## 1phlea2022004 ## Source details **Canonical URL:** [1phlea2022004](https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1phlea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1phlea2022004.pdf.json) --- ### Outlook and risks - Real GDP: 6.5 percent in 2022 (projected), 5.0 percent in 2023 (projected), 6.0 percent in 2024 (projected). - Real GDP per capita: 5.1 percent in 2022 (projected), 3.7 percent in 2023 (projected), 4.7 percent in 2024 (projected). - Output gap (percent, +=above potential): -0.1 in 2022, 0.0 in 2023, 0.0 in 2024. - Current account deficit: expected to increase to 5 percent of GDP in 2022; decline to about 1.7 percent of GDP over the medium term. - Main downside risks: difficult global environment, US dollar strength, high commodity prices, tightening global financial conditions, policy tradeoffs between supporting output and reducing inflation/safeguarding the external position. - Inflation outlook: headline inflation projected to average 5.3 percent in 2022, decline modestly in 2023, converge to the mid-point of the band in 2024 assuming tighter monetary policy. ### Key statistics (selected figures from Table 1) - Real GDP (annual percentage change): 6.1 (2019), -9.5 (2020), 5.7 (2021), 6.5 (2022 proj.), 5.0 (2023 proj.), 6.0 (2024 proj.). - Real GDP per capita: 4.6 (2019), -10.7 (2020), 4.3 (2021), 5.1 (2022 proj.), 3.7 (2023 proj.), 4.7 (2024 proj.). - Consumer prices (period average): 2.4 (2019), 2.4 (2020), 3.9 (2021), 5.3 (2022 proj.), 4.3 (2023 proj.), 3.1 (2024 proj.). - Consumer prices (end of period): 2.4 (2019), 3.3 (2020), 3.1 (2021), 5.8 (2022 proj.), 3.7 (2023 proj.), 3.0 (2024 proj.). - National government overall balance (in percent of GDP): -3.4 (2019), -7.6 (2020), -8.6 (2021), -7.6 (2022 proj.), -6.1 (2023 proj.), -5.2 (2024 proj.). - General government gross debt (in percent of GDP): 37.0 (2019), 51.6 (2020), 57.0 (2021), 59.2 (2022 proj.), 60.9 (2023 proj.), 60.8 (2024 proj.). - Current account balance (in percent of GDP): -0.8 (2019), 3.2 (2020), -1.5 (2021), -5.0 (2022 proj.), -4.1 (2023 proj.), -3.6 (2024 proj.). - Gross reserves (US$ billions): 87.8 (2019), 110.1 (2020), 108.8 (2021), 94.1 (2022 proj.), 88.7 (2023 proj.), 83.9 (2024 proj.). - Nominal GDP (US$ billions): 376.8 (2019), 361.8 (2020), 394.1 (2021), 402.2 (2022 proj.), 426.2 (2023 proj.), 459.9 (2024 proj.). - GDP (in billions of pesos): 19,518 (2019), 17,952 (2020), 19,411 (2021), 21,690 (2022 proj.), 23,597 (2023 proj.), 25,798 (2024 proj.). ### Monetary policy and exchange rate guidance - BSP actions: since May 2022 the BSP hiked the policy rate by a cumulative 225 basis points to 4.25 percent; later cumulative increase noted as 300 basis points through November 17, 2022. - Staff assessment: current policy stance described as accommodative; real policy rate about zero using staff’s projected inflation for 2023. - Staff projection/goal: additional tightening over 2022 and 2023 to move the real policy interest rate to the lower end of staff’s estimated range for the real neutral rate of 1-2 percent. - Conditional guidance: - If inflation pressures continue to rise, BSP should respond with a tighter policy stance. - If inflation proves less persistent or significant downside risks to growth materialize, tightening should be recalibrated. - Operational recommendations: - Bring policy rate close to the neutral real rate to securely bring inflation within the target range. - Adopt forward guidance and publish minutes of Monetary Board meetings to enhance transparency and accountability. - Communicate plan to manage the size of BSP’s balance sheet and the desired size of government bond holdings. - Exchange rate policy: - Maintain exchange rate flexibility; use FXI in disruptive market conditions to mitigate sharp and disorderly depreciation, alleviate inflation, and reduce pressure on monetary policy. - Publish FXI data with appropriate lags and aggregation. ### Financial sector resilience and policy measures - Banking system: profitability returned to pre-pandemic levels; gross NPL ratio declined to 3.5 percent (as of August 2022); NPL coverage ratio at 100 percent (as of August 2022). - Loans at risk (NPLs plus performing restructured loans): 5.5 percent of total loans. - MSME lending share of total bank lending: 4 percent. - Vulnerable NFCs (interest coverage ratio ≤1) among listed firms: increased from 5 percent in 2019 to 14 percent in 2021 (sample of 175 firms). - Recommended actions: - Strengthen BSP’s capacity to conduct financial stability risk assessments. - Enhance the bank resolution framework; implement resolvability assessments and resolution plans starting with D-SIBs. - Allow regulatory forbearance measures to lapse as scheduled; two measures extended into 2023 (Capital Relief on Provisioning Requirements until end-2023; reduction in credit risk weights for MSME loans until end-June 2023). - Expand macroprudential toolkit and establish operational procedures. - Supervise financial conglomerates with closer cross-agency collaboration and appoint BSP as lead supervisor where appropriate. ### Fiscal policy, consolidation, and revenue mobilization - Pandemic impact: fiscal deficit rose to 8.6 percent of GDP in 2021; National government debt rose to 60.4 percent of GDP. - Baseline consolidation: fiscal consolidation totaling 2.5 percent of GDP in 2022-23; average adjustment about 0.7 percentage point of GDP per year over 2024-27 to reach an implicit deficit target of 3 percent of GDP by 2028. - Staff recommendation: accelerate consolidation to reach 3 percent deficit target in 2026; expected outcome: national government debt below 59 percent of GDP in 2027. - Revenue mobilization scope: - National government tax-to-GDP ratio: 14 percent of GDP. - Staff assessment: scope to raise at least 1.4 percent of GDP above the baseline from VAT, corporate and personal income taxes. - Near-term tax reform measures recommended: - Broaden the PIT base and improve capital income taxation. - Streamline investment tax incentives and strengthen cross-border taxation. - Expand the VAT base. - Enhance excise taxation (remove exemptions and tap new bases). - Expenditure recommendations: - Strengthen public financial management and procurement reforms. - Finalize military pension reform. - Exercise greater spending discipline including on public sector wages. - Continue public investment management reforms to improve Build, Better, More program efficiency. - Medium-term fiscal framework: - Publish a medium-term revenue strategy (MTRS) with concrete targets. - Formalize the indicative debt-to-GDP cap of 60 percent with deficit or spending targets. ### Coordinated policy use under downside risks (IPF findings) - Monetary policy: first line of defense against persistent inflationary pressures. - FX intervention (FXI): can be used to lean against disorderly depreciation, reduce inflation, and lower pressure on monetary policy when markets are disruptive. - Scenario simulation outcomes: - Combined shocks cause around 10 percent real exchange rate depreciation in two adverse scenarios. - In absence of FXI, inflation peaks at 150 basis points above baseline in scenario 1 and 225 basis points in scenario 2. - When FXI is used alongside monetary tightening: - Inflation reduced by 40 basis points in scenario 1 and by 70 basis points in scenario 2. - FXI lowers the policy rate path by 40 basis points in scenario 2 and limits output loss to less than 3 percent below the baseline in scenario 2. - Trade-offs: - Monetary tightening combined with fiscal stimulus (1.5-2 percent of GDP over 5 years) would limit output gap deterioration but at the cost of higher inflation and higher interest rates, crowding out private domestic demand. - Under severe growth deterioration, additional fiscal support justified as trade-off between inflation and output narrows. - FXI caveats: - Should not be used to support a misaligned exchange rate or substitute for warranted policy adjustments. - Benefits depend on effectiveness in moving the exchange rate and entail reserve costs. ### Structural reforms and climate policy - Structural priorities: - Address infrastructure and education gaps worsened by the pandemic. - Effectively implement recently passed legislations to attract FDI. - Ratify RCEP to facilitate import access and stimulate export diversification. - Enhance food security and agricultural productivity; use Rice Competitiveness Enhancement Fund for mechanization, seed development, and credit assistance. - Advance digitalization to support growth, social objectives, and governance. - Climate policy: - Integrate carbon pricing; modeled carbon price rising to $50 per ton in 2030 would: - cut GHG emissions 14 percent below 2019 levels, - mobilize revenues of 1.5 percent of GDP, - increase natural gas, electricity, and gasoline prices by 32, 12, and 22 percent, respectively, relative to baseline levels in 2030, - raise the renewable share in electricity generation to 40 percent in 2030 (authorities’ target is 30 percent), - lead to net welfare benefits of 0.2 percent of GDP. - Complementary measures: use carbon revenues to cut labor income taxes or fund public investments, compensate low-income households, apply feebates, invest in clean infrastructure, and support vulnerable regions/workers/firms. - Financing NDC: government estimates only 3.6 percent of the announced 75 percent GHG reduction objective could be achieved through domestic resources; 96.4 percent conditional on international assistance. - Encourage private green financing via sustainable bonds and a taxonomy. ### AML/CFT and bank secrecy law - FATF monitoring: Philippines included in list of jurisdictions under increased monitoring in June 2021 due to poor effectiveness ratings in 2019 Mutual Evaluation Report. - Key required actions to exit FATF list: - Risk-based AML/CFT supervision of high-risk sectors (including casinos). - Access to accurate beneficial ownership information by competent authorities. - Amend bank secrecy law to enhance BSP supervisory powers and support law enforcement access. - Expected benefits of exit: improved business environment and increased foreign direct investment. - Authorities’ stance: committed to completing the FATF action items; Anti-Money Laundering Council supports amendment of bank secrecy law; bills submitted to Congress. ### Public health, labor, and social indicators - Vaccination: fully vaccinated over 70 million people, or 77.8 percent of target population as of June 2022; about 18 percent of the population received a booster shot as of October 13, 2022. - Labor market: - Unemployment rate (percent of labor force): 5.1 (2019), 10.4 (2020), 7.8 (2021), 5.7 (2022 proj.), 5.4 (2023 proj.), 5.1 (2024 proj.). - Underemployment rate: 13.8 (2019), 16.2 (2020), 15.9 (2021), 14.3 (2022), ... (2023), ... (2024). - Poverty and food price risks: - World Bank estimate cited: a 20 percent increase in cereals and energy prices could raise the poverty rate by 2.5 percentage points. ### Data, capacity development, and implementation progress - Data priorities for Fund support: - Assess external sector statistics framework; enhance cross-border trade in services compilation. - Introduce updated RREPI and Commercial Property Price Index; develop Services Producer Price Index. - Improve fiscal data for surveillance and decision-making. - Implementation of 2021 Article IV recommendations: - Six-year MTFF (2022-28) approved; aims to bring public debt-to-GDP to less than 60 percent by 2025 and reduce fiscal deficit to 3 percent of GDP by 2028. - BSP provisional advances to Bureau of the Treasury fully settled by end-May 2022. - Monetary Policy Report introduced February 2022; BSP started tightening in May 2022. - Most pandemic regulatory relief measures expired or are being phased out; targeted relief for MSME lending extended to end-June 2023. - FSAP recommendations implementation highlights (Appendix V): - Macroprudential and supervisory enhancements underway: Macroprudential Policy Strategy Framework in place; Circular 1150 issued on large exposures; Supervisory College pilots completed; TWG on early intervention and triggers constituted. - AML/CFT legislative progress: RA No. 11521 strengthened AMLA; implementing rules on targeted financial sanctions effective January 31, 2021. - Bank secrecy amendments and expanded supervisory powers remain subject to further legislative action. ### Risk assessment matrix (selected risks and policy responses) - Intensifying spillovers from Russia’s war in Ukraine - Likelihood: High; Expected impact: Medium. - Policy actions: allow exchange rate to act as shock absorber; use FXI to counter disorderly conditions; tighten monetary policy if inflation expectations de-anchor; deploy targeted fiscal support if needed. - Commodity price shocks - Likelihood: High; Expected impact: Medium. - Policy actions: tighten monetary policy as needed; avoid broad subsidies; provide targeted transfers to low-income households. - Abrupt global slowdown or recession - Likelihood: Medium; Expected impact: High. - Policy actions: allow exchange rate flexibility with FXI as needed; use fiscal space for targeted support; ensure banking sector stability. - Persistently high domestic inflation - Likelihood: High; Expected impact: High. - Policy actions: tighten monetary policy; use fiscal transfers to protect vulnerable households; accelerate supply-side reforms. - Natural disasters - Likelihood: High; Expected impact: Medium−High. - Policy actions: targeted assistance, relief to banks in affected regions if needed, prioritize disaster-resilient infrastructure. *IMF staff report for the 2022 Article IV consultation with the Philippines (staff report excerpts and Table 1 figures as provided).* ### 5.3 percent in 2022, then to decline modestly in 2023, supported by a moderation in ### 1phlea2022004 - 5.3 percent in 2022, then to decline modestly in 2023, supported by a moderation in ### Outlook and risks - Real GDP: 6.5 percent in 2022 (projected), 5.0 percent in 2023 (projected), 6.0 percent in 2024 (projected). - Real GDP per capita: 5.1 percent in 2022 (projected), 3.7 percent in 2023 (projected), 4.7 percent in 2024 (projected). - Output gap (percent, +=above potential): -0.1 in 2022, 0.0 in 2023, 0.0 in 2024. - The current account deficit is expected to increase to 5 percent of GDP in 2022 but decline to about 1.7 percent of GDP over the medium term. - The economic outlook is subject to significant downside risks stemming from a difficult global environment, US dollar strength, high commodity prices, tightening global financial conditions, and policy tradeoffs between supporting output and reducing inflation/safeguarding the external position. ### Executive Board appraisal and key context - Sustained reforms and disciplined macroeconomic policies helped the Philippines exit a sharp pandemic-induced recession; the economy is recovering at a swift pace, credit growth has picked up, and the banking system has shown resilience with sufficient liquidity and capital buffers. - Amid external pressures, inflation increased sharply, the external position weakened, and fiscal space narrowed. - Policy priorities highlighted: - Calibrating the policy mix to preserve macroeconomic stability. - Enhancing fiscal and financial resilience. - Accelerating structural reforms. ### Monetary policy - The BSP’s prompt action to fight inflation is welcome; further monetary tightening may be needed to keep inflation expectations well anchored. - The current policy stance remains accommodative; BSP should aim at bringing the policy rate close to the neutral real rate to securely bring inflation within the target range. - Guidance for conditional responses: - If inflation pressures continue to rise, BSP should respond with a tighter policy stance. - If inflation proves less persistent, or if significant downside risks to growth materialize, monetary policy tightening should be recalibrated. - Clear communication about inflation and BSP’s policy intentions is recommended to reduce uncertainty and improve policy transmission. ### Financial sector and stability - Higher downside risks to growth and rising interest rates warrant close monitoring of financial stability risks. - Pandemic increased risks in NFCs; rising interest rates could renew challenges for NFCs, especially within “mixed” conglomerate structures and sectors with relatively high debt burdens. - Recommended actions: - Strengthen BSP’s capacity to conduct financial stability risk assessments. - Enhance the bank resolution framework. - Allow regulatory forbearance measures to lapse as scheduled as recovery proceeds. - Enhanced AML/CFT effectiveness is critical to support exit from the FATF list: - Risk-based AML/CFT supervision of high-risk sectors. - Access to beneficial ownership information by competent authorities. - Prioritize amendments to the bank secrecy law to enhance BSP supervisory powers, strengthen AML/CFT effectiveness, and reduce corruption vulnerabilities. ### Fiscal policy - Near-term fiscal stance is appropriate; medium-term fiscal consolidation should be underpinned by stronger revenue mobilization and cost-effective government spending. - Accelerated medium-term consolidation would allow the government to signal intent to put debt on a firmly downward trajectory. - Ample scope to enhance revenue mobilization to underpin faster medium-term consolidation while securing resources for social and development plans. - Augment the medium-term fiscal program with explicit fiscal anchors and a medium-term revenue strategy to support fiscal credibility and debt sustainability. - If growth falls below the baseline, fiscal policy can be deployed to support the economy by slowing the pace of fiscal consolidation, noting tradeoffs: - Slower consolidation could raise inflation and interest rates and increase the debt burden over the medium-term. ### Coordinated policy use under downside risks - Monetary policy should be the first line of defense against persistent inflationary pressures. - Under disruptive market conditions and tightening FX liquidity, foreign exchange intervention (FXI) can: - Mitigate sharp and disorderly exchange rate depreciation. - Alleviate inflation. - Reduce some pressure on monetary policy. - Fiscal policy can be used to support output if growth falls below baseline (with attendant medium-term costs). - Banks can use capital buffers to support credit growth where appropriate. ### Structural reforms and climate policy - Priority reforms to raise productivity, boost competitiveness, and enhance social development: - Address infrastructure and education gaps worsened by the pandemic. - Effectively implement recently passed legislations to attract FDI. - Ratify the Regional Comprehensive Economic Partnership (RCEP) Agreement to facilitate access to imports and stimulate export diversification. - Enhance food security and strengthen agricultural performance by raising productivity and promoting new investments. - Advance digitalization to support growth, social objectives, and governance. - Climate change strategy should be integrated and include: - Introduction of a carbon pricing scheme. - Innovative private sector financing. - Support from development partners. - Policies to address distributional implications of carbon pricing. - Accelerated incentives for green financing to help finance the Nationally Determined Contribution (NDC) target, increase renewables, and develop climate-resilient infrastructure. ### Key statistics from Table 1: Philippines: Selected Economic Indicators, 2019–2024 - Real GDP (annual percentage change): 6.1 (2019), -9.5 (2020), 5.7 (2021), 6.5 (2022 proj.), 5.0 (2023 proj.), 6.0 (2024 proj.). - Consumption: 6.3 (2019), -5.3 (2020), 4.7 (2021), 7.4 (2022 proj.), 6.5 (2023 proj.), 6.5 (2024 proj.). - Private consumption: 5.9 (2019), -8.0 (2020), 4.2 (2021), 7.5 (2022 proj.), 6.2 (2023 proj.), 6.3 (2024 proj.). - Public consumption: 9.1 (2019), 10.5 (2020), 7.1 (2021), 6.7 (2022 proj.), 7.8 (2023 proj.), 7.5 (2024 proj.). - Gross fixed capital formation: 3.9 (2019), -27.3 (2020), 9.9 (2021), 17.2 (2022 proj.), 9.9 (2023 proj.), 10.3 (2024 proj.). - Final domestic demand: 5.7 (2019), -10.5 (2020), 5.7 (2021), 9.4 (2022 proj.), 7.3 (2023 proj.), 7.3 (2024 proj.). - Net exports (contribution to growth): -0.2 (2019), 4.0 (2020), -2.4 (2021), -4.6 (2022 proj.), -3.2 (2023 proj.), -2.5 (2024 proj.). - Real GDP per capita: 4.6 (2019), -10.7 (2020), 4.3 (2021), 5.1 (2022 proj.), 3.7 (2023 proj.), 4.7 (2024 proj.). - Unemployment rate (percent of labor force): 5.1 (2019), 10.4 (2020), 7.8 (2021), 5.7 (2022 proj.), 5.4 (2023 proj.), 5.1 (2024 proj.). - Underemployment rate (percent of employed persons): 13.8 (2019), 16.2 (2020), 15.9 (2021), 14.3 (2022), ... (2023), ... (2024). - Employment (annual percentage change): 1.9 (2019), -6.1 (2020), 11.7 (2021), 4.9 (2022 proj.), 2.4 (2023 proj.), 1.6 (2024 proj.). - Consumer prices (period average): 2.4 (2019), 2.4 (2020), 3.9 (2021), 5.3 (2022 proj.), 4.3 (2023 proj.), 3.1 (2024 proj.). - Consumer prices (end of period): 2.4 (2019), 3.3 (2020), 3.1 (2021), 5.8 (2022 proj.), 3.7 (2023 proj.), 3.0 (2024 proj.). - 3-month PHIREF rate (in percent) 1/: 3.1 (2019), 1.3 (2020), 1.5 (2021), ... (2022), ... (2023), ... (2024). - Claims on private sector (in percent of GDP): 48.0 (2019), 52.0 (2020), 49.9 (2021), 49.9 (2022 proj.), 51.1 (2023 proj.), 52.4 (2024 proj.). - Claims on private sector (annual percentage change): 7.8 (2019), -0.2 (2020), 3.8 (2021), 11.6 (2022 proj.), 11.4 (2023 proj.), 12.3 (2024 proj.). - Monetary base (annual percentage change): -3.0 (2019), 5.1 (2020), 5.8 (2021), 15.9 (2022 proj.), 9.4 (2023 proj.), 10.3 (2024 proj.). - Broad money (annual percentage change): 9.8 (2019), 8.7 (2020), 8.0 (2021), 11.0 (2022 proj.), 9.9 (2023 proj.), 9.7 (2024 proj.). - National government overall balance (in percent of GDP) 2/: -3.4 (2019), -7.6 (2020), -8.6 (2021), -7.6 (2022 proj.), -6.1 (2023 proj.), -5.2 (2024 proj.). - Revenue and grants (in percent of GDP): 16.1 (2019), 15.9 (2020), 15.5 (2021), 15.2 (2022 proj.), 15.4 (2023 proj.), 15.8 (2024 proj.). - Total expenditure and net lending (in percent of GDP): 19.5 (2019), 23.5 (2020), 24.1 (2021), 22.8 (2022 proj.), 21.6 (2023 proj.), 20.9 (2024 proj.). - General government gross debt (in percent of GDP): 37.0 (2019), 51.6 (2020), 57.0 (2021), 59.2 (2022 proj.), 60.9 (2023 proj.), 60.8 (2024 proj.). - Current account balance (in percent of GDP): -0.8 (2019), 3.2 (2020), -1.5 (2021), -5.0 (2022 proj.), -4.1 (2023 proj.), -3.6 (2024 proj.). - FDI, net (in percent of GDP): -1.4 (2019), -0.9 (2020), -2.5 (2021), -2.0 (2022 proj.), -2.0 (2023 proj.), -2.0 (2024 proj.). - Total external debt (in percent of GDP): 22.2 (2019), 27.2 (2020), 27.0 (2021), 26.6 (2022 proj.), 26.4 (2023 proj.), 25.8 (2024 proj.). - Gross reserves (US$ billions): 87.8 (2019), 110.1 (2020), 108.8 (2021), 94.1 (2022 proj.), 88.7 (2023 proj.), 83.9 (2024 proj.). - Gross reserves (percent of short-term debt, remaining maturity): 396.5 (2019), 524.6 (2020), 522.8 (2021), 446.0 (2022 proj.), 402.1 (2023 proj.), 361.8 (2024 proj.). - Nominal GDP (US$ billions): 376.8 (2019), 361.8 (2020), 394.1 (2021), 402.2 (2022 proj.), 426.2 (2023 proj.), 459.9 (2024 proj.). - Nominal GDP per capita (US$): 3,512 (2019), 3,326 (2020), 3,576 (2021), 3,602 (2022 proj.), 3,769 (2023 proj.), 4,015 (2024 proj.). - GDP (in billions of pesos): 19,518 (2019), 17,952 (2020), 19,411 (2021), 21,690 (2022 proj.), 23,597 (2023 proj.), 25,798 (2024 proj.). - Real effective exchange rate (2010=100): 105.4 (2019), 111.2 (2020), 111.1 (2021), ... (2022), ... (2023), ... (2024). - Peso per U.S. dollar (period average): 51.8 (2019), 49.6 (2020), 49.3 (2021), ... (2022), ... (2023), ... (2024). ### Key policy recommendations (condensed) - Monetary: Continue monetary policy tightening near-term; bring policy rate close to neutral real rate; use clear communication; recalibrate if inflation or growth developments warrant. - Exchange rate: Maintain exchange rate flexibility; use FXI in disruptive market conditions to dampen volatility and relieve pressure on monetary policy. - Fiscal: Pursue medium-term fiscal consolidation anchored in stronger revenue mobilization and expenditure efficiency; adopt explicit fiscal anchors and a medium-term revenue strategy. - Financial: Strengthen BSP financial stability assessment capacity and bank resolution framework; end regulatory forbearance as recovery continues; complete AML/CFT Action Plan and amend bank secrecy law. - Structural and climate: Accelerate reforms on infrastructure, education, FDI implementation, RCEP ratification, agricultural productivity, digitalization, and implement an integrated climate strategy including carbon pricing and incentives for green financing. *IMF staff report for the 2022 Article IV consultation with the Philippines (staff report excerpts and Table 1 figures as provided).* ### 5.0 percent relative to the April WEO forecast of 6.3 percent. ### 1phlea2022004 - 5.0 percent relative to the April WEO forecast of 6.3 percent. ### Public health and vaccination - The Philippines achieved its target of fully vaccinating over 70 million people, or 77.8 percent of its target population as of June 2022. - About 18 percent of the population have received a booster shot as of October 13, 2022. ### Inflation dynamics and outlook - Headline inflation increased to 6.9 percent (year-on-year) in September 2022. - Core inflation increased to 4.5 percent (year-on-year) in September 2022. - Both headline and core inflation surpassed the government’s inflation target range of 2-4 percent. - Food, energy, and transport price acceleration accounted for over three-quarters of the rise in headline inflation. - Second-round effects observed: approved minimum wage increases and transport fare hikes; inflation expectations edging up. - Staff projection: headline inflation is projected to average 5.3 percent in 2022, decline modestly in 2023 as commodity prices moderate, and converge to the mid-point of the band in 2024, assuming tighter monetary policy keeps inflation expectations anchored. ### External sector and reserves - The current account swung from a surplus to a deficit in 2021; the deficit is expected to increase to 5.0 percent of GDP in 2022. - Drivers of the wider current account deficit: rebound in imports consistent with strong domestic demand and high commodity prices. - Financing of larger current account deficits: mainly foreign direct investment and a drawdown of reserves. - Gross international reserves (GIR) declined by about US$15.8 billion from end-2021 to end-September 2022, reflecting valuation effects, but remain adequate based on the IMF’s ARA metric. - Near-term financing outlook: current account projected to be financed by foreign direct investment, some reserve drawdown, and portfolio inflows projected to return in 2023 supported by higher domestic interest rates. ### Financial conditions and credit - Domestic financial conditions have tightened: weaker peso and wider dollar funding spreads increased external borrowing costs; monetary policy tightening raised domestic interest rates and lowered corporate valuations. - Credit growth picked up after contracting in 2021 and is expected to increase in line with the economic recovery. - As of August 2022, NPL coverage ratio (allowance for credit loss to gross NPL) at a conservative 100 percent. - Gross NPL ratio declined to 3.5 percent (as of August 2022). - A broader “loans at risk” measure (NPLs plus performing restructured loans) is 5.5 percent of total loans. - MSME lending share of total bank lending has declined to 4 percent. - Share of vulnerable NFCs (interest coverage ratio of one or less) among listed firms increased from 5 percent in 2019 to 14 percent in 2021 (sample of 175 Philippine non-financial publicly traded corporates for 2020-21). ### Downside and upside risks to the baseline - Downside risks: intensifying spillovers from Russia’s war in Ukraine, deepening geo-economic fragmentation and geopolitical tensions, commodity price shocks, abrupt global slowdown or recession, new COVID outbreaks, more restrictive financial conditions, higher uncertainty, capital outflows, persistently high domestic inflation, deterioration in banks’ asset quality, natural disasters. - Upside scenario: an end to the war in Ukraine and taming of inflation domestically and globally could yield stronger growth than envisaged. - Box staff estimate: higher fuel prices would increase the current account deficit by 1.8 percent of GDP in 2022. - Box staff estimate: rise in commodity prices contributed 3.5 percentage points to domestic inflation in 2022 H1. - World Bank estimate (cited): a 20 percent increase in cereals and energy prices could raise the poverty rate by 2.5 percentage points. - Portfolio flows: tightening global financial conditions since the war onset led to US$1.0 billion in portfolio flows from the Philippines as of June 2022. ### Authorities’ macroeconomic outlook and assumptions - Authorities’ GDP growth assumption: 6.5-7.5 percent for 2022 and 6.5-8.0 percent for 2023-2028. - Authorities expect the trade deficit to be financed by remittances, export revenues, tourism receipts and foreign direct investment; international reserves deemed more than adequate. ### Monetary and exchange rate policy guidance - BSP monetary action: since May (2022) the BSP hiked the policy rate by a cumulative 225 basis points to 4.25 percent. - Current policy stance described as accommodative; real policy rate about zero using staff’s projected inflation for 2023. - Staff projects additional tightening over 2022 and 2023 to move the real policy interest rate to the lower end of staff’s estimated range for the real neutral rate of 1-2 percent. - Policy recommendations: - Further monetary tightening may be needed to keep inflation expectations well anchored; bring policy rate to its neutral level to help bring inflation within the target range and prevent de-anchoring of inflation expectations. - If inflation pressures rise or prove persistent, BSP should respond with tighter policy; if inflation proves less persistent or downside risks materialize, recalibrate tightening. - Adopt forward guidance and publish minutes of Monetary Board meetings to enhance transparency and accountability. - BSP operational and communication improvements noted: new Monetary Policy Report (February 2022) and better alignment of the interbank rate with the policy rate. - Liquidity and extraordinary pandemic measures largely unwound; BSP balance sheet increased by 49 percent in the last two years to P7.6 bn in assets in 2021. - Staff encourages BSP to communicate its plan to manage the size of its balance sheet and indicate the desired size of government bond holdings; the target government bond portfolio should not significantly exceed what is needed for liquidity management and should consider interest rate risk and potential impact on policy transmission. - Exchange rate: has acted as a shock absorber amid negative terms of trade shocks; policies to deepen domestic FX and capital markets (e.g., increase institutional participation of insurance and pension funds) would support macro stability. - Staff encourages publication of FXI data with appropriate lags and aggregation; authorities express concerns about full disclosure of FXI due to potential market-moving effects and speculative front-running. - BSP plans to reconfigure its government securities purchase window into a regular facility under the Interest Rate Corridor system; authorities see no urgent need to run down current holdings given tightening monetary settings. ### Financial sector policy guidance and resilience measures - Banking system performance: profitability returned to pre-pandemic levels; non-performing loans increased only modestly; banks increased capital and loan loss provisioning. - Systemic risks assessed as low; banking system has sufficient liquidity and capital buffers per 2021 FSAP stress tests. - Regulatory forbearance measures should be allowed to lapse as scheduled; most measures have lapsed or are scheduled to lapse end-2022, with two measures extending into 2023 (Capital Relief on Provisioning Requirements until end-2023; reduction in credit risk weights for MSME loans until end-June 2023). - Policy recommendations: - Enhance BSP capacity for financial stability risk assessments in line with 2021 FSAP recommendations. - Supervise financial conglomerates with closer cross-agency collaboration; appoint BSP as lead supervisor with support from relevant agencies. - Conduct more frequent comprehensive assessments, strengthen monitoring of large exposures and related-party transactions. - Develop the macroprudential toolkit beyond the countercyclical capital buffer and establish operational procedures. - Institute essential financial stability exercises, such as macro-scenario stress testing of banks. - Strengthen the bank resolution framework: implement resolvability assessments and resolution plans for individual banks (starting with DSIBs); streamline and specify the Prompt Corrective Action framework to prevent critically deficient banks from operating for prolonged periods. *https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022004.pdf* ### 21. Enhanced AML/CFT effectiveness and completion of the Philippines’ Action Plan with ### 21. Enhanced AML/CFT effectiveness and completion of the Philippines’ Action Plan with the FATF ### AML/CFT effectiveness and bank secrecy law - Owing to the poor ratings on effectiveness received in the 2019 Mutual Evaluation Report, the FATF included the Philippines in its list of jurisdictions under increased monitoring in June 2021. - Continued efforts needed: - Risk-based AML/CFT supervision of high-risk sectors (including casinos). - Access to accurate beneficial ownership information by competent authorities. - Other critical areas to support the country’s exit from the FATF list. - Expected benefits from exit: - Help improve the business environment. - Encourage foreign direct investment. - Separately, amending the bank secrecy law (consistent with the 2021 FSAP recommendations) would: - Enhance the BSP’s supervisory powers over financial conglomerates. - Strengthen AML/CFT effectiveness through direct access by law enforcement authorities. - Facilitate cooperation with foreign authorities. - Complementary measures to mitigate corruption vulnerabilities: - Enhanced due diligence measures. - Suspicious transaction reporting on politically exposed persons, family members and close relationships or associates. ### Authorities’ views on AML/CFT and bank secrecy law - Authorities noted strong capital and liquidity positions helped the Philippines’ banking system withstand the COVID-19 crisis. - Banks have improved credit and earning prospects and continue to maintain adequate capital and liquidity buffers. - Recent stress tests illustrated continued banking sector resilience. - The Financial Institutions Strategic Transfer Act (FIST) should help improve the banking system’s resilience to future shocks. - The BSP will continue to monitor credit and market developments through its surveillance toolkits, regulatory reforms, and partnerships with institutions and stakeholders to ensure sustained resilience and soundness of the financial system. - The Financial Stability Coordination Council (FSCC) will ensure cross-sectoral coordination of macroprudential policies and crisis management. - The authorities are committed to completing the FATF action items and improving implementation of their AML/CFT framework. - The Philippines’ inclusion on the list is not currently causing significant disruptions to financial flows, but corrective measures are being taken to ensure a timely exit. - The Anti-Money Laundering Council (AMLC) supports the amendment of the bank secrecy law; several bills to amend the law have been submitted to Congress. ### Fiscal policy: regaining fiscal space and securing resources for a sustainable recovery - Pandemic impact on fiscal metrics: - Fiscal deficit rose to 8.6 percent of GDP in 2021 (from 3.4 percent of GDP in 2019). - National government (NG) debt rose to 60.4 percent of GDP, above the authorities’ indicative cap of 60 percent. - Mandanas ruling impact: - Local government units (LGUs) will receive higher transfers starting in 2022. - The Mandanas ruling shifts fiscal responsibilities to LGUs, but they assume new responsibilities in a phased manner, requiring the NG to continue to finance LGU expenditures in the interim. - The Mandanas ruling is not expected to have a material impact on the general government deficit, as the LGUs are expected to continue to run fiscal surpluses. ### Fiscal consolidation projections and recommendations - Under current baseline projections: - Fiscal consolidation totaling 2.5 percent of GDP will be undertaken in 2022-23. - An average adjustment of about 0.7 percentage point of GDP per year over 2024-27 to achieve the authorities’ implicit deficit target of 3 percent of GDP by 2028. - Staff recommendation: - Accelerate the pace of consolidation in the medium-term to reach the 3 percent deficit target in 2026. - Expected outcome: national government debt below 59 percent of GDP in 2027. - Support accelerated consolidation with high-quality revenue measures and more efficient and well-targeted expenditures. - Near-term fiscal stance: considered appropriate. - Spending commitments: - Infrastructure development spending expected to remain above 5 percent of GDP over the medium-term. - An additional 0.23 percent of GDP—funded by an increase in import tax revenue and dividend income from government owned and controlled corporations (GOCCs)—allocated to cushion the most vulnerable from the impact of higher commodity prices through targeted and temporary fiscal transfers. - Downside risks guidance: - If growth falls below the baseline, the pace of consolidation should be slower and available fiscal space deployed to support growth. - Under downside scenarios, debt sustainability analysis suggests general government debt would increase the most under a growth shock, peaking at 73 percent in 2024 (Appendix IV). ### Revenue mobilization and tax reform scope - National government tax-to-GDP ratio: 14 percent of GDP. - Staff assessment: significant scope to raise additional tax revenues—of at least 1.4 percent of GDP above the baseline under VAT, corporate and personal income taxes. - This would be more than enough to achieve faster consolidation; remainder of about 0.7 percent of GDP could finance high-priority spending and increase support for the vulnerable. - Near-term high-quality tax reforms recommended: - Broaden the PIT base and improve capital income taxation. - Streamline investment tax incentives and strengthen cross-border taxation. - Expand the VAT base. - Enhance excise taxation (by removing tax exemptions and tapping new bases). - Design principles: - Focus on improving overall efficiency and equity of the tax regime. - Exclude policies that are difficult to implement and administer, or that have a negligible revenue impact. - Revenue administration improvements: - Enhanced use of e-filing and electronic payments. - Sustained efforts by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) to improve tax compliance by stepping up efforts for digital tax filing. ### Expenditure efficiency and public financial management - Authorities have prioritized digitalization of public financial management (PFM) and public service delivery to enhance efficiency, transparency, and accountability. - Procurement reforms implemented: simplifying bidding documents, issuing blacklisting orders, and streamlining procurement through better use of information and communications technology (ICT). - Additional recommendations: - Finalize pending military pension reform bill (raising the retirement age and introducing mandatory pension contributions). - Exercise greater spending discipline in areas including public sector wages. - Continue public investment management reforms to close the efficiency gap in public infrastructure investment and improve the effectiveness of the Build, Better, More program. - Increase efficiency in public service delivery at the LGU level as they take over greater responsibilities under the Mandanas ruling. ### Oversight of GOCCs and fiscal risks - Progress noted: - Monitoring and analyzing the financial position of GOCCs and measuring quasi-fiscal activities. - Financial reporting of three GOCCs (SSS, GSIS, PhilHealth) now consistent with international standards. - Further steps needed: - Ensure GOCCs systematically report their PPP operations to accurately reflect fiscal costs and contain risks. - GOCCs should identify and measure their public service obligations (PSOs) which are rarely fully and transparently compensated, resulting in widespread quasi-fiscal activities (QFAs). - PSOs and QFAs should be regularly scrutinized through better fiscal risk monitoring and management frameworks to ensure decisions on government guarantees are informed by risk assessments. ### Medium-term fiscal framework (MTFF) - The Philippines published a six-year MTFF to guide macroeconomic and fiscal policies. - Recommendations to enhance credibility: - Publish a medium-term revenue strategy (MTRS) with concrete targets and explicit measures, supported by sustained government commitment. - Formalize the authorities’ indicative debt-to-GDP ratio cap of 60 percent with deficit or spending targets as intermediate objectives. ### Authorities’ views on fiscal policy - Broad agreement on the need and pace of fiscal consolidation. - Authorities planned to maximize gains from the comprehensive tax reform program which started in 2018 and pursue remaining elements of the reform. - Belief that higher revenue mobilization can be achieved through improved tax administration such as digitalization and modernization efforts of the BIR and BOC. - Several tax reform measures included in the 2023 budget: rationalization of the mining fiscal regime, VAT on digital service providers, imposition of excise taxes on single-use plastic bags, and adjustment of the excise tax on pre-mixed alcoholic beverages. - Current administration focused on expenditure control and efficiency with priority legislative initiatives: - National Government Rightsizing Program. - Military and Uniformed Personnel (MUP) Pension Reform. - Budget Mobilization Bill (BMB) which will institutionalize the Cash Budgeting System and other PFM reforms, including digitalization of the PFM system. - Authorities acknowledged need to improve PFM through greater oversight of the GOCCs. ### Managing downside risks and integrated policy framework (IPF) analysis - Near-term downside risks dominate and primarily involve escalation of adverse shocks shaping the baseline (Appendix II). - Two scenarios considered using an estimated linearized variant of the New Keynesian model (Adrian et al, 2021): - Scenario 1: inflation remains stubbornly high in the Philippines and globally; financial conditions tighten; “risk-off” environment with significant and disorderly capital outflows from emerging market economies. - Scenario 2: similar “risk-off” environment but with a steeper import price Philips curve and a higher degree of pass-through from the real exchange rate to core inflation. - Frictions and role for FX intervention (FXI): - Philippine banks have only moderate currency mismatches, suggesting less need to stabilize the exchange rate to avert negative balance sheet effects. - Foreign exchange market is often shallow and subject to periods of illiquidity. - Philippine trade largely invoiced in USD, so short-term response of trade to exchange rates manifests mostly through imports. - Given these frictions, FXI can be used to lean against disorderly exchange rate depreciation in adverse scenarios, reducing the policy trade-off between inflation and output. ### Scenario simulation findings and policy implications - Combined shocks cause a real exchange rate depreciation of around 10 percent in both scenarios. - Monetary policy is tightened; inflation outcomes: - In absence of FXI, inflation peaks at 150 basis points above the baseline in scenario 1 and 225 basis points in scenario 2. - When FXI is used alongside monetary tightening: - Inflation is reduced by 40 basis points in scenario 1 and by 70 basis points in scenario 2. - Exchange rate depreciates by less. - Use of FXI helps limit the loss in output. - If exchange rate pass-through is higher (scenario 2), using FXI to stabilize the exchange rate has a stronger benefit: - FXI lowers the policy rate path by 40 basis points and reduces the output loss to less than 3 percent below the baseline in scenario 2. - Risks and trade-offs: - Risks of a large depreciation on potential FX mismatches are relatively small given limited direct FX exposures and reliance on short-term wholesale funding. - By reducing the need for a larger policy rate hike, FXI can reduce financial stability risks. - A monetary policy response combined with fiscal stimulus (1.5-2 percent of GDP over 5 years) would limit deterioration in the output gap but at the cost of somewhat higher inflation and higher interest rates, crowding out private domestic demand. - Under scenarios where growth deteriorates significantly, justification for additional fiscal support is strong as the trade-off between inflation and output becomes smaller. - Under both scenarios, public debt would increase but remain sustainable (Appendix IV). ### Policy guidance and caveats - Appropriate policy mix depends on nature of shocks and initial conditions: - With robust recovery, the output gap is effectively closed. - Inflation has been mostly supply-driven. - FX mismatches in the banking sector are small. - Exchange rate assessed to be consistent with fundamentals. - Recommended priorities: - Monetary policy should be the first line of defense against persistent inflationary pressures. - Exchange rate should continue to act as a shock absorber against external shocks. - FXI can support monetary policy when there is risk that a large exchange rate change may de-anchor inflation expectations. - Discretionary fiscal spending that is well targeted can protect vulnerable households without contributing to further inflationary pressures. - A credible plan to bring down debt over the medium-term would reinforce confidence. - FXI caveats: - Should not be used to support a misaligned exchange rate or as a substitute for warranted monetary and fiscal policy adjustment. - Benefits of FXI depend critically on its effectiveness in moving the exchange rate, which can vary over time. - Costs and unintended consequences of FXI should be carefully considered. ### Authorities’ views on IPF and FXI - Authorities welcomed staff’s work on the integrated policy framework (IPF). - IPF consistent with their practice of jointly using interest rate and FXI policies in periods of market dysfunction. - Encouraged further customization of IPF to country circumstances. - Agreed that policy mix depends on nature of shocks and underlying frictions; monetary policy should be the main lever for persistent inflationary pressures. - FXI is futile in responding to fundamental shifts in the global economy (e.g., lean against depreciation fundamentally driven by higher U.S. interest rates), but effective in containing excessive intra-day volatility. - Any benefit from FXI needs to be weighed against reserve losses as investors hold emerging market economies to a higher ARA standard. *Source: IMF staff report excerpt, “21. Enhanced AML/CFT effectiveness and completion of the Philippines’ Action Plan with the FATF.”* ### 39. The authorities will continue to use multiple policy tools to manage downside risks and ### 1phlea2022004 - 39. The authorities will continue to use multiple policy tools to manage downside risks and ### Downside Risk and Policy Scenarios - The authorities will continue to use multiple policy tools to manage downside risks and maintain macroeconomic stability. - The BSP can deploy liquidity enhancing and management tools to address short term market volatility as well as macroprudential measures to mitigate financial stability risks. - Continued recovery in structural flows (remittances, BPO and tourism receipts, and foreign direct investment) could partly offset negative external risks. - Policy combinations examined: interest rate, FXI and fiscal policy; interest rate and fiscal policy; interest rate and FXI policy; interest rate policy only. - Scenario indicators shown in the source for: Domestic Core Inflation (Scenario 1 and Scenario 2), Nominal Policy Interest Rate (Scenario 1 and Scenario 2), Nominal Exchange Rate (percent deviation from baseline, Scenario 1 and Scenario 2), and Output Gap (Scenario 1 and Scenario 2) across up to 20 Quarters. ### Structural Policies: Mitigate Scarring and Raise Potential Growth - Pandemic scarring and delayed recovery in tourism and construction lowered staff’s estimate of medium-term potential growth to 6.0-6.3 percent. - New administration priorities: return to pre-pandemic growth trend, reduce poverty, increase resilience; emphasized infrastructure and agricultural development, investment in health and education, food security, digitalization, and addressing climate change. - Infrastructure and education gaps, and competitiveness need further addressing to achieve ambitious growth and quality jobs: - Build, Better, More program shifted public expenditure toward pro-growth infrastructure; focus needed on improving investment efficiency and developing LGU capacity to implement the Mandanas ruling; civil society participation recommended to ensure transparency and effective use of additional LGU resources. - Further investments in education and training, including upskilling and reskilling, necessary to offset pandemic-induced human capital losses and address stark inequality in human capital outcomes. - Reducing the poverty rate from 23.7 percent in the first half of 2021 to single digit by 2028 will require access to quality education. - Effective implementation of key legislations will boost competitiveness and attract FDI, promoting jobs in light manufacturing, transport, energy, and ICT. - Ratification of the Regional Comprehensive Economic Partnership (RCEP) Agreement should spur FDI, enhance access to imports, and stimulate export diversification. - In agriculture, the Rice Tariffication Law (RTL) yielded benefits for food affordability; Rice Competitiveness Enhancement Fund should be used for mechanization, seed development, and credit assistance; liberalizing imports of other agricultural products could benefit consumers in the current high inflation environment. ### Digitalization and Payments - Digital national ID: more than 72 million citizens registered to the Philippines Identification System as of end-August 2022; expected benefits include enhanced tax administration and improved delivery of social programs. - World Bank analysis highlights need to expand well defined social protection systems (such as the 4Ps conditional cash transfer program), develop a dynamic social registry with regular updates, and better leverage digital tools such as the National ID to enhance social protection delivery. - Launching a wholesale central bank digital currency (CBDC), if decided and properly designed, could enhance the payment system and reduce cross-border transaction costs, addressing challenges related to large cross-border transfers and reliance on costly correspondent banking networks (Appendix VII). ### Climate Change: Mitigation, Transition, and Financing (Box 2) - Philippines’ NDC currently specifies an unconditional target of cutting GHGs 2.7 percent below baseline level in 2030 or 75 percent below baseline, conditional on external support. - Philippines could consider adopting a net zero target for GHG emissions around mid-century; revising the NDC for COP27 in November 2022 could set a mid-century net zero target and align the unconditional target with long-run GHG neutrality. - Carbon pricing modeled: a carbon price rising to $50 per ton in 2030 would: - cut GHG emissions 14 percent below 2019 levels, - mobilize revenues of 1.5 percent of GDP, - increase natural gas, electricity, and gasoline prices by 32, 12, and 22 percent, respectively, relative to baseline levels in 2030, - raise the renewable share in electricity generation to 40 percent in 2030 (authorities’ target is 30 percent), - lead to net welfare benefits of 0.2 percent of GDP. - Complementary measures: use carbon pricing revenues to cut labor income taxes or fund productive public investments, compensate low-income households, use feebates at sectoral level, public investment in clean infrastructure, pricing broader emissions sources (e.g., forestry), and assistance for vulnerable regions, workers, and firms. - Climate finance needs: of the announced 75 percent GHG emissions reduction objective, government estimates only 3.6 percent could be achieved through the country’s own resources, while 96.4 percent is conditional on international assistance. - Authorities are seeking to stimulate private sector financing through sustainable bonds and a taxonomy to define green and transitional economic activities. - Abatement by sector chart covers Power sector, Transport, Buildings, Industry, Agriculture, Waste, Other for 2019–2035 (in metric tons of CO2 equivalent, for $50 carbon tax excluding LULULCF). ### Authorities’ Views - Authorities agreed policies to develop infrastructure, raise productivity, and strengthen social protection should support higher medium-term growth targets. - Infrastructure development remains a priority; legal framework enhancements for public private partnerships and recent amendments to the Build, Operate, and Transfer Law will help. - Authorities are confident recent legislation to spur FDI will contribute to higher output in transport and telecommunications and stimulate domestic competition. - Sharper focus on quality education and improved access to health and nutrition services in the 2023-28 Philippine Development Plan expected to mitigate scarring. - For agriculture, authorities intend to scale up investments in R&D on better seeds, shell-life extending technologies, climate change adaptation, rationalize subsidies including import tariff and non-tariff barriers, promote farm clustering and consolidation, and scale up mechanization. - On climate change financing and carbon taxation: authorities favor realistic financing strategy, incentivizing financing for green projects, developing a taxonomy, and prioritized budget allocations for mitigation and adaptation; they view carbon taxation cautiously given current inflation and political pressures for fuel subsidies and lower fuel excise taxes. ### Staff Appraisal and Policy Recommendations - Phased recovery underpinned by sound fundamentals: economy recovering at a swift pace, credit growth picked up, banking system resilient with sufficient liquidity and capital buffers. - Risks: difficult global environment—US dollar strength, high commodity prices, tightening global financial conditions—has increased inflation, weakened external position, and narrowed fiscal space. - Policy mix calibration is critical: - Monetary and fiscal policy are aligned to support external and domestic balance. - Tightened policy stance will keep inflation expectations anchored and help alleviate pressure on capital outflows and the exchange rate. - Exchange rate flexibility remains important as a shock absorber. - Policies must balance growth and price stability, manage limited fiscal buffers, preserve financial stability, and ensure external sustainability. - Monetary policy: - BSP’s prompt action to fight inflation is welcome; further tightening may be needed to keep inflation expectations well anchored. - BSP should aim at bringing the policy rate close to the neutral real rate to secure bringing inflation within the target range. - If inflation pressures continue, BSP should tighten policy; if inflation proves less persistent or significant downside growth risks materialize, tightening should be recalibrated. - Clear communication about inflation and BSP’s policy intentions recommended to reduce uncertainty and improve policy transmission. - Financial stability: - Higher downside growth risks and rising interest rates warrant close monitoring of financial stability risks, particularly in NFCs and mixed conglomerates. - Strengthen BSP’s capacity for financial stability risk assessments and the bank resolution framework. - Allow regulatory forbearance measures to lapse as scheduled as recovery proceeds. - AML/CFT: - Enhanced AML/CFT effectiveness is critical to exit the FATF list; key items include risk-based supervision of high-risk sectors, access to beneficial ownership information, and prioritizing amendments to the bank secrecy law to enhance BSP supervisory powers. - Fiscal policy: - Medium-term fiscal consolidation should be underpinned by stronger revenue mobilization and cost-effective spending. - Near-term fiscal stance appropriate, but an accelerated medium-term consolidation would signal intent to put debt on a firmly downward trajectory. - Ample scope to enhance revenue mobilization; augment medium-term fiscal program with explicit fiscal anchors and a medium-term revenue strategy to support fiscal credibility and debt sustainability. - Policy coordination: - Monetary policy should be the first line of defense against persistent inflationary pressures. - Under disruptive market conditions and tightening FX liquidity, FXI can mitigate sharp exchange rate depreciation, alleviate inflation, and reduce pressure on monetary policy. - If growth falls below the baseline, fiscal policy can slow the pace of consolidation to support the economy, though at the cost of higher inflation, interest rates, and a higher debt burden over the medium-term. - Structural reforms: - Address infrastructure and education gaps as a priority. - Effective implementation of recent legislations to attract FDI is key. - Ratification of RCEP would facilitate imports and stimulate export diversification. - Enhance food security and agricultural performance by raising productivity and promoting new investments. - Further progress in digitalization and harnessing the digital economy will support growth, social objectives, and governance. *INTERNATIONAL MONETARY FUND* ### 54. Climate change policies will benefit from an integrated strategy that includes a carbon ### 1phlea2022004 - 54. Climate change policies will benefit from an integrated strategy that includes a carbon ### Climate change policy and financing - Authorities are committed to addressing the impacts of climate change and greening the economy. - Financing the Nationally Determined Contribution (NDC) target will benefit from: - introduction of carbon pricing; - developing policies to address its distributional implications; - accelerating efforts to incentivize green financing. - With limited government resources, additional financial support from development partners and the private sector is essential to: - attract foreign investors; - increase the share of renewables in the energy mix; - develop climate-resilient infrastructure. ### Institutional timing - It is expected that the next Article IV consultation take place on the standard 12-month cycle. ### COVID-19 developments and drivers of growth - Daily cases stabilized after the third wave, but may pick up as the economy reopens. - Test positivity rates have fluctuated. - Vaccination rates are rising but remain below peers. - Pandemic restrictions are eased as the economy reopens and mobility has increased. - Real GDP contracted in 2020:H1 and has recovered since. - Private consumption drove the increase in real GDP. - Recovery of contact-intensive industries (e.g., accommodation, transport, construction) has lagged. - Unemployment rate has receded, but under-employment remains high. - Economic activity improved in both industry and service sectors; PMI remains solid but recently started moderating. ### Inflation, monetary and financial conditions - Inflation started increasing noticeably and rose above the government’s target band, mainly due to higher food and utilities prices. - Higher food prices have been driven by adverse supply shocks. - Commodity prices have been increasing, in part due to the war in Ukraine. - Capacity utilization has been returning to pre-pandemic levels. - Short-term inflation expectations have edged up recently. - The BSP has started to withdraw monetary stimulus, increasing the policy rate in response to inflation pressures. - Other short-term interest rates also increased. - Reserve requirement reduction contributed to the increase in placements in the overnight and term deposit facilities. - The monetary base decreased recently driven by lower bank reserves at the central bank. - Yields have risen for longer maturity bonds, influenced by the rise in U.S. yields. ### Credit, housing, and banking sector - Credit growth has picked up, but remains below pre-pandemic growth rates. - The credit gap remained positive in most of 2020 because of the contraction of GDP. - Corporate loans outstanding account for over 80 percent of total loans, with real estate and construction accounting for a fairly large share. - Residential real estate prices and loans started to recover somewhat. - The share of bank loans to micro, small and medium enterprises continued to decline. ### External sector: levels and dynamics - Current account (CA) swung to a deficit of 1.5 percent of GDP in 2021 from a surplus of 3.2 percent of GDP in 2020. - The CA deficit is expected to widen to 5.0 percent of GDP this year, before narrowing in the medium term due to fiscal consolidation, continued recovery in services (including tourism and BPO), and higher remittances. - External financing appears sustainable but assessment subject to uncertainty around the war in Ukraine. - Net international investment position (NIIP) widened to -7.1 percent of GDP in 2021 from -5.9 percent of GDP in 2020; the 2016-2020 average was −10.4 percent of GDP. - Foreign reserves held by the BSP accounted for about 45 percent of total external assets. - Key components of external liabilities included FDI (28 percent of GDP) and portfolio investment (23 percent of GDP). - Total external debt remained constant at 27 percent of GDP in 2021; public external debt decreased slightly to 15 percent of GDP in 2021. - FX reserves are substantially larger than short-term external liabilities (19.1 percent to FX reserves). - Gross international reserves (GIR) declined to US$108.8 billion (27.6 percent of GDP) at end-2021, slightly below end-2020 level (US$110.1 billion) despite the new SDR allocation (US$2.78 billion) in August 2021. - Reserves as of end 2021 were about 8.7 months of imports of goods and services, or about 230 percent of the IMF’s reserve adequacy metric. - The peso appreciated by 0.4 percent in real effective terms and by 2.0 percent in nominal effective terms in 2021. - The real effective exchange rate (REER) in 2021 is assessed to be line with the level implied by fundamentals and desirable policies. - Net financial inflows declined slightly to 1.8 percent of GDP in 2021 but remained above the most recent 5-year average of 1.5 percent of GDP. - FDI inflows were at a historic high level of 3.1 percent of GDP in 2021. - Inflows of debt securities reversed to -0.4 percent of GDP in 2021 from 3.0 percent of GDP in 2020. ### Fiscal developments - The overall budget deficit widened in 2021 as the strong recovery in revenue did not offset the increase in expenditure. - Fiscal financing has mostly relied on domestic resources. - Fiscal consolidation will start in 2022, but will be more gradual compared to other ASEAN peers. - End-2022 debt-to-GDP ratio will remain comparable to peers, but higher than pre-pandemic level. - Strengthening revenue mobilization is one option to rebuild fiscal space in the medium term. ### Risk Assessment Matrix — selected risks, likelihoods, expected impacts, and policy recommendations - Intensifying spillovers from Russia’s war on Ukraine - Likelihood: High - Expected impact: Medium. Philippines has little direct trade with Ukraine or Russia; further sanctions or disruptions resulting in higher commodity prices and tighter global financial conditions could adversely affect regional and trading partner growth, raising risks to Philippine economic activity, inflation, trade, and capital flows. - Policy recommendations: - Allow the exchange rate to act as a shock absorber while using foreign exchange intervention to counter disorderly market conditions. - Stand ready to further tighten monetary policy if inflation expectations show signs of becoming de-anchored. - Use available fiscal space effectively to provide targeted support if domestic demand weakens significantly. - Ensure banking sector remains stable and markets remain liquid; increase financial sector resilience. - Provide targeted support to viable firms while facilitating the exit of unviable ones. - Commodity price shocks - Likelihood: High - Expected impact: Medium. Increased pressure on CPI inflation may risk destabilizing inflation expectations and require a more aggressive monetary policy response. - Policy recommendations: - Stand ready to further tighten monetary policy if inflation expectations show signs of becoming de-anchored and second round effects are increasing. - Avoid subsidies and lowering taxes; provide targeted transfers to low-income households. - Abrupt global slowdown or recession - Likelihood: Medium - Expected impact: High. Lower GDP growth; larger economic scarring effects; a decline in capital inflows, leading to currency depreciation and tightening of domestic credit conditions. - Policy recommendations: - Allow the exchange rate to act as a shock absorber while using foreign exchange intervention to counter disorderly market conditions. - Use available fiscal space effectively to provide targeted support. - Ensure banking sector remains stable and markets remain liquid; increase financial sector resilience. - Provide targeted support to viable firms while facilitating the exit of unviable ones. - Local COVID-19 outbreaks - Likelihood: Medium - Expected impact: Medium. Larger economic scarring effects including from higher structural unemployment and persistent underinvestment; a decline in capital inflows, currency depreciation; deterioration of bank assets; and a higher poverty rate. - Policy recommendations: - Maintain an accommodative fiscal stance to support the health sector, including vaccine and booster procurement and delivery; short-term income support for hard-hit households and sectors; and increased spending on social protection. - Keep markets liquid; maintain a flexible, market-driven exchange rate. - Deepening geo-economic fragmentation and geopolitical tensions - Likelihood: High - Expected impact: Medium. Larger economic scarring effects including higher structural unemployment and persistent underinvestment; decline in capital inflows; deterioration of bank assets; higher poverty rate. - Policy recommendations: - Accelerate trade integration efforts within the ASEAN region and pursue new, high-quality regional trade agreements. - Implement structural reforms to reduce trade costs, promote competition and financial deepening. - Persistently high domestic inflation - Likelihood: High - Expected impact: High. Persistently high inflation can reduce policy credibility and macroeconomic stability, lead to capital outflows, a higher risk premium and a significant economic slowdown reflecting tighter monetary policy, lower real household incomes and higher uncertainty. - Policy recommendations: - Tighten monetary policy to bring about a sustained reduction in actual inflation and use monetary policy communication to influence inflation expectations. - Use available fiscal space effectively to provide targeted support to protect vulnerable households. - Accelerate reforms to reduce supply constraints and reduce trade restrictions to support monetary policy. - Deterioration in banks’ asset quality and funding positions - Likelihood: Medium - Expected impact: Medium. Credit slowdown can hamper the recovery, and the associated uncertainty can lead to capital outflows and currency depreciation. - Policy recommendations: - Recognize potential capital adequacy issues upfront. - Provide liquidity and allow banks to use regulatory buffers. - Provide targeted support to viable firms. - Accelerate reforms on bank resolution and crisis management and maintain high provisioning. - Natural disasters (e.g., typhoons, volcano eruptions and/or earthquakes) - Likelihood: High - Expected impact: Medium−High. Disruption in economic activity in the affected region; poor agriculture production; damage to properties; higher food inflation, with larger impact on vulnerable groups. - Policy recommendations: - Provide targeted assistance to affected groups and sectors. - If the economy slows significantly, provide relief to banks in affected regions while monitoring credit risk. - Prioritize public investment in disaster-resistant infrastructure and sustainable growth. *Source: IMF staff (Philippines chapter), 1phlea2022004* ### Appendix III . Implementation of Main Recommendations of the ### Appendix III. Implementation of Main Recommendations of the 2021 Article IV Consultation ### Fiscal Policy — actions and targets - Policy recommendation: A medium-term fiscal strategy to anchor fiscal prudence and gradual return to lower budget deficits; 60 percent indicative cap on public debt-to-GDP to serve as medium-term anchor; include beneficial ownership in COVID-19 spending publications; continued reforms in public investment management. - Actions since 2021 Article IV Consultation: - A six-year medium-term fiscal strategy covering 2022-28 was laid out and approved by the House of Representatives and the Senate. - The 2022-28 medium term fiscal strategy aims to: - bring the public debt-to-GDP ratio to less than 60 percent by 2025 and further to about 51 percent by 2028; - reduce the fiscal deficit to 3 percent of GDP by 2028. - Budget utilization reports of COVID-19 funds are available online, but beneficial ownership information is not included. - Build-Operate-Transfer (BOT) Law amended to enhance governance of PPPs and improve spending discipline. - Activities ongoing to strengthen management, accounting, and reporting of GOCCs with IMF technical assistance. - Key fiscal statistics and outcomes: - General government gross debt reached 57 percent of GDP as of end-2021 (from 37 percent of GDP in 2019). - Baseline projection: debt-to-GDP ratio projected to peak at about 61 percent in 2023–24 and then decline over the medium term. - Gross financing needs projected to increase to an average of about 10 percent of GDP in 2022−24; fall below 9 percent of GDP in the medium term. ### Monetary Policy — actions and communication - Policy recommendation: Phase out direct budgetary financing to preserve BSP’s operational capacity and independence; improve communication on COVID-19 exit sequencing to enhance monetary policy effectiveness. - Actions since 2021 Article IV Consultation: - BSP provisional advances to the Bureau of the Treasury were fully settled by the government as of end-May 2022. - Monetary Policy Report of the BSP introduced in February 2022 includes forward guidance on policy rates. - BSP started tightening monetary policy in May 2022 in response to inflationary pressures. - Key macro projections related to policy: - Headline inflation will reach an average of 5.3 percent in 2022 and return close to the midpoint of the target band at 3.0 percent in 2024. - Real GDP: rebounded in 2021 with real GDP growth of 5.7 percent; projected to grow 6.5 percent in 2022 and converge to 6.0-6.3 percent over the medium term. ### Financial Sector Policies — regulatory forbearance and AML/CFT - Policy recommendation: Strengthen prudential regulation and supervision; phase out regulatory forbearance as scheduled; enhance AML/CFT effectiveness to support exit from the FATF list and reduce cross-border flow risks. - Actions since 2021 Article IV Consultation: - Most regulatory relief measures at onset of COVID-19 have expired as scheduled, including temporary relaxation of requirements on compliance reporting, asset classification and provisioning, and prudential regulations on mark-to-market valuations. - Authorities continue to progress in completing their Action Plan to enhance AML/CFT effectiveness, including implementing supervision for targeted financial sanctions. - Authorities are closely monitoring impact of FATF listing on the financial sector. - Key outcomes: - Expiration of most pandemic-era regulatory relief measures; other ongoing measures noted in staff report (paragraph 17 and Appendix V). ### Structural Policies — investment, competitiveness, and poverty reduction - Policy recommendation: Continue efforts to ease impediments to investment and reduce infrastructure gaps; maintain structural reform momentum including steps to reduce poverty and inequality. - Actions since 2021 Article IV Consultation: - Several laws and regulatory changes adopted to enhance competitiveness and attract foreign investment: - Amendments to the Retail Trade Liberalization Act in December 2021. - Amendments to the Foreign Investment Act in March 2022. - Amendments to the Public Service Act in March 2022. - Government approved in September 2022 revisions to the Implementing Rules and Regulations of the BOT Law to unlock PPP benefits. - Incoming administration declared objective to reduce the poverty rate to single digit level by 2028 and to implement a comprehensive 8-point socioeconomic agenda. ### Debt Sustainability — baseline, scenarios, and vulnerabilities (Appendix IV) - Background and baseline realism: - After a 2021 rebound with real GDP growth of 5.7 percent, baseline assumes real GDP growth of 6.5 percent in 2022 and convergence to 6.0-6.3 percent over the medium term. - National government deficit will reach 7.6 percent of GDP in 2022 but decline to 3.2 percent of GDP in the medium term on the back of post-pandemic fiscal consolidation and strong GDP growth. - Current account (CA) balance: shifted to a deficit of 1.5 percent in 2021; projected to widen to 5.0 percent in 2022; expected to adjust gradually towards 1.7 percent of GDP over the medium term. - Public debt baseline and stress outcomes: - General government gross debt increased from 57 percent of GDP in 2021; projected to peak at about 61 percent in 2023 before declining in the baseline. - Gross financing needs will average about 10 percent of GDP in 2022−24 and fall below 9 percent of GDP in the medium term. - Debt composition projected broadly stable with relatively low shares of foreign currency–denominated debt. - Alternative scenario outcomes: - Historical scenario: debt path would fall slightly faster than baseline. - Constant primary balance scenario: debt path would be higher than baseline. - Growth shock: would temporarily increase debt ratio to a peak of about 73 percent of GDP in 2024. - Interest rate and exchange rate shocks: would increase debt to slightly below 62 percent of GDP in 2024. - External debt and shocks: - External debt stood at 27.0 percent of GDP as of end-2021 and is projected to decline to around 24.0 percent in the medium term. - One-time depreciation of 30 percent in 2022 would raise the external debt ratio to about 38.9 percent of GDP in 2023 before slightly declining over the medium term. - Debt dynamics sensitive to large peso depreciation and current account deterioration. - Additional quantified projections and indicators (selected): - Public sector defined as general government. - General government net debt: series shown in staff tables (examples) — 35.8, 48.1, 53.4, 55.7, 57.3, 57.3, 56.6, 55.3, 53.4 (across projection years as presented). - Change in general government gross debt (cumulative row in staff table): -1.2, 14.7, 5.3, 2.3, 1.7, -0.1, -0.7, -1.3, -1.8, 0.0 (by year as presented). - Real GDP growth (table row): 6.3, -9.5, 5.7, 6.5, 5.0, 6.0, 6.1, 6.2, 6.3 (across years as presented). - Effective interest rate (table row): 5.2, 4.5, 3.8, 4.7, 4.7, 4.3, 4.2, 4.2, 4.0 (across years as presented). *Source: IMF staff (Appendix III and Appendix IV of the 2021 Article IV Consultation implementation and Public and External Debt Sustainability Analysis).* ### Appendix V. Implementation of FSAP Recommendations ### Appendix V. Implementation of FSAP Recommendations ### Macroprudential Policy and Systemic Risk Monitoring Framework - Recommendation: Limit bank dividend distributions while downside risks remain high and be ready to take additional measures to strengthen banks’ capital if the risks materialize to continue providing credit to the economy (FSCC members, BSP). - Timing: ST - Update: BSP may limit or prohibit dividend declaration as provided in the law and the regulations governing dividends, as necessary. Dividend prohibition is handled on a case-by-case basis considering a bank’s varied internal capital targets, stress testing results, and risk profile. Banks applying for relief measures may be restricted from making dividend or other forms of profit distributions. This restriction automatically applies to banks that utilize their capital conservation buffers and may be imposed on banks that have reached their internal capital targets. - Recommendation: Enhance collaboration within the BSP to conduct essential macroprudential risk analyses, including macro scenario stress tests, and assure a balanced decision-making process (BSP). - Timing: MT - Update: BSP upholds strong collaboration and coordination to foster a balanced decision-making process in carrying out price stability and financial stability mandates. Board-level committees and mechanisms ensure interrelated issues are considered. Financial stability and financial supervision implications are discussed during the Advisory Committee to the Monetary Board (MB) and in preparatory board meetings attended by MB members and heads of relevant units. - Recommendation: Strengthen the influence of FSCC decisions by adding a comply-or-explain mechanism and providing sectoral regulators with a financial stability objective (FSCC members). - Timing: MT - Update: Executive Order (EO) No. 144 signed July 6, 2021 institutionalizes the FSCC and provides the Council power to issue directives and regulations. The EO can be the start of any consideration for a comply-or-explain mechanism. - Recommendation: Expand macroprudential policy toolkit and establish operational procedures to set them in a more systemic risk-based manner (BSP). - Timing: MT - Update: The Macroprudential Policy Strategy Framework approved by the FSCC in July 2020 outlines strategic and tactical elements for executing macroprudential policy and provides a basis for market surveillance and analysis of systemic risks. Authorities are working to extend and update the toolkit. ### Financial Sector Supervision - Recommendation: Lapse or limit the use of issued regulatory forbearance measures (BSP). - Timing: ST - Update: Most regulatory relief measures implemented at the onset of the COVID-19 pandemic have expired or are set to expire as scheduled. The BSP’s regulatory forbearance allowing exclusion from past due and non-performing loan classification for borrowers affected by COVID-19 expired on December 31, 2021. Staggered booking of allowance for credit losses for credits affected by COVID-19—available as of March 8, 2020 for a maximum period of five (5) years—lapsed on March 8, 2021. - Two regulatory relief measures issued in October 2021 (effective until December 31, 2022, and subject to reporting requirements) are described: 1. Regulatory Treatment of Restructured Loans for Measuring Expected Credit Losses (ECL) — Memorandum No. M-2021-056 dated October 21, 2021. 2. Capital Relief on the Treatment of Provisioning Requirements under PFRS 9 — Memorandum No. M-2021-055 dated October 19, 2021; allows BSFIs to add-back increases in Stage 1 and Stage 2 provisioning requirements from end-December 2019 to Common Equity Tier 1 (CET1) capital over two (2) years starting January 1, 2022, subject to a declining add-back factor of 100 percent in 2022, and 50 percent in 2023. - Update: BSP has started to scale back temporary relief measures, except those incentivizing lending to MSMEs. Relief measures extended until end-June 2023 include reduced credit risk weight of loans granted to MSMEs as alternative compliance with reserve requirements. Other measures scheduled to expire end-2022 pertain to: - Increase in Single Borrower’s Limit (SBL) temporarily increased to 30 percent from 25 percent. - Relief from sanctions for breaches in SBL by branches of foreign banks. - The Minimum Liquidity Ratio (MLR) of Thrift Banks and Rural and Cooperative Banks reduced from 20 percent to 16 percent until end-December 2022 unless otherwise revoked by the BSP. - Relaxation of maximum borrowing limit of pawnshops. - Update: BSP’s MB approved setting interest or finance charge on all credit card transactions not to exceed an annual interest rate of 24 percent effective November 3, 2020, subject to review every six (6) months. - Recommendation: Enhance regulatory powers and standards regarding transfer of significant ownership or controlling interest and to assess the suitability of beneficial owners of banks (BSP, DoF). - Timing: ST - Update on transfer of significant ownership: BSP is finalizing draft policy amendments to operationalize Section 25-A of R.A. No. 7653 as amended by R.A. No. 11211, covering prior BSP approval for transfers/acquisitions of at least ten percent (10%) of voting shares and aligning regulations on transfer of actual control or management. The draft also aims to introduce fit and proper requirements for individual and corporate stockholders and their beneficial owners and to establish reporting of adverse information affecting fitness and propriety of substantial stockholders and controlling interests. - Update on suitability of beneficial owners: Amendments to Appendix 33 of the Manual of Regulations for Banks (MORB) per Circular No. 1105 dated December 2, 2020 (Guidelines on the Establishment of Digital Banks) include ultimate beneficial owners (UBOs) among those required to provide documentary requirements for BSP assessment. UBO defined under Item “m” of Sec. 904 of the MORB. - Recommendation: Strengthen sectoral supervision, appoint the BSP as the lead supervisor of financial conglomerates and conduct more frequent and comprehensive risk-assessment of FCs (BSP, IC, SEC, FSF). - Timing: ST - Update: The Financial Sector Forum (FSF) established the Supervisory College. College Supervisors are lead supervisors from two financial sector authorities; lead supervisor determined by dominant supervised entities within the conglomerate. BSP is usually the appointed lead supervisor. A holistic risk assessment of the financial conglomerate is done periodically. Pilot Supervisory College concluded in August 2022. Post-College offsite surveillance continues. The 2nd Supervisory College started in October 2022 and is expected to be completed by January 2023. - Recommendation: Update the large exposure requirements (applicable on solo and consolidated level) and enhance large and related party exposure reporting requirements (BSP). - Timing: ST - Update: BSP issued Circular 1150 dated August 23, 2022 — Prudential Framework for Large Exposures Monitoring Threshold — providing guidance for universal/commercial banks and subsidiary banks/quasi-banks to comply with a large exposure monitoring threshold of 25% of Tier 1 capital on solo and consolidated basis. Circular requires semestral reports on large exposures and expects covered banks/QBs to include material concentration risk from large exposures into stress testing for ICAAP pursuant to Appendix 94 MORB / Q-54 MORNBFI. - Recommendation: Amend the bank secrecy laws to enhance supervision powers, strengthen AML/CFT effectiveness, and cooperation with foreign authorities (BSP, SEC, IC, AMLC and DoF). - Timing: MT - Update: Section 24 of the Anti-Money Laundering Act, as amended, expressly repealed existing bank deposit secrecy laws (Republic Act Nos. 1405 and 6426) by providing the AMLC with unimpeded access to bank account information. Agencies support initiatives and bills seeking to amend bank secrecy laws to include exemptions for BSP inquiry/examination in supervisory exercise in cases involving fraud, serious irregularity, or unlawful activity. - Recommendation: Provide the power to the BSP to insert a regulated Financial Holding Company into a mixed conglomerate and obtain information from the wider group (BSP, DoF). - Timing: MT - Update: Not doable in the medium-term as this requires legislation. BSP is conducting a study on a proposed financial conglomerate model. Letters were sent to the Lower House and the Senate in December 2020 informing them of BSP recommendations requiring legislative amendments, including expansion of BSP’s authority to insert a Financial Holding Company. ### AML/CFT - Recommendation: Make legislative amendments to (i) designate tax crimes as predicate ML offenses and (ii) establish a comprehensive legal framework for targeted financial sanctions against proliferation financing (AMLC, DoF). - Timing: ST - Update: Passage of Republic Act No. (RA) 11521 An Act Further Strengthening the Anti-Money Laundering Law addressed (i) designation of tax crimes as predicate money laundering offenses and (ii) establishment of a comprehensive legal framework for targeted financial sanctions against proliferation financing. Implementing rules and regulations on targeted financial sanctions took effect January 31, 2021. - Recommendation: Strengthen risk-based AML/CFT supervision (including sanctioning procedures) for high-risk sectors, such as banks, casinos, money value transfer service providers (BSP, AMLC, PAGCOR). - Timing: ST - Update on AMLC sanctioning framework: AMLC Resolutions Nos. 12 and 69 (series of 2018 and 2020) approved prioritization policies for evaluation of reports and referrals; these policies are under substance review to strengthen escalation mechanisms. AMLC Resolution No. 98, series of 2020 approved Enforcement Action Guidelines (EAG) to apply necessary measures to counteract ML/TF. - Update on AMLC risk-based supervision of DNFBPs: AMLC conducted sectoral risk studies including Real Estate Sector; Understanding the Internet-Based Casino Sector; a Risk Assessment jointly with PAGCOR; and 2021 Risk Review of AMLC Registered DNFBPs. AMLC finalized compliance and supervision manual in November 2021 covering casinos, OGOs and their service providers, and other DNFBP sectors. - Update on BSP risk-based supervision: BSP’s risk-based AML/CFT framework includes regulations and guidance aligned with international standards, onsite/blended examinations, thematic reviews, offsite activities, and proportionate supervisory enforcement. FATF noted since June 2021 the Philippines has taken steps including implementing registration requirements and sanctions for unregistered and illegal remittance operators. - Update on casinos and POGOs: Casinos and Philippine Offshore Gaming Operators (POGOs) became covered persons under the AMLA through R.A 10927 and 11521 and are classified as DNFBPs. Promulgation of the Casino Implementing Rules and Regulations (CIRR) and the 2018 IRR provided implementation details. AMLC issued 2021 AML/CTF Guidelines for DNFBPs. AMLC imposed enforcement actions on six (6) POGOS for noncooperation with compliance examinations. PAGCOR applies risk-based supervision to land-based casinos; “Casino Guide for a Fitness and Propriety Assessment of Junket Operators” approved June 21, 2022. - Recommendation: Enhance the accuracy and availability of beneficial ownership information of companies (SEC). - Timing: MT - Update: As of July 1, 2022, SEC entered into Data Sharing Agreements (DSAs) with four (4) government agencies: Department of Trade and Industry – Strategic Trade Management Office, Bureau of Immigration, National Intelligence Coordinating Agency, and Philippine Amusement and Gaming Corporation. With assistance of AMLC and NACC, SEC is coordinating for additional DSAs. SEC implemented aggressive registration strategy to enhance awareness and compliance with Electronic Filing and Submission Tool (eFast) for annual reports including the General Information Sheet (GIS). As of July 31, 2022, SEC reviewed compliance with Beneficial Ownership disclosure and issued notices of deficiencies and/or show-cause orders. Interventions include: (1) SEC eFAST Filing System; (2) SEC Registration Campaign through Outreach Programs. ### Crisis Management, Resolution, and Safety Net - Recommendation: Ensure timely corrective actions and resolution of weak banks (BSP, PDIC). - Timing: ST - Update: BSP constituted Technical Working Group (TWG) on Early Intervention and Triggers for Entry into Resolution Framework and Guidelines under Sector Order No. 15 dated October 14, 2022, with assigned tasks. *Source: Appendix V. Implementation of FSAP Recommendations (authorities’ updates).* ### 1. To facilitate the preparation of a structured early intervention framework and triggers for entry into resolution whi ### 1phlea2022004 - 1. To facilitate the preparation of a structured early intervention framework and triggers for entry into resolution whi ### Early intervention framework and resolution triggers - Recommendation: Facilitate preparation of a structured early intervention framework and triggers for entry into resolution to enable supervisors to detect deterioration in a financial institution’s risk condition and/or deficiencies in risk management and governance at an early stage. - Implementation action: An upcoming World Bank mission will work with the TWG on the structured early intervention framework. - Recommendation: Develop relevant issuance and Supervisory Guidelines relating to the operationalization and implementation aspect of the early intervention framework as well as triggers for entry into resolution. - Legal context: - The trigger for closing a bank is "very clear" under the BSP Charter and those provisions are tested several times. - BSP has Internal Policies and Procedures on Banks for Resolution (BRes) Framework which provides the profile of banks under the BRes framework as well as guidelines and procedures on resolution options. - Resolvability assessments and resolution plans: - Recommendation: Implement resolvability assessments and resolution plans, starting with D-SIBs (PDIC, BSP). ST - Update: "The BSP has not yet undertaken resolvability assessments or prepared resolution plans for individual banks including DSIBs. However, DSIBs are currently required to submit their recovery plans which are evaluated by the BSP on an annual basis." - Update: "BSP participated in the Asian Crisis Simulation Exercise conducted by the Financial Stability Institute last July 2022 which involved the orderly resolution of a simulated bank which is considered a DSIB in our jurisdiction." - Emergency Liquidity Assistance (ELA): - Recommendation: Make the legal framework for ELA more specific regarding the conditions under which it can be provided and avoid assistance without collateral (BSP). ST - Update: "The legal framework is specific regarding the conditions where ELA can be provided to banks, when ELA may be availed of, and sufficiency of collateral. See the Manual of Regulations for Banks (MORB) section 285." ### PDIC, BSP, and bank resolution powers and tools - Recommendation: Designate and provide the PDIC with powers to act as resolution authority (PDIC, BSP, DoF). MT - Recommendation: Expand and operationalize bank resolution tools (particularly P&A) beyond liquidation (PDIC). MT - Legal and institutional updates: - Update: "With the enactment of the amendments of the PDIC Charter pursuant to Republic Act No. 11840, the role of the PDIC in the resolution of banks was made clear." - Amendments clarified roles to prevent overlap between PDIC and the BSP; certain PDIC powers were removed or modified to enable PDIC to fulfill its deposit insurer and liquidator mandates. - After a bank is closed/prohibited from doing business, the law made clear that PDIC shall be designated as receiver, and it shall proceed with the takeover and liquidation of the closed bank. - R.A. No. 11840 provides PDIC the ability to preposition early in the resolution process through joint BSP-PDIC examinations whenever there is a finding of fraud, unsafe or unsound banking, and declaration of prompt corrective action (PCA) failure due to capital deficiency, among others. - The instances for PDIC's examination powers are limited to prevent duplication with BSP. - BSP and PDIC conduct regular meetings and have an information sharing arrangement to discuss banks under PCA or Banks for Resolution (BRes) frameworks. - "The Implementing Rules and Regulations (IRR) of Republic Act No. 11840 was approved by the concerned agencies, PDIC, BSP and DOF on September 30, 2022 and published on October 11, 2022." - Resolution tools operationalization: - Update: "The BSP is currently guided to deploy Positive Resolution tools under Supervision Guidelines No. 2019-02 dated April 11, 2019. Such tools include Third Party Investor (TPI), Existing Stockholder Infusion (ESI), acquisition, merger, and consolidation." ### Climate change, environmental risks, and supervision - Recommendation: Improve information collection, monitoring of risk metrics, and stress test capacity for climate change and environmental risks (BSP). MT - Update: "The BSP is currently working with the World Bank and the World Wide Fund (WWF) for Nature Philippines in conducting climate stress testing and vulnerability assessment, respectively, to estimate the potential impact of climate and other environmental-related risks to the banking system." ### Project CBDCPh: Wholesale CBDC in the Philippines - Current plan: "The BSP is currently in the process of planning for an upcoming wholesale CBDC pilot." - Rationale and findings: - BSP exploratory studies since 2020 concluded that a retail CBDC would have limited benefits due to widespread digitalization of retail payments and financial inclusion reforms. - A wholesale CBDC could help enhance the safety and efficiency of the national payment system and address: - (i) frictions on cross border foreign currency transfers; - (ii) settlement risk exposure arising from the use of commercial bank money in the equities market; - (iii) current challenges in operating the automated intraday liquidity facility. - Legal and policy considerations: - "The BSP Charter allows the issuance of wholesale CBDC, but the regulatory framework may need to be revisited to ensure governance and financial stability risks are addressed." - Cybersecurity concerns, AML laws, data privacy, secrecy of deposits, counterfeiting of currency, and rules on foreclosure need to be considered. - Allowing a greater central bank role in financial intermediation could reduce interbank activity and price discovery, potentially detracting from capital market deepening. - Pilots and international coordination: - Recommendation: Conduct extensive proof-of-concept and pilots to understand technology, policy implications, and build capacity. - Observation: "Although several Asian countries have been the global front-runners of research and development, no country in the Asia-Pacific region has launched a CBDC to-date." - Interoperability potential: Cross-border interoperability could benefit remittances and reduce reliance on costly correspondent banking networks, but requires extensive testing on policy, regulatory, technological, governance, payment and settlement models, reconciliation procedures, and risk management. - Regional lessons: Consider experiences from Project Dunbar and the Multiple CBDC (mCBDC) Bridge project; also consider bilateral tests with another central bank. ### Integration of IMF capacity development assistance and surveillance - Overview: "The Fund has provided considerable capacity development (CD) assistance to the Philippines" across fiscal reform, monetary policy framework, macroeconomic frameworks, financial sector supervision, real sector, balance of payments, and government finance statistics. - Recent CD topics and actions: - Public financial management TA on: treasury management (treasury single account and cash management); improving the financial management information system; Public Investment Management Assessment in 2018; strengthening financial oversight of GOCCs; training on international accounting standards; management of PPPs. - Revenue administration TA following TADAT assessment in 2015 focused on VAT refund; tax policy TA on international taxation, tax treaty negotiations, and the review of mining taxation. - Monetary sector TA focused on introduction of an interest rate corridor system and improving monetary and financial stability policy communications. - Financial sector TA on strengthening the supervision framework (2020 Financial System Stability Assessment), enhancing financial soundness indicators, training on financial market analysis from a macroprudential perspective, debt management and capital market development. - Forward-looking CD agenda and authorities' requests: - Fiscal sector requests: follow-up on accounting and financial reporting of GOCCs; methodological guidance and prioritized implementation plan to align GOCCs and PPPs with international standards; capacity on negotiating tax treaties including BEPS; holistic diagnostic of domestic taxation achievements and consideration of new revenue sources from digitalization; TA on revenue forecasting; training on macroeconomic diagnostics; an ICD scoping mission during FY23 to conduct an in-depth diagnostic of needs and capacity for DSGE and FPP-based models. - Monetary sector requests: (i) inflation forecasting and refinements to the BSP’s Policy Analysis Model for the Philippines; (ii) transitioning from exceptional COVID-19 measures and reforming liquidity management operations; enhancements to BSP communication including forward guidance on policy rates, elevating the Monetary Policy Report, communicating unwinding of crisis support measures, and integrating communication on digital money, cyber, and climate-related financial risks; request for Fund advice and training for a sandbox project on the development of a wholesale CBDC. - Financial sector requests: TA on financial conglomerates supervision and establishment of a supervisory college; assessing the expected credit loss model of banks; assessing operational resilience of the banking system; advising on the trust regulatory framework. - Other requests: Securities and Exchange Commission requested TA to develop risk management instruments; Bureau of the Treasury requested TA to enhance cash management, develop the government’s debt management strategy, deepen the domestic debt market through innovative financial instruments, and develop a strategy to access the international capital markets. *Source: 1phlea2022004 - 1. To facilitate the preparation of a structured early intervention framework and triggers for entry into resolution whi* ### 8. Fund support to enhance the quality of statistics will focus on assessing the ### 8. Fund support to enhance the quality of statistics will focus on assessing the compilation and dissemination framework for external sector statistics, enhancing the compilation of cross-border trade in services, assisting with the introduction of the updated Residential Real Estate Price Index and Commercial Property Price Index, developing a new Services Producer Price Index, and improving fiscal data to support surveillance and decision-making. ### Fund support priorities - Assess the compilation and dissemination framework for external sector statistics (ESS). - Enhance the compilation of cross-border trade in services. - Assist with the introduction of the updated Residential Real Estate Price Index (RREPI) and Commercial Property Price Index (land only). - Develop a new Services Producer Price Index (PPI for services). - Improve fiscal data to support surveillance and decision-making. ### Data adequacy for surveillance — summary of current status and shortcomings - General: Data provision is broadly adequate for surveillance with some shortcomings in external sector and fiscal statistics. - National accounts: - PSA rebased national accounts from 2000 to 2018 and adopted the 2008 System of National Accounts; results were disseminated in 2020. - Ongoing work to improve: - the accuracy of the GDP volume measures; - the coverage of the public corporations sector; - the accuracy of the quarterly GDP data; - the adoption of benchmark techniques to reconcile quarterly and annual national accounts estimates; - the development of high-frequency indicators of economic activities. - Price statistics: - In February 2022, PSA introduced an updated consumer price index (CPI) with an index reference period of 2018=100; weights from the 2018 Family Income and Expenditures Survey; CPI disseminated five days after the reference month. - In March 2021, PSA updated the producer price index (PPI) to 2018=100, with weights from the 2018 Census of Philippine Business and Industry; PSA is working to expand PPI coverage to services. - BSP publishes a quarterly RREPI using a basic stratification approach; authorities intend to implement improved methods for the RREPI and publish information on commercial property prices (land only) for the first time. - External sector statistics (ESS): - BSP completed balance of payments compilation based on BPM6 in March 2014 and IIP in September 2014. - Current account transactions and portfolio investment and other investment transactions and positions are adequately covered and treated broadly in line with BPM6. - Some components requiring minor improvements: remittances and IT-related business services. - Relevant shortcomings in coverage and consistency across datasets notably in direct investment equity and debt, and portfolio debt securities; most issues can be mitigated by improvements in the ESS data collection framework. - In April 2022, STA provided technical assistance (TA) to the BSP for improving the ESS data collection framework. - Monetary and financial statistics: - Authorities report monthly monetary statistics for the central bank and other depository corporations with a lag of less than two months, using standardized report forms for publication in the International Financial Statistics (IFS). - In October 2019, BSP started publication of the Other Financial Corporations Survey; results are now disseminated through IFS. - BSP reports several Financial Access Survey series, including mobile money series and the two indicators adopted by the United Nations to monitor Target 8.10 of the Sustainable Development Goals: commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - Financial sector surveillance: - Authorities report all 15 core financial soundness indicators (FSIs), 7 of the 12 encouraged FSIs for deposit takers, and 2 FSIs for real estate markets—on a quarterly basis—for posting on the IMF’s FSI website with one quarter lag. - Government finance statistics (GFS): - Provision of fiscal data is broadly adequate for surveillance. - Philippines report data for the budgetary central government in the GFSM 2014 format. - Progress made on regular production of quarterly GFS, expanding sector coverage of GFS to the general government on a higher frequency, and enhancing compilation of data on public debt. - Some improvements are yet to be reflected in published data pending implementation of administrative arrangements and finalization of recording of transfers to the lower government tier. ### Data standards and participation - Subscriber to the Special Data Dissemination Standard (SDDS) since 1996; met SDDS specifications in January 2001. - Uses SDDS flexibility options on the timeliness of production index and producer prices data. - A data ROSC was published in August 2004. - STA provided TA to the BSP in April 2022 for improving ESS data collection framework. ### Table of Common Indicators Required for Surveillance — selected entries (as of October 11, 2022 unless otherwise noted) - Exchange rates: Date of Latest Observation 10/11/2022; Date Received 10/11/2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 9/2022; Date Received 10/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/base money: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data D; Frequency of Reporting W; Frequency of Publication W. - Broad money: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central bank balance sheet: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated balance sheet of the banking system: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest rates: Date of Latest Observation 10/11/2022; Date Received 10/11/2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - Consumer price index: Date of Latest Observation 9/2022; Date Received 10/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, expenditure, balance and composition of financing—general government: Date of Latest Observation 2021; Date Received 6/2022; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Revenue, expenditure, balance and composition of financing—central government: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Stocks of central government and central government-guaranteed debt: Date of Latest Observation 8/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External current account balance: Date of Latest Observation 6/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q. - Exports and imports of goods and services: Date of Latest Observation 6/2022; Date Received 9/2022; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of Latest Observation Q2:2022; Date Received 8/2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross external debt: Date of Latest Observation Q2:2022; Date Received 8/2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - International investment position: Date of Latest Observation Q2:2022; Date Received 9/2022; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Recent macroeconomic data updates (supplementary information, November 2022) - October 4, 2022: PSA released October 2022 inflation data: - Headline inflation rose by 7.7 percent year-on-year in October, higher than the 6.9 percent recorded in September. - Core inflation accelerated to 5.9 percent from 5.0 percent the previous month. - Food commodities increased by 9.4 percent in October, up from 7.4 percent the previous month; higher food inflation attributed to disruptions from typhoons in September. - November 11, 2022: PSA released 2022Q3 national account data: - The economy expanded by 7.6 percent year-on-year in the third quarter of 2022, slightly higher than the 7.5 percent growth recorded in the previous quarter, reflecting robust private consumption and investment. - November 17, 2022: Bangko Sentral ng Pilipinas hiked the policy rate by 75 basis points, bringing the cumulative increase in the policy rate to 300 basis points so far this year. *Prepared by Asia and Pacific Department; Philippines — Staff Report for the 2022 Article IV Consultation — Informational Annex (as of October 24, 2022; supplementary information up to November 17, 2022).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022004.pdf_