## 1. Major Policy Responses to COVID-19 in the Philippines, 2020‒21

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### Context and pandemic trade-offs
- Pre-pandemic: Philippines among best performing in region with reforms and prudent macro policies; authorities’ agenda focused on infrastructure, education, and health.
- Early stringent containment delayed transmission, but continued severe restrictions were required due to:
  - health sector capacity constraints;
  - large informal sector;
  - high population density;
  - transportation bottlenecks, notably in Metro Manila.

### Economic impact, inflation, and outlook
- Real GDP and growth:
  - Real GDP declined by 9.6 percent in 2020.
  - Moderate recovery began in 2020:Q3 supported by easing containment and policy stimulus.
  - Recovery projected to strengthen in H2 2021 and in 2022.
  - Output gap expected to close in 2023.
  - Medium-term growth forecast to return to 6.5 percent by 2024.
  - Real GDP level in 2025 projected to be 15 percent below that in the January 2020 WEO pre-COVID-19.
- Inflation:
  - CPI inflation rose in Q4 2020 due to food supply shocks and transportation restrictions.
  - Headline CPI averaged 4.4 percent through June 2021 (authorities’ target band: 2 to 4 percent).
  - Headline inflation expected to decrease to 3.3 percent by end-2021.
- External and current account:
  - Current account turned from a deficit of US$3 billion in 2019 to a surplus of US$13 billion (3.6 percent of GDP) in 2020, largely reflecting import compression.
  - Current account projected to narrow to 0.4 percent of GDP in 2021 and stabilize at a deficit of 1.8 percent over the medium term.

### Major policy responses (fiscal, monetary, financial)
- Fiscal measures:
  - Two stimulus packages (Bayanihan Acts I and II) in 2020.
  - CREATE tax reform package approved in March 2021, with accelerated reduction of corporate income tax rates.
  - Direct budgetary support amounted to 4.4 percent of 2020 GDP.
  - Below-the-line measures (mainly credit guarantees) amounted to about 0.6 percent of 2020 GDP.
  - 2021 fiscal program (May 2021 update): budget deficit projected to increase by 2 percentage points to 9.6 percent of GDP, implying a fiscal impulse of 2.4 percent; national government infrastructure spending rises by 11.7 percent, total infrastructure program increases by 17 percent.
- Monetary and FX measures:
  - BSP cut policy rate by a cumulative 200 basis points in 2020 and reduced reserve requirement ratio by 200 basis points to 12 percent.
  - BSP conducted secondary market purchases of government securities and provided direct advances to the Bureau of the Treasury.
  - Real policy rate around −1½ percent in 2020 context; neutral policy rate assessed in 2018 to be in the range of 1−2 percent.
  - Peso appreciated in real effective terms through much of 2020; gross reserves at end-2020: US$110.1 billion (about 30 percent of GDP).
- Financial sector measures:
  - Liquidity injections boosted bank funding; higher net savings supported deposits.
  - Credit support measures (credit guarantees, FIST law) introduced to facilitate NPAs disposal and MSME support.

### Fiscal outturn, debt dynamics, and fiscal space
- 2020 fiscal outturn:
  - Revenue collection was 13 percent higher than projected in the revised mid-2020 budget.
  - Total expenditure was about 2.5 percent less than programmed.
  - Disbursements for Bayanihan I were about 88 percent of allotments or 95 percent of obligations.
  - Total infrastructure spending exceeded the programmed amount under Build, Build, Build.
- Debt and projections:
  - General gross public debt-to-GDP estimated to have increased to about 52 percent of GDP by end-2020 (from 37 percent at end-2019).
  - Staff baseline: general government gross debt would peak at about 62 percent of GDP in 2024 (just above government’s indicative cap of 60 percent).
  - Gross financing needs projected to average about 13.7 percent of GDP in 2021−23, then fall below 12 percent in the medium term.
  - Public debt vulnerable primarily to a growth shock, followed by real interest rate and primary balance shocks.
  - MAC DSA threshold of 70 percent noted as indicating higher risk of debt distress for emerging markets above that level.

### Financial sector conditions and risks
- Asset quality and capital:
  - Overall CAR increased to 16.6 percent as of 2021:Q1; Tier 1 CAR increased to 15.7 percent as of 2021:Q1.
  - NPLs rose to 4.4 percent of total loans in April 2021 (twice end-2019 level).
  - Loans at risk (NPLs plus performing restructured loans) increased to 6.0 percent of total loans (2.2 percent at end-2019).
  - BSP projects NPL ratio to rise to 6 percent by end-2021.
- Credit and lending:
  - Private sector credit declined; outstanding bank loans fell in late 2020 with sharp contractions in car loans and credit card debt.
  - Banks likely to remain risk averse and apply tight lending standards for some time.
  - Loans under regulatory relief accounted for about 3 percent of total NPLs as of end-September 2020.
- Regulatory forbearance and recommended measures:
  - Forbearance included delayed NPL recognition (until December 2021) and staggered provisioning (over up to five years, subject to BSP approval).
  - Recommendations: phase out forbearance as scheduled; limit dividend distributions for banks using forbearance; encourage proactive provisioning; allow temporary use of capital conservation buffers for sufficiently provisioned banks.
  - Accelerate implementation of credit guarantee program and operationalize FIST for timely disposal of NPAs.
- AML/CFT and bank secrecy:
  - Urgent strengthening of AML/CFT implementation recommended; amend bank secrecy laws to improve access to depositor information and beneficial ownership transparency.
  - Addressing deficiencies would support exit from FATF monitoring and reduce adverse impacts on remittances and investment.

### Fiscal transparency, procurement, and public investment management
- Transparency measures:
  - Public consultations; regular reporting to Congress; web publication of allotment releases for COVID-19 measures.
  - Simplified procurement rules for emergencies with a mandate to post contracts online.
  - Recommendation: include beneficial ownership information of awarded companies in COVID-19 spending publications.
- Public investment:
  - Infrastructure push continued; digitalization of procurement information enhanced; remaining step: launch modernized Philippine Government Electronic Procurement System.

### Vaccination program and risks
- Vaccination:
  - Authorities aim to secure 173 million doses in 2021 to meet target of inoculating 70 percent of the country's target population.
  - Program in early phase with significantly higher supplies scheduled to arrive in H2 2021.
- Risks:
  - Near-term risks tilted to the downside: virus resurgence, delays in vaccine rollout, deeper macro-financial legacy if bank asset quality problems emerge post-forbearance, inclusion in FATF list affecting flows, spillovers from rising U.S. yields.
  - Upside scenario: faster easing of quarantine with faster vaccination and containment leading to faster recovery and reduced scarring.

### Structural policies and inclusion
- Key structural reforms:
  - Implement ease of doing business reforms and CREATE Law to support MSMEs and investment.
  - Easing restrictions on FDI via Public Service Act, Amendments to the Foreign Investments Act, and Retail Trade Liberalization Act seen as critical.
  - Digitalization of public services and improving digital/physical connectivity across the archipelago emphasized.
- Social inclusion and climate:
  - Rollout of National ID to support targeting and service delivery; goal to register 50 million citizens by end-2021.
  - Increase spending on education, health, social protection; Nationally Determined Contribution: reduce emissions by 75 percent by 2030 vs business-as-usual baseline.
  - Renewable energy target: 35 percent by 2030.

### Labor market impact (Appendix I)
- Employment dynamics:
  - Employment fell to 45.9 percent in 2020:Q2 and rose to 55.8 percent in 2020:Q3 (3 percentage points below pre-pandemic level).
  - Unemployment remained twice pre-pandemic level even as non-participation recovered in 2020:Q3.
- Job separation and finding rates:
  - Non-agricultural workers’ job separation rate quadrupled year-on-year in 2020:Q2 and reached 0.21.
  - Job finding rates rebounded more in non-agriculture than in agriculture in 2020:Q3, notably in construction and trade and repair.
- Regional and demographic heterogeneity:
  - Largest year-on-year increases in non-agricultural job separation rates in 2020:Q2:
    - Zamboanga Peninsula: 1,336 percent
    - Bangsamoro ARMM: 992 percent
    - Cordillera Administrative Region: 784 percent
  - Metro Manila: job separation rate for non-agricultural workers tripled year-on-year in 2020:Q2.
  - Young and less educated non-agricultural workers experienced higher separation; middle-aged and educated workers recovered faster.

### Key policy recommendations and priorities
- Fiscal policy:
  - Sustain 2021 expansionary stance to nurture recovery while maintaining flexibility to meet additional health, vaccine, short-term support, and social protection needs.
  - Adopt a medium-term fiscal strategy to rebuild fiscal space considering economic scarring, revenue impact of CREATE, and Mandanas ruling.
  - Potential fiscal consolidation measures: strengthen revenue administration, reduce tax exemptions and loopholes, tax the digital economy, improve expenditure control and efficiency, strengthen LGU capacity as fiscal devolution is implemented.
- Monetary policy and FX:
  - Monetary policy should remain supportive under baseline; stand ready to adjust if inflation becomes entrenched.
  - Communication of exit sequencing recommended; terminate direct budgetary financing through BSP advances as first step in normalization.
  - Further foreign reserve accumulation not warranted; recommend publishing FX intervention data with lags and aggregation to enhance transparency.
- Financial sector:
  - Phase out regulatory forbearance as scheduled; limit dividends for banks using forbearance; accelerate credit guarantee implementation; implement FIST effectively.
  - Strengthen macroprudential toolkit (operationalize CCyB, consider targeted measures like debt-to-income caps), bank resolution framework, and conglomerate supervision.
  - Urgent AML/CFT reforms and amendments to bank secrecy laws to support FATF exit and financial stability.
- Structural reforms and capacity development:
  - Advance reforms on FDI restrictions, digitalization, PFM at LGU level, public investment management, GOCC oversight, and National ID rollout.
  - IMF capacity development priorities: monetary communication, bank resolution/crisis management, debt management and capital market development, revenue mobilization and PFM, fintech/payments and CBDC considerations, and targeted AML/CFT assistance.

### Selected quantitative indicators (as cited)
- Real GDP decline in 2020: 9.6 percent.
- Headline CPI averaged through June 2021: 4.4 percent.
- Headline inflation expected end-2021: 3.3 percent.
- Output gap expected to close: 2023.
- Medium-term growth target: 6.5 percent by 2024.
- Real GDP level in 2025 projected to be 15 percent below January 2020 WEO pre-COVID-19.
- Direct budgetary support in 2020: 4.4 percent of 2020 GDP.
- Below-the-line measures in 2020: about 0.6 percent of 2020 GDP.
- 2021 projected budget deficit: 9.6 percent of GDP (May 2021 program).
- Fiscal impulse implied for 2021: 2.4 percent.
- Infrastructure spending by national government rises by 11.7 percent; total infrastructure program increases by 17 percent.
- General gross public debt-to-GDP: about 52 percent as of end-2020 (from 37 percent at end-2019).
- Staff baseline peak general government gross debt: about 62 percent of GDP in 2024.
- Gross reserves at end-2020: US$110.1 billion (about 30 percent of GDP); end-2019: US$87.8 billion.
- Reserves at end-2020: about 12.6 months of imports, or about 237 percent of the IMF’s reserve adequacy metric.
- REER Index implied gap in 2020: 11 percent; EBA REER level models implied gap in 2020: 17.0 percent; CA model (with COVID-19 adjustors) implied gap of −11 percent.
- Bank capital ratios as of 2021:Q1: CAR 16.6 percent; Tier 1 CAR 15.7 percent.
- NPLs in April 2021: 4.4 percent of total loans; loans at risk: 6.0 percent of total loans.
- BSP policy rate cuts in 2020: cumulative 200 basis points; reserve requirement ratio cut by 200 basis points to 12 percent.
- PhilGuarantee additional capital under Bayanihan II: PHP 5 billion (PHP 2 billion for MSMEs; PHP 2 billion for housing; PHP 1 billion for large corporations).
- Potential loan guarantee support from PhilGuarantee: about PHP 100 billion (0.5 percent of 2021 GDP).
- MCGP launched: December 2020; provides 50 percent loan guarantee.
- PhilGuarantee operations start date: September 1, 2019.
- As of end-March 2021: loan guarantees to 12,122 MSMEs approved; guarantees covered loans of PHP 1.5 billion.
- FIST law passed: February 2021; implementing rules promulgated March 26, 2021; eligible NPAs cutoff date: December 31, 2022.
- National digital ID registration goal: 50 million citizens by end-2021.
- Emissions reduction aim: 75 percent by 2030 vs business-as-usual baseline.
- Renewable energy target: 35 percent by 2030.
- Vaccination procurement target for 2021: 173 million doses to inoculate 70 percent of the country's target population.

*Source: 1. Major Policy Responses to COVID-19 in the Philippines, 2020‒21 (IMF staff report content).*

### 1. Major Policy Responses to COVID-19 in the Philippines, 2020‒21 ____________________________ 6

### 1. Major Policy Responses to COVID-19 in the Philippines, 2020‒21

### Context and pandemic trade-offs
- Before the pandemic, the Philippines was one of the best performing economies in the region, with reforms and prudent macroeconomic policies supporting strong growth and containing external and macro-financial vulnerabilities.
- The authorities’ socioeconomic agenda focused on infrastructure, education, and health.
- Early, stringent containment measures delayed domestic coronavirus transmission, but pandemic control required continued, comparatively severe restrictions due to structural factors including health sector capacity constraints, a large informal sector, high population density, and transportation bottlenecks, notably in Metro Manila.

### Economic impact and inflation
- Real GDP declined by 9.6 percent in 2020, driven by a contraction in the first half of the year.
- A moderate recovery began in 2020:Q3, supported by easing containment measures and policy stimulus.
- CPI inflation started increasing in the last quarter of 2020 due primarily to food supply shocks and pandemic-related transportation supply restrictions.
- Headline CPI averaged 4.4 percent through June 2021, above the authorities’ target band of 2 to 4 percent.
- Headline inflation is expected to decrease to 3.3 percent by end-2021 as recent food price effects taper off and transportation capacity increases.

### Sectoral and demand-side effects
- Contact-intensive services were hit hard, but construction and manufacturing also suffered.
- Gross fixed capital formation, including public investment, retreated sharply, producing a sharp import contraction and a positive contribution of net exports to growth.
- The pandemic’s economic scarring is expected to persist:
  - Output gap expected to close in 2023.
  - Medium-term growth forecast to return to the pre-pandemic rate of 6.5 percent by 2024.
  - Real GDP level in 2025 projected to be 15 percent below that in the January 2020 WEO pre-COVID-19.

### Major policy responses (fiscal, monetary, financial)
- The authorities implemented a comprehensive package including fiscal, monetary, and financial measures.
- Fiscal support highlights:
  - Two stimulus packages (Bayanihan Acts I and II) in 2020.
  - The CREATE tax reform package (Corporate Recovery and Tax Incentives for Enterprises Act) approved in March 2021, including an accelerated reduction of corporate income tax rates compared to earlier plans.
  - Direct budgetary support amounted to 4.4 percent of 2020 GDP.
  - Below-the-line measures (mainly credit guarantees) amounted to about 0.6 percent of 2020 GDP.
- Monetary and financial measures:
  - BSP policy rate cuts and liquidity injections boosted bank funding.
  - Higher net savings of households and firms supported deposits and funding.
  - Policy discussions stressed sustained accommodative monetary policy to support recovery.

### Financial sector conditions and risks
- Private sector credit declined, with outstanding bank loans falling in late 2020, led by sharp contractions in car loans and credit card debt.
- Bank capitalization and asset quality:
  - Overall CAR increased to 16.6 percent as of 2021:Q1.
  - Tier 1 CAR increased to 15.7 percent as of 2021:Q1.
  - Nonperforming loans (NPLs) rose to 4.4 percent of total loans in April 2021, twice the level at end-2019.
  - Loans at risk (nonperforming plus performing restructured loans) increased to 6.0 percent of total loans, compared to 2.2 percent at end-2019.
  - Increased delinquencies in household consumption and real estate loans accounted for the bulk of rising NPLs.
- Financial market conditions:
  - After a brief volatility in March 2020, conditions remained broadly favorable.
  - The peso appreciated with a large balance of payment surplus.
  - Equities and bond portfolio flows reverted to net inflows in September 2020 after large outflows at the pandemic onset.
  - Domestic corporates increased local currency bond issuance markedly in 2020:Q3.
  - Foreign bank funding of the government and domestic banks increased substantially in 2020:Q4.

### Fiscal outturn, 2020 and 2021 stance
- The 2020 fiscal outturn was better than programmed in the revised mid-2020 budget, mainly due to revenue overperformance:
  - Revenue collection was 13 percent higher than projected.
  - Total expenditure was about 2.5 percent less than programmed.
  - Disbursements for the COVID-19 response under Bayanihan I were about 88 percent of the allotments or 95 percent of obligations.
  - Total infrastructure spending exceeded the programmed amount under Build, Build, Build.
- 2021 fiscal program and stance:
  - The authorities envisaged an expansionary fiscal stance in 2021 to support recovery, including higher infrastructure spending.
  - Under the updated fiscal program of May 2021:
    - Budget deficit projected to increase by 2 percentage points to 9.6 percent of GDP.
    - Implies a fiscal impulse of 2.4 percent.
    - Spending on infrastructure projects by the national government rises by 11.7 percent, with the total infrastructure program increasing by 17 percent.
  - The program was enhanced through carryover of unused 2020 budget and Bayanihan II appropriations.
  - The 2021 budget also provides for higher spending on health care, including new health programs to tackle the pandemic, and social protection.
- Fiscal space and debt dynamics:
  - General gross public debt-to-GDP ratio is estimated to have increased to about 52 percent of GDP by year-end 2020 (from 37 percent at end-2019).
  - Under staff’s baseline, general government gross debt would peak at about 62 percent of GDP in 2024, just above the government’s indicative cap of 60 percent.
  - Debt sustainability analysis suggests the Philippines still has some fiscal space.
  - The MAC DSA threshold of 70 percent is noted as an indicator that emerging market economies above this threshold are more likely to face debt distress.

### Vaccination, outlook, and projections
- Authorities aim to secure 173 million doses of vaccine in 2021 to meet the target of inoculating 70 percent of the country's target population.
- The vaccination program is in an early phase, with significantly higher supplies scheduled to arrive in the second half of 2021.
- Economic outlook:
  - Recovery projected to strengthen in H2 2021 and in 2022, underpinned by greater mobility and reopening, continued policy support including infrastructure and accommodative monetary policy, and improved global growth.
  - Headline inflation expected to decrease to 3.3 percent by end-2021.
  - Output gap expected to close in 2023.
  - Medium-term growth forecast to return to 6.5 percent by 2024.
  - Real GDP in 2025 projected to be 15 percent below the January 2020 WEO pre-COVID-19 level.

### Risks, spillovers, and external assessment
- Near-term risks are larger than usual and tilted to the downside due to pandemic and vaccine rollout uncertainty.
- Downside risks include:
  - Virus resurgence until sufficient vaccination is achieved; delays in vaccine rollout.
  - Macro-financial legacy could be deeper if bank asset quality problems emerge after forbearance measures are unwound.
  - Inclusion in FATF’s list due to AML/CFT deficiencies could adversely affect cross-border financial flows.
  - Spillovers from rising U.S. yields could steepen the domestic yield curve and tighten domestic credit conditions.
- Upside scenario:
  - Faster easing of quarantine measures with effective containment and faster vaccination progress could lead to a faster recovery.
  - More support for affected businesses and households and acceleration of structural reforms could reduce scarring.
- External position:
  - Current account turned from a deficit of US$3 billion in 2019 to a surplus of US$13 billion (3.6 percent of GDP) in 2020, largely reflecting pandemic-related import compression.
  - The current account gap in the external balance assessment (EBA) exceeded 2 percent of GDP, reflecting pandemic circumstances expected to unwind with recovery.
  - Foreign reserves in percent of the adequacy metric are expected to decrease as FX market conditions normalize in the recovery.

### Authorities’ views
- Authorities expect stronger growth in 2021−22: 6 to 7 percent in 2021 and 7 to 9 percent in 2022.
- BSP expects annual average inflation in 2021 of 4 percent (at the upper bound of its 2 to 4 percent target range).
- Authorities view risks as broadly balanced but remain concerned about renewed virus resurgence and new variants; testing, tracing, and isolating capacity has been strengthened to allow more localized containment if needed.

### Policy priorities to secure recovery and bolster medium-term prospects
- Policy focus: nurture recovery, manage risks, mitigate scarring, sustain fiscal space, and prioritize structural reforms.
- Fiscal policy recommendations and considerations:
  - The 2021 expansionary fiscal stance balances available fiscal space and recovery needs; steadfast implementation and flexibility are needed to meet emerging priorities such as:
    - Additional health sector needs, including the vaccine program.
    - Short-term support for sectors hit by renewed containment measures.
    - Social protection.
  - If downside risks materialize, some fiscal space exists to respond.
  - Adoption of a medium-term fiscal strategy is recommended to rebuild fiscal space, given:
    - Economic scarring.
    - Revenue impact of CREATE.
    - Implications of the Mandanas ruling for revenue sharing with LGUs.
  - Potential measures to rebuild fiscal space include:
    - Further strengthening revenue administration.
    - Reductions in tax exemptions and loopholes.
    - Taxation of the digital economy.
    - Improving expenditure control and increasing efficiency in public service delivery, including at the LGU level as fiscal devolution is implemented.
  - The Mandanas ruling will increase the allotment to LGUs by about 0.8 percent of the authorities’ projected GDP in 2022; LGUs are expected to increase devolved functions in a phased manner with capacity development support, and a Growth Equity Fund will be set up in 2022 to assist the least capable LGUs.
- Structural reforms to lift investment and growth are emphasized to reinforce confidence and anchor a gradual return to lower budget deficits.

*Source: 1. Major Policy Responses to COVID-19 in the Philippines, 2020‒21 (IMF staff report content).*

### 22.      To bolster the effectiveness of COVID-19-related fiscal measures, the authorities took

### To bolster the effectiveness of COVID-19-related fiscal measures, the authorities took

### Fiscal transparency, procurement, and public investment management
- Measures adopted to foster transparency and safeguard public accountability:
  - Public consultations.
  - Regular reporting to Congress.
  - Web publication of allotment releases for COVID-19 measures by the Department of Budget and Management.
- Procurement adjustments:
  - Procurement rules were simplified for emergency cases; all contracts under these rules are mandated to be posted online for tracking and transparency.
  - Recommendation: Inclusion of beneficial ownership information of awarded companies in publications of COVID-19 spending would further enhance transparency and accountability.
- Public investment management and infrastructure push:
  - Government infrastructure push increased program spending in the past few years, although there was some slowing in 2020 as strict quarantine measures weighed on construction activity.
  - Transparency enhanced by requiring procurement information to be posted on an on-line portal.
  - Remaining digitalization steps should be completed, including through the launch of the modernized Philippine Government Electronic Procurement System.

### Authorities’ views on the fiscal program and medium-term fiscal stance
- On the 2021 fiscal program:
  - The 2021 program uses a three-pronged approach: (i) reviving infrastructure development (rebound); (ii) responding to the pandemic with a focus on health and nutrition (reset); and (iii) adapting to the post-pandemic environment (recover).
  - Carryover of unspent appropriations in the 2020 budget and from the Bayanihan II Law to 2021, approved by Congress, provided additional fiscal stimulus.
  - Depending on the evolving economic situation, authorities could consider additional spending measures in health or social assistance areas, contingent on raising additional revenue and generating savings to keep the budget deficit as programed.
  - To raise revenue, authorities are contemplating increasing dividend rates on government-owned and controlled corporations (GOCCs).
  - Authorities were confident they could implement the planned infrastructure program in 2021, citing a strong implementation record relative to budget in 2020 despite the pandemic.
- Medium-term fiscal prudence:
  - Commitment embodied in a multi-year fiscal program developed by the Development Budget Coordination Committee, targeting a return to the smaller budget deficits (as a percent of GDP) recorded before the pandemic.
  - Potential measures to rebuild fiscal space: reforms to the military and uniformed personnel pension scheme, and the taxation of the digital economy.
  - Progress in improving effectiveness of tax collecting agencies through digital transformation; implementation efforts to continue.
  - Strengthening capacity of local government units (LGUs) to manage devolved expenditure functions could allow the National Government to reduce expenditure for devolved functions and services.
- Fiscal transparency and COVID-19 spending:
  - Online reports on COVID-19 related spending, tax relief measures, grants and loans, and public procurement are regularly published and submitted to Congress and the Commission on Audit (COA).
  - COA mandated to conduct and publish ex-post audit reports on all public funds, including emergency spending.
  - Two portals launched amid the pandemic to provide information on local and foreign humanitarian assistance and procurement projects.

*Source: IMF staff report text provided in the content unit.*

### Monetary and exchange rate policies
- Policy actions in 2020:
  - BSP cut the policy rate by a cumulative 200 basis points, resulting in a negative real policy rate for much of the year.
  - BSP reduced the reserve requirement ratio by 200 basis points.
  - Secondary market purchases of government securities helped shore up domestic market liquidity and reduced risks of market instability from higher budget financing.
  - Through direct advances to the Bureau of the Treasury, the BSP provided budget financing flexibility.
- Contextual notes and metrics:
  - In 2018, the neutral policy rate was assessed to be in the range of 1−2 percent.
  - The current settings with a real policy rate of around −1½ percent entail substantial monetary policy accommodation.
  - At 12 percent, the reserve requirement ratio is still relatively high.
- Outlook and guidance:
  - Under the baseline, monetary policy should remain supportive, as economic slack would help contain inflation.
  - Recent inflation acceleration primarily reflects supply shocks; inflation should start reversing toward the midpoint of the target range later in the year.
  - If inflation becomes more entrenched due to local or global factors, including global commodity prices, BSP should stand ready to adjust the policy stance.
  - If downside risks to the recovery materialize, inflation would likely be lower than expected depending on the driver, and BSP has room for further accommodative monetary responses.
  - Renewed temporary recourse to BSP advances should be a last-resort measure linked to domestic bond market conditions, within the limits set in the BSP charter.
- Communication and sequencing:
  - Communication about the sequencing of the exit could enhance monetary policy effectiveness even if policy normalization is not imminent.
  - Termination of direct budgetary financing through renewal of BSP’s advances should be the first step in policy normalization, to preserve BSP’s operational capacity and independence.
- Exchange rate and reserve management:
  - The peso appreciated in real effective terms despite policy rate cuts, the pandemic, and an economic downturn, reflecting temporary large imbalances between FX flow demand and supply in a shallow domestic market.
  - Appreciation lowered inflation pressures but weighed on external competitiveness and domestic demand given significant economic slack.
  - Accumulation of foreign reserves in 2020 partly reflected BSP intervention to smooth peso volatility and larger government FX holdings after sizeable increases in FX bond issuance in 2020.
  - Valuation changes (switch from valuation of gold holdings at cost to valuation at market prices in July 2020) also contributed to the increase in reserves.
  - A further buildup of foreign reserves would be costly and have diminishing prudential value given current high levels.
  - Recommendation: Publish foreign exchange intervention (FXI) data, with appropriate lags and aggregation, to enhance transparency of the inflation targeting regime and BSP’s exchange rate policy.
- Authorities’ views:
  - BSP considers the accommodative monetary policy stance appropriate given the inflation outlook and expects headline inflation to decline below the upper bound of the inflation target range well before year-end.
  - BSP notes annual price increases for most goods and services were below the 2 percent lower bound of the target range, reflecting downward pressure from economic slack.
  - BSP supports keeping the policy rate at current low levels for as long as necessary while monitoring risks.
  - BSP officials underscore that exceptional circumstances required use of instruments authorized in the BSP charter, that direct advances were temporary and limited in size, and intended as crisis interventions.
  - On publishing FXI data, BSP senior officials view that the market already has a good understanding of BSP’s FXI operations and further disclosure, even with lags, was unlikely to contribute to understanding BSP policies.

*Source: IMF staff report text provided in the content unit.*

### Financial sector policies and risks
- Asset quality and buffers:
  - Despite sizeable capital and liquidity buffers, banks face uncertain and possibly significant asset quality risks.
  - Large banks are tightly interlinked with nonfinancial corporates through conglomerate ownership structures and significant exposures.
  - 2021 FSAP stress tests: banks’ solvency and liquidity were relatively resilient under baseline downturn stresses, but banks could experience systemic solvency distress under a much more severe adverse scenario.
  - Rise in NPLs has not been as large as initially expected, due to resilience of conglomerate businesses, improvements in banks’ risk management, and proactive loan restructuring; nevertheless, further deterioration of asset quality is expected due to the lagged macro impact of the crisis.
- Credit provision vs. bank health:
  - Banks likely to remain risk averse and apply tight lending standards for some time.
  - Loans under regulatory relief measures accounted for only about 3 percent of total NPLs as of end-September 2020.
  - MSMEs take-up rate of the government’s credit guarantee scheme under the COVID-19 response has been low to date.
- Recommended regulatory and policy adjustments:
  - Phase out regulatory forbearance measures as scheduled and use flexibility in the Basel capital framework.
    - Forbearance in 2020 included delayed NPL recognition (until December 2021) and staggered provisioning (over a maximum period of five years, subject to BSP approval).
    - Risks: underlying financial health of banks might be overstated until measures lapse.
    - Interim measures: limit bank dividend distributions for capital retention for banks that use forbearance; impose immediate remedial measures on banks that do not meet minimum capital requirements; encourage proactive provisioning more broadly.
    - To foster lending, BSP could encourage temporary use of capital conservation buffers for banks that sufficiently provision for credit risk.
  - Accelerate implementation of the government’s credit guarantee program and implement regulation to ensure the effectiveness of the Financial Institution Strategic Transfer (FIST) Act.
    - If downside risks materialize, the credit guarantee scheme would play a more important supportive role as banks’ risk aversion increases.
    - Asset management companies set up under FIST would promote timely disposal of nonperforming assets and improve bank liquidity.
- Strengthening BSP capacity and macroprudential tools:
  - Operationalize the countercyclical capital buffer (CCyB) and develop targeted macroprudential measures, such as debt-to-income caps.
  - Enhance capacity to monitor real estate-related financial system risks, including developing indicators for commercial real estate.
  - Strengthen the bank resolution framework—streamline the prompt corrective action framework and work on resolvability assessments and resolution planning.
- AML/CFT and bank secrecy:
  - Urgent strengthening of AML/CFT implementation recommended; initiatives to amend bank secrecy laws are welcome.
  - Key priorities from the 2019 Mutual Evaluation Report (MER): risk-based supervision of high-risk sectors; transparency of beneficial ownership information; financial intelligence on proceeds-generating crimes including effective access to information covered by bank secrecy; targeted financial sanctions.
  - Addressing deficiencies promptly would support efforts to exit the FATF list and minimize adverse impacts on remittances and investment flows.
  - Amending bank secrecy laws would improve transparency and supervision for financial stability, strengthen AML/CFT effectiveness, and reduce vulnerabilities to corruption.
- Authorities’ views on financial stability:
  - Authorities expect further deterioration of banks’ asset quality but that the situation will remain manageable.
  - BSP projects the NPL ratio to rise to 6 percent by end-2021.
  - BSP highlights banks were well capitalized with ample liquidity at pandemic onset and that system-wide loan performance statistics provide an adequate picture of loan performance.
  - BSP argues against blanket prohibition of dividend distribution; prefers case-by-case approach considering internal capital targets, risk profile, stress testing results, and use of regulatory relief.
  - Authorities are considering steps to enhance financial system resilience; the June 8 assessment by the Financial Stability Coordination Council pointed to leverage risk as the primary concern.
  - Authorities have introduced and started implementation of key AML/CFT measures contributing to compliance with the International Co-operation Review Group (ICRG) action plans and are optimistic remaining FATF issues will be addressed.

*Source: IMF staff report text provided in the content unit.*

### Structural policies to revive investment and growth
- Maintain strong structural reform momentum to rekindle investment and return to high rates of economic growth.
- Key reforms and expected impacts:
  - Effective implementation of ease of doing business reforms and the CREATE Law to lower the burden on MSMEs and promote investment and new businesses, mitigating economic scarring.
  - Easing restrictions on foreign direct investment—passing the Public Service Act, the Amendments to the Foreign Investments Act, and the Retail Trade Liberalization Act—would be critical steps.
  - Progress in digitalization of public services and improving digital and physical connectivity throughout the archipelago is an important pillar for reform.

*Source: IMF staff report text provided in the content unit.*

### 44.      The reform momentum should include steps to reduce poverty and inequality. Rapid

### 44. The reform momentum should include steps to reduce poverty and inequality. Rapid

### Structural reforms and social inclusion
- Rapid progress in rolling out the National ID system would support greater efficiency in public sector service delivery, including in social protection and other measures to reduce inequality.
- Continued investment in education and infrastructure will play an important role in facilitating development and transition into higher-income jobs.
- Goal for the national digital ID system: register 50 million citizens by end-2021.
- Increased spending on social protection, particularly health and education, strengthening public service delivery, and meeting commitments on climate change are recommended to foster more inclusive and greener growth.

### Climate change and environmental policy
- Nationally Determined Contribution: aim to reduce emissions by 75 percent by 2030 compared to a business-as-usual baseline.
- Renewable energy target: increase share of renewables in electricity production to reach 35 percent by 2030.
- Continued budgetary allocations to spending on climate change adaptation and strengthening resilience to natural disasters, with a budget tagging system, are welcome.
- The Single-Use Plastics Regulation Bill would help reduce the high rate of plastic waste.
- Authorities are reviewing options to strengthen insurance and risk transfer mechanisms for natural disasters, continuing implementation of infrastructure projects to strengthen resilience to climate change, and preparing legislation and regulation to increase energy efficiency in construction and transportation.

### Authorities’ reform priorities and implementation
- Four important reform bills were submitted to Congress during the pandemic, including CREATE, the corporate tax reform bill.
- Commitment to completing the digitalization of government operations by 2030.
- Improvement of public financial management (PFM) at the level of LGUs to strengthen management of devolved responsibilities, governance, and optimize their share in national taxes under the Mandanas ruling.
- Institutionalization of best PFM practices, including the cash budgeting system, was another priority.
- Executive Order No. 138, dated June 1, 2021, was issued to support these PFM objectives.
- An updated and simplified version of the Budget Modernization Bill has been refiled in Congress.
- Anti-Red Tape Authority has established the national-business one stop shop to streamline government services.

### Capacity development (CD) focus areas
- CD should focus on enhancing institutional capacity related to:
  - monetary policy communication;
  - bank resolution, crisis management, and corporate restructuring;
  - debt management and capital market development;
  - public investment management;
  - fintech-related policy issues.
- Rationale: possible increases in risks to banks’ asset quality and prolonged weakness in corporate earnings in some sectors due to the pandemic.

### Fiscal and monetary assessment and recommendations
- The fiscal program provides for a sizeable fiscal impulse of more than 2 percent of GDP in 2021, supporting health, social assistance, and infrastructure.
- Indicative public debt cap: 60 percent of GDP should serve as a medium-term anchor and allow short-term fiscal flexibility.
- Recommendation: formulate an explicit strategy, including fiscal targets, to rebuild fiscal space.
- Monetary stance: appropriately accommodative given the inflation outlook; phasing out direct budgetary financing should be the first step in policy normalization to preserve the BSP’s operational capacity and independence.
- Reserve stance: further foreign reserve accumulation would not be warranted; the exchange rate should continue to act as a shock absorber.
- Recommendation on prudential policy: ensure adequate provisioning, timely remedial measures for capital shortfalls, temporary limits to dividend payouts when needed; regulatory forbearance should expire as scheduled.

### External and banking sector outlook
- Sharp turnaround to a current account surplus in 2020 largely reflects import compression during the pandemic and is likely temporary; expected to reverse as activity returns to capacity.
- With strong initial capital and liquidity positions, banks should be well positioned to absorb the downturn, but credit conditions could remain slow to improve.
- Timely implementation of the credit guarantee scheme for MSMEs and the FIST law would facilitate credit recovery.
- Urgent enhancement of the AML/CFT regime is recommended to support exit from the FATF grey list and reduce risks to cross-border financial flows.

### Policy tools to support MSMEs and financial sector cleanup
- Credit Guarantee Scheme (PhilGuarantee and MCGP):
  - PhilGuarantee started operations on September 1, 2019.
  - Bayanihan II fiscal package provided PhilGuarantee an additional PHP 5 billion capital, with allocation of PHP 2 billion for MSMEs; PHP 2 billion for housing and PHP 1 billion for large corporations, which could support loan guarantee of about PHP 100 billion (0.5 percent of 2021 GDP).
  - MSME Credit Guarantee Program (MCGP) launched in December 2020; provides a loan guarantee of 50 percent.
  - As of end-March 2021, loan guarantees to 12,122 MSMEs had been approved; the guarantees covered loans of PHP 1.5 billion as of end-March 2021.
  - To date, 34 banks (9 commercial banks, 8 thrift banks and 17 rural banks) have signed up since MCGP launch.
  - No guarantee has been called to date under the COVID-19 response package for MSMEs.
  - Faster implementation would require increasing operational capacity (e.g., hiring additional staff) or providing portfolio guarantees rather than individual loans; greater flexibility in eligibility criteria is suggested.
  - Policy trade-off: balance between providing credit support and preserving sound financial practices and fiscal safeguards given contingent fiscal risks.
- Financial Institutions Strategic Transfer (FIST) Act:
  - FIST law passed in February 2021 to facilitate sale of nonperforming assets (NPAs) to FISTCs and Special Purpose Vehicles.
  - Implementing rules and regulations promulgated on March 26, 2021 by SEC, BSP, DOF, Bureau of Internal Revenue and Land Registration Authority.
  - Under the law, a certificate of eligibility for NPAs will be issued by the regulatory authority (BSP, DOF, SEC, or IC) for tax exemptions and fee privileges.
  - Eligible NPAs are those classified as NPAs on or before December 31, 2022.
  - Tax exemptions are intended to lower transaction costs and promote permanent removal of risk from financial institutions’ balance sheets.
  - Success depends on participation of financial institutions, willingness to accept haircuts, and effectiveness of supervisory oversight.

### Staff appraisal: recovery prospects and risks
- The Philippines deployed a comprehensive policy response (health, fiscal, monetary, financial) to cushion the pandemic’s impact.
- Economic recovery slowed in the first half of 2021 due to a second wave but is poised for a rebound in the second half of 2021.
- Main drivers of rebound: broader and faster COVID-19 vaccine distribution, more agile quarantine measures, increased mobility, and improved global economic conditions.
- Economic outlook and vulnerabilities subject to larger-than-usual uncertainty: downside risk from delays in vaccination and protracted pandemic; upside risk from faster resolution.
- Recommendation: next Article IV consultation to take place on the standard 12-month cycle.

### Selected quantitative points and indicators referenced
- Emissions reduction aim: 75 percent by 2030 compared to a business-as-usual baseline.
- Renewable target: 35 percent by 2030.
- National digital ID registration goal: 50 million citizens by end-2021.
- Fiscal impulse in 2021: more than 2 percent of GDP.
- Indicative public debt cap: 60 percent of GDP.
- PhilGuarantee additional capital: PHP 5 billion (PHP 2 billion for MSMEs; PHP 2 billion for housing; PHP 1 billion for large corporations).
- Potential loan guarantee support: about PHP 100 billion (0.5 percent of 2021 GDP).
- MCGP launched: December 2020; provides 50 percent loan guarantee.
- PhilGuarantee operations start date: September 1, 2019.
- As of end-March 2021: loan guarantees to 12,122 MSMEs approved; guarantees covered loans of PHP 1.5 billion.
- FIST law passed: February 2021; implementing rules promulgated on March 26, 2021.
- Eligible NPAs cutoff date: December 31, 2022.
- Philippines’ foreign reserve increased to US$110 billion in 2020.
- Vaccination target cited in figures: 70 percent of the total target population.

*PHILIPPINES — INTERNATIONAL MONETARY FUND*

### Appendix I. Impact of COVID-19 on the Philippines’ Labor

### Appendix I. Impact of COVID-19 on the Philippines’ Labor Market

### Overview
- The COVID-19 pandemic triggered large effects on employment in the Philippines with considerable heterogeneity across economic sectors, population segments, and geographical regions.
- The containment measures impacted activity and employment in all sectors, albeit to differing degrees.
- The Labor Force Survey (LFS) groups unemployment and non-participation in the survey question on past-quarter employment status, leading the analysis to study the non-employed in general.

### Employment level and aggregate dynamics
- Employment fell sharply to 45.9 percent during 2020:Q2.
- Employment rose to 55.8 percent in 2020:Q3, which was just 3 percentage points below the pre-pandemic level.
- Following 2020:Q2, non-participation appeared fully recovered in 2020:Q3, but unemployment remained twice as high as its pre-pandemic level.
- Non-employment includes both unemployment and non-participation.

### Sectoral shifts and agricultural employment
- Agricultural employment share increased during the pandemic, interrupting a long-term declining trend observed in the last 15 years.
- The transient rise in agricultural employment share during 2020:Q2 was primarily driven by higher job separations in non-agriculture rather than stronger hiring in agriculture.
- Lower perceived infection risk and geographical dispersion are noted as consistent with the movement toward agricultural employment during the peak of the pandemic.

### Job separation and finding rates (key statistics)
- Job separation rates (Employment to Non-employment, EN) for both agricultural and non-agricultural workers increased dramatically in 2020:Q2.
- Non-agricultural workers’ job separation rate quadrupled year-on-year in 2020:Q2 and reached 0.21, implying that roughly one in every five non-agricultural workers separated from his/her employer during that quarter.
- Hiring rates (Non-employment to Employment, NE) in both agriculture and non-agriculture remained timid and similarly low in 2020:Q2.
- In 2020:Q3, job separation rates declined to similar levels for agricultural and non-agricultural workers, but the job finding rate rebounded significantly more in non-agriculture than in agriculture, particularly in construction and trade and repair.

### Regional heterogeneity (key statistics)
- The worsening labor market conditions for non-agricultural workers in 2020:Q2 were evident across the entire Philippines.
- Largest year-on-year increases in job separation rates for non-agricultural workers during 2020:Q2:
  - Zamboanga Peninsula: 1,336 percent (year-on-year)
  - Bangsamoro Autonomous Region in Muslim Mindanao: 992 percent (year-on-year)
  - Cordillera Administrative Region: 784 percent (year-on-year)
- National Capital Region (Metro Manila): job separation rate for non-agricultural workers tripled (year-on-year) during 2020:Q2.
- Job finding rates in non-agriculture fell sharply in 2020:Q2 across all administrative regions but recovered substantially in 2020:Q3, with Ilocos Region, Metro Manila, and Calabarzon achieving the highest job finding rates in 2020:Q3.

### Demographic differentials
- Young and less educated non-agricultural workers experienced higher job separation rates in 2020:Q2 than their peers.
- Middle-aged and educated workers recovered more quickly in terms of job finding rates during 2020:Q3.
- Across genders, males in non-agricultural sectors suffered proportionally more from higher job separation in 2020:Q2 but recuperated more swiftly due to a greater rebound in job finding rate.

### Industry-level impacts
- All non-agricultural industries saw significant increases in job separation rates during 2020:Q2; the hardest-hit sectors included:
  - Construction
  - Mining and quarrying
  - Hotel and restaurants
  - Transport, storage and communications
- Some sectors, notably hotel and restaurants and construction, continued registering relatively high job separation rates during 2020:Q3 (though lower than in 2020:Q2).
- Job finding rates (NE) across non-agricultural industries registered negative year-on-year growth in 2020:Q2.
- In several sectors, job finding rates remained lackluster and did not recover in 2020:Q3, notably:
  - Utilities
  - Mining and quarrying
  - Health and social
  - Financial intermediation

### Policy implications and recommendations
- The pandemic triggered asymmetric impacts on labor markets, underscoring the importance of targeted policy responses toward specific economic sectors and population segments.
- Fiscal policy targeting of specific sectors and population segments aims to at least partially offset the asymmetric impacts.
- A well-functioning labor market is crucial to reduce scarring effects through sectoral reallocations.
- Investments in infrastructure and education are highlighted as important for improving labor reallocations and should be considered for a long-lasting recovery of labor productivity and employment.

*Prepared by Eugenio Cerutti and Yiliang Li. Source: Philippines Statistics Authority, Labor Force Survey; Appendix I text.*

### 6.      Assessment. The real effective exchange rate (REER) gap in 2020 implied by the REER Index

### 1phlea2021002 - 6.      Assessment. The real effective exchange rate (REER) gap in 2020 implied by the REER Index

### REER assessment
- REER Index model implied a REER gap in 2020 of 11 percent.
- EBA REER level models implied a REER gap in 2020 of 17.0 percent.
- Both REER Index and EBA REER level models indicate the REER in 2020 was stronger than the level implied by fundamentals and desirable policies.
- The CA model (with COVID-19 adjustors) implied a gap of −11 percent, suggesting a weaker REER.

### Capital and financial accounts—background and assessment
- 2019 flows:
  - Net FDI inflows: 1.4 percent of GDP.
  - Portfolio inflows: 0.7percent of GDP.
  - Other investments: almost neutral in 2019 (0.02 percent of GDP inflow).
- 2020 flows:
  - Net FDI inflows declined to 0.8 percent of GDP.
  - Net portfolio investments turned to slight outflow: 0.1 percent of GDP.
  - Other investments registered large capital inflow of 0.5 percent of GDP driven by government borrowing related to the COVID-19 response.
- Assessment:
  - As a small open economy, the Philippines is exposed to cross-border capital flow volatility.
  - Despite the downturn and global market turmoil parts of 2020, net capital inflows remained sizeable.
  - Portfolio outflows and inflows declined in Q1 2020, but rebounded subsequently—consistent with increased risk aversion due to the pandemic and increased funding needs of government and corporates.

### FX intervention and reserves level—background and assessment
- Exchange rate regime and intervention:
  - Exchange rate classified as floating; the peso is determined in the interbank FX market.
  - The BSP intervenes in the spot and forward markets to smooth excess exchange rate volatility.
  - Intervention data are not published and not available to staff.
  - The peso appreciated in effective terms through much of 2020.
- Foreign reserves:
  - Gross reserves at end-2020: US$110.1 billion (about 30 percent of GDP).
  - Gross reserves at end-2019: US$87.8 billion.
  - Increase in 2020 reserves reflected valuation changes (mainly revaluation of BSP’s gold stock) and accumulation of reserves from BSP leaning against appreciation and increased national government deposits from higher external loan proceeds.
  - Going forward, foreign reserves in percent of the adequacy metric are expected to decrease as domestic FX market conditions normalize in the recovery.
- Assessment:
  - Reserves at end-2020 were about 12.6 months of imports, or about 237 percent of the IMF’s reserve adequacy metric.
  - Both approaches indicate reserves are ample.
  - FX interventions implied by reserve accumulation in 2020 were not warranted from a reserve adequacy angle, but they appear appropriate to slow temporary peso appreciation in a shallow FX market amid the larger COVID-19-induced downturn and higher uncertainty.
  - The currency appreciation could not have been addressed through a different macroeconomic policy mix.
  - Further buildup of foreign reserves would not be helpful as the economic recovery strengthens.

### Public and external debt sustainability—key projections and vulnerabilities
- General government gross debt:
  - Estimated increase by about 15 ppts, reaching about 52 percent of GDP as of end-2020.
  - Baseline projection: debt-to-GDP ratio projected to peak at about 62 percent in 2024 and then decline over the medium term with reduction in budget deficits and growth recovery.
  - General government debt-to-GDP ratio most vulnerable to a growth shock, followed by real interest rate and primary balance shocks.
- External debt:
  - External debt stood at 27.2 percent of GDP as of end-2020.
  - Projected to decline to below 23 percent in the medium term.
  - Debt dynamics sensitive to large peso depreciation and current account balance deterioration.
- Baseline macro assumptions and realism:
  - Real GDP contracted by 9.6 percent in 2020.
  - Real GDP growth projected to rise to 5.4 percent in 2021 and converge to 6.5 percent over the medium term.
  - Headline inflation expected to return close to the midpoint of the target band at 3 percent as temporary shocks dissipate in 2021.
  - National government deficit projected to reach 9.6 percent of GDP in 2021 but decline to 3.5 percent of GDP in the medium term.
  - Current account: sharp turnaround to a 3.6 percent of GDP surplus in 2020 largely due to import compression; projected to narrow to 0.4 percent in 2021 and stabilize at a deficit of 1.8 percent over the medium term.
- Debt sustainability details:
  - Public debt projected to peak in 2024 before decreasing in the baseline (under current policies).
  - General government gross debt-to-GDP ratio expected to rise from 37 percent of GDP in 2019 to about 62 percent in 2024.
  - Gross financing needs projected to increase to an average of about 13.7 percent of GDP in 2021−23, then fall below 12 percent of GDP in the medium term.
  - Debt composition projected broadly stable with relatively low shares of foreign currency-denominated debt.
- Alternative scenarios and shocks:
  - Historical scenario: debt path would fall faster than the baseline reflecting pre-pandemic prudent fiscal management and strong GDP growth.
  - Constant primary balance scenario: debt path higher than baseline reflecting no post-pandemic fiscal consolidation; average gross financing needs over 18 percent of GDP for the projection period.
  - Growth shock: would temporarily increase the debt ratio to a peak of 64 percent of GDP in 2024.
  - External debt resilience: baseline external debt-to-GDP ratio expected to fall to below 23 percent of GDP in 2025 from 27.2 percent in 2020.
  - One-time depreciation of 30 percent in 2021 would raise the external debt ratio to about 38 percent of GDP in 2021 before slightly declining over the medium term.

### Key FSAP recommendations (summary)
- Urgent actions on bank resolution and supervisory powers:
  - Streamline the prompt corrective action (PCA) framework and conduct resolvability assessments and resolution planning for individual banks, starting with D-SIBs.
  - Amend the unusually stringent bank secrecy laws to allow financial sector regulators and law enforcement full and direct access to depositor information.
  - Enhance powers for conglomerate supervision, including information access from banks’ affiliates, supervising related financial institutions under a regulated financial holding company, and appointing the BSP as lead supervisor for financial conglomerates.
- Macroprudential framework and systemic risk monitoring:
  - Strengthen collaboration within the BSP for macroprudential risk analyses, including macro scenario stress tests.
  - Expand the macroprudential toolkit beyond the countercyclical capital buffer (CCyB) and establish operational procedures for setting macroprudential policies.
  - Elevate the influence of the Financial Stability Coordination Council (FSCC) with a comply-or-explain mechanism and financial stability objectives for nonbank supervisors.
- AML/CFT and beneficial ownership:
  - Amend legislation to designate tax crimes as predicate ML offenses and establish a legal framework for targeted financial sanctions against proliferation financing.
  - Strengthen risk-based AML/CFT supervision and enhance accuracy and availability of beneficial ownership information.
- Crisis management, resolution, and safety net:
  - Ensure timely corrective actions and resolution of weak banks; implement resolvability assessments and resolution plans (starting with D-SIBs).
  - Make ELA legal framework more specific regarding conditions and avoid assistance without collateral.
  - Designate and provide the PDIC with powers to act as resolution authority; expand and operationalize bank resolution tools (particularly P&A) beyond liquidation.
- Climate and environmental risk management:
  - Build capacity to understand and manage climate and environmental risks, improve information collection, monitoring of risk metrics, and stress test capacity.
  - FSAP climate change bank solvency stress test: physical risks relevant for financial stability but not systemic unless extreme tail events (once in 250−500 years) materialize.
- Notable specific recommendations listed with timing labels (short-term = ST; medium-term = MT) include:
  - Limit bank dividend distributions while downside risks remain high and be ready to strengthen banks’ capital if risks materialize (ST).
  - Lapse or limit use of issued regulatory forbearance measures (ST).
  - Enhance regulatory powers on transfer of significant ownership and assess suitability of beneficial owners (ST).
  - Update large exposure requirements and enhance reporting on solo and consolidated bases (ST).
  - Amend bank secrecy laws to enhance supervision powers and AML/CFT effectiveness (MT).
  - Improve climate change information collection and stress test capacity (MT).

*Source: IMF content unit 1phlea2021002.*

### Appendix VI. Integration of IMF Capacity Development

### Appendix VI. Integration of IMF Capacity Development

### Overview
- Capacity development (CD) in the Philippines will focus on strengthening institutional capacity to address the fallout from the pandemic, in line with surveillance priorities.
- Key objectives: enhance capacity to manage macroeconomic and financial risks, revenue mobilization, public financial management, execute a well-calibrated exit strategy, and rebuild policy buffers.

### Central bank communication and monetary operations
- Findings and needs:
  - Recent CD on monetary policy communication was provided; further assistance likely needed on:
    - Communicating the BSP’s exit strategy.
    - Communicating when a broader set of instruments is used.
  - The BSP reduced its policy rate in 2020 by a cumulative 200 bps to two percent and lowered the reserve requirement ratio by 200 bps to 12 percent (context provided elsewhere in the source).
  - The BSP provided provisional advances to the NG in the form of a repurchase agreement in March 2020 and direct provisional advances in January 2021, the latter maturing in July 2021.
- Policy recommendation:
  - Provide further CD to strengthen BSP communication strategies around exit and instrument breadth.

### Bank regulation, supervision, and resolution
- Findings and needs:
  - The BSP launched major initiatives to strengthen its supervisory framework in response to the pandemic and FSAP recommendations.
  - Fund CD in conglomerate supervision has helped close important gaps and should continue as needed.
  - The FSAP highlighted potential stress facing the banking and corporate sectors; Fund CD may be needed to enhance capacity for bank resolution, crisis management, and corporate restructuring.
- Policy recommendations:
  - Continue Fund CD in conglomerate supervision.
  - Provide CD targeted at bank resolution, crisis management, and corporate restructuring to prepare for elevated stress.

### Financial stability and macroprudential capacity
- Findings and needs:
  - Recent training on financial market analysis has been provided.
  - More advanced training and technical assistance would help strengthen BSP capacity in financial stability analysis and macro-prudential policies.
- Policy recommendation:
  - Deliver advanced training and technical assistance on financial stability analysis and macroprudential tool design and use.

### Anti-money laundering / Combating the financing of terrorism (AML/CFT)
- Findings and needs:
  - The Fund stands ready to offer targeted CD to enhance overall AML/CFT effectiveness.
  - CD would support the country’s exit of the Financial Action Task Force (FATF) list and complement ongoing assistance from other providers.
- Policy recommendation:
  - Provide targeted AML/CFT CD focused on addressing outstanding strategic deficiencies to support removal from FATF monitoring.

### Revenue mobilization and public financial management
- Findings and needs:
  - Public debt rose sharply due to the pandemic, approaching just above the government’s indicative threshold of 60 percent of GDP.
  - Authorities are strengthening capacity in tax policy design, revenue administration, and expenditure management to rebuild policy buffers.
- Policy recommendations:
  - Provide CD on tax policy design and revenue administration modernization.
  - Support improvements in expenditure management and public financial management systems.

### Debt management and capital market development
- Findings and needs:
  - Elevated public debt heightens the need to strengthen capacity in debt management.
  - Accelerating capital market development is needed to ensure stable domestic financing.
  - Authorities have expressed interest in continued Fund CD in debt management and capital market development.
- Policy recommendations:
  - Deliver CD to strengthen debt management practices, including domestic debt issuance strategy and risk management.
  - Support capital market development through technical assistance on market infrastructure and regulatory frameworks.

### Public investment management and GOCC oversight
- Findings and needs:
  - Building on Fund CD in Public Investment Management Assessment (PIMA) and financial oversight of GOCCs, further assistance would help improve efficiency in infrastructure investment and minimize contingent liabilities.
- Policy recommendation:
  - Provide further CD to strengthen public investment management, project appraisal and selection, and GOCC financial oversight.

### Digital economy, fintech, and central bank digital currencies
- Findings and needs:
  - The BSP has created a new Payments and Currency Management Sector and a Research Academy.
  - Fund CD could be valuable for building capacity in the new sector and the academy, including on fintech and possibly central bank digital currencies.
- Policy recommendations:
  - Provide CD focused on payments, fintech oversight, and the policy/design implications of central bank digital currencies where relevant.

*Source: Appendix VI. Integration of IMF Capacity Development (1phlea2021002).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1phlea2021002.pdf_