - Return on equity
- Financial Markets — Efficiency indicator:
  - Stock market turnover ratio (stocks traded/capitalization)

### Macroprudential Policy Measures in the Philippines
- Broad-based tools (applicable to banking sector and in some cases to investment firms):
  - Countercyclical capital buffer (CCyB)
    - Status: Yes
    - Description: "The CCyB is was adopted on December 6, 2018, but it was set initially at a buffer of zero percent subject to upward adjustment to a rate determined by the Monetary Board when systemic conditions warrant but not to exceed two and a half percent (2.5%). Any increase in the CCyB rate shall be effective 12 months after its announcement. Decreases shall be effective immediately. The mechanism to operationalize the CCyB, including the decision-making framework, is not yet in place."
    - Reference: BSP Circular No. 1024 of December 06, 2019
  - Capital conservation buffer (CCB)
    - Status: Yes
    - Description: "A capital conservation buffer (CCB) of 2.5% composed of Common Equity Tier 1 (CET1) capital has been effective since January 1, 2014."
    - Reference: BSP Circular No. 781 of January 15, 2013
  - Limit on leverage ratio
    - Status: Yes
    - Description: "A 5.0% minimum leverage ratio was implemented starting from July 1, 2018. The Basel III Leverage Ratio monitoring period was extended to June 30, 2018, and migration from monitoring to a Pillar 1 minimum requirement starting July 1, 2018."
    - Reference: BSP Circular No. 990 of January 22, 2018
  - Cap on Credit Growth
    - Status: No
  - Other broad-based measures to increase resilience or address risks from broad-based credit booms
    - Status: Yes
    - Description:
      - "A Real Estate Loan limit of 20% of a bank’s total loan portfolio, with certain exclusions, is in place since February 4, 2008."
      - "Real Estate Stress Test Limit (REST) limits are 10% of the CAR and 6% of CET1 after adjusting for a stress scenario resulting in a 25% write-off rate on real estate exposures and real and other properties acquired. REST limits took effect in July 2014."
      - "The bank uniform stress testing program started end-June 2014."
      - "Report granular information on their real estate loans to mid- and high-end housing units; residential real estate price index; commercial real estate loans and a new Report on Project Finance Exposures including type of infrastructure project and project phase. The new report was implemented on June 30, 2018."
    - References: BSP Circular No. 600 of February 04, 2008 (took effect February 24, 2008); BSP Circular No. 839 of June 27, 2014; Memorandum No. M-2012-046 September 21, 2012; Memorandum No. M-2014-032 of August 11, 2014; Circular No. 976 of October 10, 2017

- Household sector tools:
  - Household sector capital requirement: No
  - Cap on loan-to-value ratio: No
  - Cap on debt-service to income ratio: No
  - Cap on household credit growth: No
  - Fiscal measures to contain systemic risks: No

- Corporate sector tools:
  - Corporate sector capital requirement: No
  - Loans/eligibility restrictions: No
  - Exposure caps on corporate credit: Yes
    - Description: "Real estate loans for commercial properties cannot exceed 20% of total loan portfolio."
    - Reference: BSP Circular No. 600 of February 04, 2008 (took effect February 24, 2008)

- Liquidity tools (banking sector):
  - Liquidity Coverage Ratio (LCR)
    - Status: Yes
    - Description: "Starting in January 1, 2019, universal and commercial banks are required to maintain LCR on solo and consolidated basis of at least 90% and 100%. The subsidiary banks and QBs will be subject to a minimum LCR of 100% from January 01, 2020 onwards (70% during observation period). The stand-alone TBs, RBs, CBs, and QBs, on the other hand, will be subject to a Minimum Liquidity Ratio (MLR) of 20% by January 1, 2019."
    - References: BSP Circular No. 905 of March 10, 2016; BSP Circular No. 996 of February 08, 2018; BSP Circular No. 1035 of March 15, 2019
  - Net Stable Funding Ratio (NSFR)
    - Status: Yes
    - Description: "Universal and commercial banks, including their subsidiary banks and quasi banks, are required to comply with an NSFR of 100% on an ongoing basis from January 1, 2019 (70% during the observation period)."
    - References: BSP Circular No. 1007 of June 6, 2018; BSP Circular No. 1034 of March 15, 2019
  - Net open foreign exchange positions
    - Status: Yes
    - Description: "Since March 8, 2007, bank’s allowable Net Open Foreign Exchange Position (either overbought or oversold) shall be the lower of 20% of their unimpaired capital or US$50 million. Banks shall submit a report on the daily consolidated foreign exchange position."
    - Reference: Circular No. 561 of March 8, 2007
  - Foreign exchange swaps or derivative positions
    - Status: Yes
    - Description: "Limits and higher risk weights on Non-Deliverable Forward (NDF) were imposed in 2011-13 to curb speculative attacks on the Philippine Peso by raising capital charge from 10% to 15% and limits of 20% and 100% of unimpaired capital for domestic banks and foreign bank branches on a bank’s gross exposures to peso NDF transactions."
    - References: BSP Circular No. 740 of November 16, 2011; BSP Circular No. 790 of March 06, 2013
  - Other measures to mitigate systemic liquidity risks
    - Status: Yes
    - Description: "The BSP issued Circular No. 1014 (published on 27 September 2018, effective 12 October 2018) on the Currency Rate Risk Protection Program (CRPP) and Circular No. 1015 (published on 9 October 2018, effective 24 October 2018) on the implementation guidelines of the CRPP. The CRPP Facility was enhanced to ease the demand pressures in the foreign exchange spot market."
    - References: BSP Circular 1014 of September 24, 2018; BSP Circular 1015 of October 05, 2018

- Tools for systemic liquidity risk and nonbank sector:
  - Asset management industry: No
  - Pension funds: No
  - Insurance companies: No

- Tools for SIIs and Interconnectedness:
  - Capital surcharges for systemically important institutions (SIIs)
    - Status: Yes
    - Description: "Higher loss absorbency (HLA) requirement (additional CET1 requirement ranging from 1.5% to 2.5%) for identified D-SIBs. The requirements shall be phased-in from January 1, 2017 with full implementation by January 1, 2019."
    - References: BSP Circular No. 856 of October 29, 2014; Circular No. 904 of March 19, 2016

- Note: "In addition to these MPMs, the Philippines has extensive capital flow management (CFM) measures on FX transactions and borrowings—mostly to banks. For instance, banks have to obtain a separate license to handle FX transactions, and their access to non-deliverable forwards (NDFs) are constrained. However, many of the CFM measures do not apply for NBFIs and nonfinancial corporations as well as transactions in cash or in foreign soil (that are not repatriated), which led to developing substantial and efficient informal FX and derivatives markets that are even larger than formal markets."

### Corporate Leverage in the Philippines — A Concern?
- Key findings and data:
  - Dataset: Novel firm-level dataset from S&P’s Capital IQ covering over 160 listed and nonlisted nonfinancial firms in the Philippines during 2014–2018; includes currency of debt and instrument type.
  - Trend: "Nonfinancial corporate leverage in the Philippines has steadily increased since 2010."
  - Median leverage: "Increased by 2 percentage points in the Philippines since 2014."
  - Regional standing: Philippine firms’ median leverage "stands among the highest in the region as of end-2018."
  - Alternative leverage measure: Net debt to earnings ratio — Philippine firms have the highest median leverage in the sample at "265 percent."
  - Firm-size and sector patterns:
    - Larger firms and "Medium" firms (assets between the 40th and 60th quintile in the sample) have average leverage ratios above 30 percent.
    - Most leveraged sectors: utilities and mining/energy, followed by manufacturing and real estate (real estate includes construction).
    - Mining/energy showed the largest increase in leverage over the last five years.
  - Dynamics by initial leverage: Firms with initial leverage 30 percent or below in 2014 tended to increase leverage; high-leverage firms generally reduced leverage.
  - Foreign currency debt:
    - Average share of debt in foreign currencies as of end-2018: "about 17 percent" (2014: "19 percent").
    - Currency composition of foreign debt: "86.5 percent" U.S. dollars; "2.7 percent" Japanese Yen.
    - Instrument composition of foreign debt: "79.1 percent" bank loans; "13.6 percent" bonds and notes; remainder in other instruments (e.g., capital lease).
    - Foreign currency debt share higher among larger firms and firms in utilities, mining/energy, and manufacturing.
  - Debt maturity and liquidity:
    - "As of end-2018, Philippine firms had on average about three thirds of their outstanding debt with a maturity of over one year."
    - Quick ratio (liquid assets-to-liquid debt) is comparable to regional peers.
  - Investment and profitability:
    - Firms that increased leverage during 2014–2018 did not significantly increase investment relative to assets.
    - Profitability (return on assets) declined.
    - Supply-side credit expansion averaged "16.8 percent" over this period and may have driven the leverage increase.

- Solvency and debt-service capacity:
  - Measure: Interest Coverage Ratio (ICR) = EBIT / interest expenses. High debt service burden defined as ICR < 2.
  - 2018 observations:
    - "About 41 percent of Philippine firms used more than one third of their EBIT to make interest payments."
    - "7 percent of them spending more than half of their EBIT on interests."
    - Earnings rose "22 percent" in 2018, but interest payments rose "38 percent" from 2017 (due to higher market interest rates and exchange rate depreciation).
  - Leverage vs ICR:
    - Firms above median leverage have average ICR of "2.7"; those below median leverage have average ICR of "3.5".
    - Larger firms, despite being more leveraged, often have higher debt service capacity; however, some large firms used more than one third of earnings for interest payments.
  - Sectoral vulnerability:
    - Mining and energy: "14 percent" of sector’s total debt held by firms with ICR < 2.
    - Utilities: "34 percent" of sector’s total debt held by firms with ICR < 2.
    - Sample shares: mining and energy "5 percent" of sample debt; utilities "16 percent" of sample debt.
  - FX exposure grouping:
    - Firms classified by net FX valuation gains/losses into "Exposed" (net FX valuation loss on depreciation) and "Hedged" (net FX valuation gains on depreciation).
    - "In 2018, about 84 percent of total sample debt was held by 'Exposed' firms in the Philippines," a higher share than in other major EM economies in the region.

- Illustrative stress tests:
  - Framework: Shocks applied to interest expenses, net FX valuation loss, and operating income; shock sizes match changes between 2007–2008 and 2012–2013 and are applied to 2018 benchmark levels for each firm.
  - Scenario I:
    - Only negative shock: exchange rate shock
    - Net FX loss: average increase of "182 percent" from the 2018 level
    - Macro equivalent: "equivalent to 0.4 percent of 2018 GDP"
    - Interest expenses: assumed to decline slightly on average
  - Scenario II:
    - Operating income: assumed decline of "3.9 percent"
    - Net FX loss: average increase of "156 percent"
    - Interest expenses: assumed to decline slightly on average

*International Monetary Fund — Box 1. Financial and Market Development in the Philippines (Concluded)*

### 17.      The stress scenarios differ markedly in terms of the impacts on the earnings

### 17.      The stress scenarios differ markedly in terms of the impacts on the earnings

### Stress scenario impacts on earnings distribution
- Scenario I:
  - Negative earnings shock is largely concentrated among large firms, especially in utilities.
  - Features only exchange rate shocks; decline in EBIT is largest among large firms and in utilities.
- Scenario II:
  - Negative earnings shock is more evenly distributed across firm sizes and sectors.
- Rationale:
  - The distributional differences reflect scenario shock composition; firms with the highest shares of foreign currency-denominated debt (notably large firms and utilities) are most affected by exchange rate shocks.

### Firm balance sheet resilience (findings)
- Overall assessment:
  - Philippine firms’ balance sheets are sufficiently healthy to absorb large adverse shocks in the short term.
- Key statistics (ICR = interest coverage ratio):
  - Benchmark level in 2018: 7.1 percent (share of total debt held by firms with ICR less than 2).
  - Under Scenario I: rises to 8.4 percent.
  - Under Scenario II: rises to 11.7 percent.
  - Median level during 2009−2018: 7.9 percent.
- Relative impact of shock types on EBIT:
  - Largest impact: negative shock to firms’ operating income.
  - Next largest: interest rate shock.
  - Smallest among the three: exchange rate shock (in terms of impact ranking on EBIT).

### Bank balance sheet implications
- Assumption: 10 percent of firms with ICR less than 2 default on their debt.
- Resulting average gross NPL ratio among commercial and universal banks:
  - Under Scenario I: expected to rise to 2.7 percent.
  - Under Scenario II: expected to rise to 3 percent.
  - Comparison point: end-May 2019 level of 2.2 percent.
  - Historical comparison: these NPL ratios are comparable to levels observed in 2014.
- Capital buffers:
  - Philippine banks have ample capital buffers (above 15 percent of risk-weighted assets on average), implying shocks appear manageable given current capitalization.

### Caveats and limitations
- Household sector vulnerability is not considered; household distress could add pressures on banks’ balance sheets under stress scenarios.
- Higher average leverage ratio in 2018 implies potential nonlinearity: balance sheet impacts from negative macroeconomic shocks could be nonlinear, leading to disproportionately larger losses compared to past stress episodes.
- Tests do not assess potential negative impacts on firms’ real activities, especially investment.
  - Empirical evidence: a robust negative relationship exists between leverage and investment (IMF, 2015), which should be considered when evaluating broader macroeconomic vulnerability.

### Policy implications (recommendations)
- Short run / near term:
  - Consider targeted macro-prudential measures to contain further increases in leverage in some sectors.
  - Strengthen corporate insolvency regimes pre-emptively to prepare for a potential increase in corporate failures.
- Long run:
  - Promote domestic financial market development to reduce exposure to exchange rate fluctuations.
  - Rationale: firms in developed financial markets carry less unhedged dollar debt; domestic market development can improve access to hedging instruments and reduce unhedged external borrowing.

### Data, methodology, and sample (Appendix I highlights)
- Data source:
  - Corporate balance sheet database provided by Capital IQ, S&P Global Market Intelligence.
  - Debt Capital Structure database provides principal amount due, currency of denomination, and instrument type.
- Sample construction and cleaning rules (selected thresholds preserved exactly):
  - Drop firm-year observations where difference between sum of total liabilities and equity and total assets is greater than US$10,000.
  - Drop firm-year observations where cash and cash equivalents and tangible assets are greater than total assets, respectively.
  - Drop any firm with a negative value for total assets in any year.
  - Drop firm-year observations where difference between sum of due amounts for individual debt instruments and the total principal due outstanding is greater than US$100,000.
  - Drop firm-year observations where outstanding debt denominated in individual currencies exceeds the total debt.
  - Exclude all firms that do not carry any outstanding debt.
- Final sample:
  - Total of 164 firms over the period of 2014−2018 (160 listed and 4 non-listed).
  - The total market capitalization of listed sample firms accounts for 77 percent of the Philippine Stock Exchange’s market capitalization (US$258 billion as of end-2018).
- Balance sheet exposure measurement:
  - Uses net FX translation gains in firms’ income statements (reported as part of nonoperating income / “FX translation gains or loss”).
  - Illustrative example (San Miguel Corporation’s 2017 Annual Report):
    - One-peso increase (depreciation) against the U.S. dollar in 2018 would:
      - Increase income from revaluation of foreign currency-denominated assets by P 2,403.
      - Increase loss from foreign currency-denominated liabilities by P 5,885.
      - Imply net valuation loss of P 3,482, indicating more unhedged foreign currency liabilities than assets for that company.

*PHILIPPINES  INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020002.pdf_