## 1phlea2023002 ## Source details **Canonical URL:** [1phlea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1phlea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1phlea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1phlea2023002.pdf.json) --- ### Drivers of growth and post‑pandemic context - The Philippine economy "emerged strongly from the pandemic but has since confronted a confluence of global shocks." - Domestic demand rebounded strongly after full reopening; prudent pre‑pandemic fiscal management enabled a well‑targeted fiscal response that supported recovery and contained the increase in poverty. - Subsequent external shocks: the war in Ukraine, monetary policy tightening in advanced economies, heightened volatility in global financial markets following global banking turmoil, and terms of trade fluctuations. - Authorities’ actions: - Decisive monetary policy rate increases to fight inflation (BSP hiked policy rates by 425 basis points cumulatively in 2022 and early 2023). - Fiscal consolidation under the medium‑term fiscal framework (MTFF), adopted by Congress in 2022. - Targeted support programs for vulnerable households; Inter‑Agency Committee on Inflation and Market Outlook (IAC‑IMO) formalized in May 2023. - Structural reforms and legislation: PPP Code, ratification of RCEP, amendments to the Retail Trade Liberalization Act, the Foreign Investment Act, the Public Service Act, and the Renewable Energy Act allowing full foreign ownership in the sector. ### Recent developments and key statistics (Q2–Q3 2023 highlights) - Growth - Real GDP growth moderated from 7.6 percent in 2022 to 4.3 percent (y/y) in Q2 2023; Q3 2023 rebounded to 5.9 percent (y/y). - Private consumption resilient due to favorable labor market dynamics, solid remittances, and personal income tax cuts. - Electronics exports (over half of total exports) slowed; service exports benefited from China’s reopening. - Fixed investment weak; increased vacancy rates in commercial and residential real estate. - Inflation and wages - Headline inflation peaked at 8.7 percent (y/y) in January and decelerated, but ticked up to 4.9 percent (y/y) in October from 4.7 percent (y/y) in July due to fuel and food prices. - Core inflation was 5.3 percent (y/y) in October. - Minimum wage in Metro Manila increased from PHP570 to PHP610 in July 2023. - Labor market - Unemployment rate: 4.5 percent in September. - Underemployment rate: 10.7 percent in September. - External sector - Current account (CA) deficit widened to 4.5 percent of GDP in 2022 from 1.5 percent of GDP in 2021; narrowed in 2023 (projected CA deficit 3.0 percent of GDP in 2023). - Gross international reserves (GIR): rebuilt to US$101.1 billion in October 2023 from US$93.0 billion in September 2022; GIR metrics: ARA metric 190 percent; coverage of 7.2 months of imports in 2023. - Fiscal - National government fiscal deficit narrowed from 8.3 percent of GDP in 2021 to 7.2 percent of GDP in 2022 (GFS 2014). - H1 2023 fiscal deficit 18 percent lower than H1 2022; revenues improved by 7.7 percent while spending rose by 0.4 percent; current spending was 1.4 percent lower. - National government debt: 60.9 percent of GDP at end‑2022; 61.0 percent of GDP at end‑June 2023. - Financial conditions - Domestic financial conditions tightened; sovereign spreads returned to pre‑pandemic levels; private credit growth slowed. - Banking sector: banks’ assets ₱24.0 trillion (September 2023), loans ₱13.1 trillion, NPL ratio 3.4 percent, NPL coverage ratio 103.6 percent. ### Outlook and projections - Growth - Real GDP growth expected to reach 5.3 percent in 2023 and 6.0 percent in 2024. - Output gap projected to close in 2023 and remain close to balance in 2024. - Medium‑term growth potential estimated at about 6‑6½ percent. - Inflation - Headline inflation forecast: average 6.0 percent in 2023; converge to the target band in Q1 2024 (based on October 2023 WEO assumptions and expected normal rice harvest in Q4 2023). - Core inflation likely to remain above upper target band in 2023 and fall within the range by Q1 2024 given ex‑ante real interest rates remaining above neutral. - External position - CA deficit expected to narrow to 3.0 percent of GDP in 2023 and 2.6 percent of GDP in 2024 from 4.5 percent of GDP in 2022. - Fiscal outlook - Fiscal consolidation to continue in 2024; proposed FY2024 budget (House approved in September) aims for a deficit of 5.1 percent of GDP. - IMF staff projects a similar deficit but with higher non‑tax revenues and higher interest payments reflecting elevated global and domestic interest rates. ### Risks (tilted to the downside) and scenarios - Global and domestic downside risks: - Persistently high global and local inflation could force further monetary tightening and amplify financial vulnerabilities. - Abrupt global slowdown (including in China) could reduce exports. - Sharp swings in market sentiment could cause sudden tightening of financial conditions, capital outflows, and peso depreciation. - Intensified geopolitical tensions and geoeconomic fragmentation could disrupt supply chains and investment. - Inflation upside risks: - Higher global oil prices; higher global or domestic food prices (rice, vegetables) due to typhoons, El Niño, or export bans. - Second‑round wage effects and political pressure for higher minimum wages (a proposal to raise minimum wage by 26 percent—PHP150—was not approved in the last congressional session). - Scenario analysis used in policy discussions included: BSP passive following model optimal path; US Federal Reserve not cutting rates before end‑2024; BSP adopting higher‑for‑longer strategy. ### Monetary policy, FX intervention, and operational guidance - Monetary policy - Recommendation: BSP should stay the course until inflation fully returns to target. - BSP hiked policy rates by 425 basis points cumulatively in 2022 and early 2023; resumed in late October with an off‑cycle 25 basis point hike. - Staff assesses real rates above neutral (estimated between 1‑2 percent); BSP should stand ready to raise rates further and maintain higher‑for‑longer until inflation is firmly within target. - Foreign exchange intervention (FXI) - Allowing the exchange rate to absorb shocks is crucial; FXI may be appropriate to smooth destabilizing premia and address risks to price stability in illiquid FX markets after large risk‑off shocks. - Given the 2022 external sector position assessed as moderately weaker than fundamentals and an inflation‑targeting framework, FXI, if deployed, should be temporary and not substitute warranted macro adjustments. - Operational framework refinements - BSP reduced reserve requirement to 9.5 percent at end‑June but combined this with expiry of a pandemic‑era measure that allowed certain loans to count toward RR compliance. - Recommendations: expand market‑based operations (reverse repos), variables‑rate RRPs, clearer communication on desired BSP balance sheet size in normal times, and use of treasury securities portfolio to manage liquidity. - Yield curve development and coordination with BTr - Large discrepancy between BSP bill yields and Treasury bill yields; recommendations include BTr transitioning to price‑taker model in auctions, reducing number of bond series, harmonizing approved participants, and enhancing primary dealer obligations. ### Financial stability and supervisory recommendations - Systemic risk: overall moderate; banking system well‑capitalized and liquid but pockets of vulnerabilities persist (CRE exposures, leveraged corporates, FX mismatches). - Key concerns: - HTM holdings and stable deposit base helped weather rate rises, but loan resets could raise NPLs, especially in CRE. - Foreign exchange mismatches as corporates increased external borrowing while hedging markets remain underdeveloped. - Recommendations: - Consider sectoral systemic risk buffer (SyRB) for real estate exposures or increase relevant risk weights. - Move toward a positive neutral countercyclical capital buffer (CCyB) over the medium term and communicate intentions early. - Expand supervisory colleges, stress testing capabilities, and improve corporate insolvency framework (out‑of‑court restructuring). - Ensure robust regulation for digital banks, EMIs, and VASPs before lifting moratoria. - Bank resolution, PCA, and AML/CFT - BSP intentions: establish separate resolution unit, draft resolution manual; PCA framework timelines considered overly long and warrant reform. - AML/CFT: Philippines placed under increased monitoring in June 2021; deadline to complete full action plan by January 2023 missed; FATF determined deficiencies remain (key gaps listed in source). ### Fiscal framework, MTFF and revenue mobilization - MTFF objectives: - Anchor debt sustainability, restore fiscal space, reach 3 percent deficit target in 2028, bring national government debt‑to‑GDP to less than 60 percent over the medium term, allocate at least 5 percent of GDP annually to infrastructure. - Assessment: - Pace of fiscal consolidation in MTFF is appropriate; expected to bring national government debt below 59 percent of GDP in 2027 (as recommended in 2022 Article IV). - Gross financing needs estimated to average 9.3 percent of GDP over the medium term. - Bond Sinking Fund had around 3.2 percent of GDP of assets at end‑2022. - Revenue mobilization recommendations: - Introduce a tax‑policy oriented medium‑term revenue strategy with more ambitious measures while keeping consolidation path unchanged. - Broaden VAT and corporate income tax bases by rationalizing exemptions; evaluate CREATE implementation; incentivize investment through expensing of capital spending. - Rationalize mining fiscal regime to introduce progressivity and reduce incentives for aggressive tax planning. - Continue tax administration digitalization (BIR Digitalization Program; Bureau of Customs’ Computer‑Aided Risk Management System); upcoming Fund TA using TADAT. ### List of proposed revenue measures (In percent of GDP, cumulative; IMF staff calculations for 2024–2026) - VAT on digital service providers: 0.06 0.06 0.06 (2024 2025 2026) - Passive income and financial intermediary taxation: 0.01 0.00 -0.01 - Excise tax on single‑use plastics: 0.02 0.02 0.02 - Excise tax on pre‑mixed alcoholic beverages: 0.001 0.001 0.001 - Excise tax on sweetened beverages and junk food: 0.29 0.31 0.34 - Mining fiscal regime: 0.05 0.04 0.04 - Excise tax on pick‑ups: 0.02 0.02 0.02 - Motor vehicles road user's tax: 0.05 0.1 - Total: 0.45 0.53 0.58 ### Expenditure reforms, pensions, and decentralization - MUP and veterans pension payments grew at an average of 12 percent annually during 2018–2022. - Reform options: institute a contributory MUP pension system; stop indexing pensions to salaries of current personnel. - Mandanas‑Garcia ruling raises share of revenues to LGUs; need stepped‑up capacity building on budgeting, execution, and reporting at local level. - Barangays: 42,027 barangays as of April 2023. ### Debt consolidation and projections (selected series) - Public debt (Percent of GDP), actual and projection: - 2022: 60.9; 2023: 61.1; 2024: 61.1; 2025: 60.9; 2026: 60.3; 2027: 58.8; 2028: 56.9; 2029: 55.1; 2030: 53.2; 2031: 51.4; 2032: 49.5 - Primary deficit (Percent of GDP): - 2022: 4.9; 2023: 3.2; 2024: 2.2; 2025: 1.7; 2026: 1.2; 2027: 0.5; 2028: 0.2; 2029: 0.1; 2030: 0.0; 2031: 0.1; 2032: 0.0 - Gross financing needs (Percent of GDP): - 2022: 10.6; 2023: 11.4; 2024: 10.0; 2025: 9.6; 2026: 8.3; 2027: 8.6; 2028: 7.9; 2029: 8.6; 2030: 7.7; 2031: 8.1; 2032: 7.6 - Memo indicators: - Real GDP growth (percent): 2022: 7.6; 2023: 5.3; 2024: 6.0; 2025: 6.1 - Inflation (GDP deflator; percent): 2023: 4.8; 2024: 3.0; 2025: 2.7 - Nominal GDP growth (percent): 2023: 10.4; 2024: 9.3; 2025: 8.9 - Commentary: "Public debt will rise slightly but then decline, reflecting expectations of a narrowing of primary deficits and favorable interest‑growth differential. Gross financing needs are expected to remain manageable." ### Implementation of FSAP recommendations (selected updates) - Macroprudential policy - Dividend restrictions handled case‑by‑case; macroprudential stress testing approach approved at FSPC and FSCC; credit risk component of MaPST completed; market risk and liquidity risk phases underway. - GaR model refinement and enhancement of fixed‑threshold models in progress. - Financial supervision and crisis management - Temporary regulatory relief measures largely unwound as of end‑June 2023 with specified exceptions (detailed timelines for certain measures). - Draft Circular on transfer of significant ownership re‑exposed July 13, 2023; BSP reappointed as lead supervisor in supervisory college reviews. - Circular No. 1150 (August 23, 2022) aligns large exposures with Basel framework; semestral large exposures reporting to commence in Q1 2024 (reference period ending December 2023). - Proposed amendments to Bank Secrecy Law (House Bill No. 7446) approved by Lower House on May 8, 2023 and transmitted to Senate on May 9, 2023; counterpart Senate bills pending. - PCA maximum allowable period updated to two years (November 2021). - BSP progressing on establishing resolution unit, drafting resolution manual, and updating ELA/LOLR frameworks. - AML/CFT - AMLC increased registration of covered persons from 7,018 (December 31, 2022) to 8,899 (August 31, 2023); outreach and interagency data sharing arrangements enhanced. - FATF gaps persist; authorities committed to implementing action plan with optimism for substantial progress by early 2024. - Climate and supervision - BSP conducting climate transition risk stress testing with World Bank; report targeted Q4 2023; exploring a data catalogue and participating in capacity building. ### Agriculture, food inflation, and policy responses - Food inflation: second among ASEAN peers in 2021; onion prices rose from around 70 pesos/kg (April 2022) to as much as 700 pesos/kg (December 2022); rice inflation 17.8 percent in September 2023 (highest since March 2009). - Short‑term policy responses in 2023: - Targeted cash transfers to 7.6 million poorest households; fertilizer discount vouchers; temporary domestic rice cap (Executive Order 39, Sept 5–Oct 4, 2023) with price caps at 41 pesos/kg (regular‑milled) and 45 pesos/kg (well‑milled). - Financial aid: 15,000 pesos to small rice retailers; release of 12.1 billion pesos for Rice Farmers Financial Assistance (RFFA) to assist about 2.4 million small rice farmers; allocation of 705 million pesos to Palayamanan Plus from excess rice tariff collection. - Department of Agriculture budget increased by 42.5 percent for FY2023. - Structural recommendations: - Facilitate cheaper food imports by reducing tariff and non‑tariff barriers; expand PPPs for value chain development; consider land consolidation via amendments to Comprehensive Agrarian Reform Law. ### Digital economy, inclusion, and social protection - Digital economy estimated contribution: about 10 percent of GDP in 2022. - Generative AI productivity gains: up to 14 percent for customer support agents. - Financial inclusion: banked Filipinos rose from 20.9 million to 42.9 million between 2019 and 2021; e‑money accounts drove most new accounts. - Broadband and connectivity: 17.7 percent of households had internet access in 2019; average price of one gigabyte of data in 2023 higher than most ASEAN peers. - Social protection: - 4Ps coverage: 4.4 million poor households; budget proposals include PHP113 billion in FY2024. - SP expenditure: 2.7 percent of GDP in 2022 (from 1.3 percent in 2015); SP coverage 36.7 percent. - Recommendations: scale up SP with revenue mobilization; digitalize SP systems, adopt national ID, use digital payments, and develop early warning systems for disaster response. ### Staff appraisal — consolidated policy recommendations - Monetary: maintain restrictive stance until inflation within target; be ready to raise rates if upside risks materialize; communicate BSP balance sheet intentions; coordinate with BTr on yield curve development. - Fiscal: continue consolidation under MTFF; complement with a medium‑term revenue strategy and ambitious tax measures; reform MUP pension system and improve expenditure efficiency. - Financial sector: strengthen supervision, expand macroprudential toolkit, improve bank resolution framework, and address AML/CFT deficiencies. - Structural: reduce infrastructure and education gaps, promote foreign investment, harness digital economy, address agricultural supply constraints, and implement climate adaptation with debt sustainability in mind. *Source: IMF staff report excerpt (Philippines, content unit 1phlea2023002).* ### 1. Drivers of Growth ___________________________________________________________________________ 26 ### 1. Drivers of Growth ### Context: post-pandemic landscape - The Philippine economy "emerged strongly from the pandemic but has since confronted a confluence of global shocks." - Domestic demand rebounded strongly after full reopening. - Prudent pre-pandemic fiscal management enabled a well-targeted fiscal response that supported recovery and contained the increase in poverty. - Subsequent external shocks included: the war in Ukraine, monetary policy tightening in advanced economies, heightened volatility in global financial markets following global banking turmoil, and terms of trade fluctuations. - Authorities’ actions: - Decisive monetary policy rate increases to fight inflation. - Fiscal consolidation under the medium-term fiscal framework (MTFF), adopted by Congress in 2022. - Targeted support programs for vulnerable households rather than generalized subsidies. - Formalization in May 2023 of an Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO) to design direct and non-monetary measures to reduce food and energy prices. - Structural reforms under “Build Better More” and recent legislation: - Public-Private Partnerships (PPP) Code to unify legal PPP framework and institutionalize best practices. - Measures to stimulate exports, strengthen minority investor protection, and spur FDI, including ratification of RCEP and amendments to the Retail Trade Liberalization Act, the Foreign Investment Act, the Public Service Act, and the Renewable Energy Act allowing full foreign ownership in the sector. ### Recent developments: policy normalization takes hold - Growth: - Real GDP growth moderated from 7.6 percent in 2022 to 4.3 percent (y/y) in Q2 2023. - Drivers of moderation: external headwinds, monetary policy tightening, fiscal underspending, normalization of pent-up demand, weaknesses in agri-fisheries. - Private consumption remained resilient due to favorable labor market dynamics, solid remittances, and personal income tax cuts. - Electronics exports (over half of total exports) slowed due to weaker external demand and the tech cycle; service exports benefited from China’s reopening. - Fixed investment was weak due to subdued real estate demand and higher borrowing costs; increased vacancy rates in commercial and residential real estate. - Decline in private building permits since 2020 partly reflects restrictions on Philippine offshore gaming operators. - Fiscal underspending (notably current expenditure) contributed negatively in Q2 2023. - Inflation and wages: - Headline inflation peaked at 8.7 percent (y/y) in January and decelerated, but ticked up to 4.9 percent (y/y) in October from a recent low of 4.7 percent (y/y) in July due to fuel and food prices. - Core inflation was 5.3 percent (y/y) in October, though on a declining trend. - Mitigating actions included decisive monetary tightening, decreases in import prices, a moderate minimum wage hike in Metro Manila from PHP570 to 610 in July 2023, and non-monetary measures including increased food imports. - Labor market: - Unemployment rate: 4.5 percent in September. - Underemployment rate: 10.7 percent in September. - Labor Utilization Composite Index (LUCI) largely recovered; labor force participation moved above pre-pandemic levels, though broader measures suggest some slack remains. - External sector: - Current account (CA) deficit widened to 4.5 percent of GDP in 2022 from 1.5 percent of GDP in 2021. - External position in 2022 assessed as moderately weaker than implied by fundamentals and policies. - Narrowing of CA in 2023 supported by lower imports of fuel and capital goods and a strong recovery in the service sector. - Gross international reserves (GIR) rebuilt to US$101.1 billion in October 2023 from US$93.0 billion in September 2022. - GIR metrics: ARA metric (190 percent); coverage of 7.2 months of imports in 2023. - Financial conditions: - Domestic financial conditions tightened. - Sovereign spreads returned to pre-pandemic levels; private credit growth slowed due to stricter credit standards and a weaker exchange rate. - Real estate prices below previous highs; corporate spreads are low. - Fiscal developments: - National government fiscal deficit narrowed from 8.3 percent of GDP in 2021 to 7.2 percent of GDP in 2022 (based on GFS 2014). - H1 2023 fiscal deficit was 18 percent lower than H1 2022: revenues improved by 7.7 percent while spending rose by 0.4 percent; current spending was 1.4 percent lower. - National government debt: 60.9 percent of GDP at end-2022 to 61.0 percent of GDP at end-June 2023. ### Outlook: a more gradual disinflation - Growth projections: - Real GDP growth expected to bounce back in H2 and reach 5.3 percent in 2023 and 6.0 percent in 2024. - Output gap projected to close in 2023 and remain close to balance in 2024. - Recovery in private investment expected to be gradual while excess real estate inventory is run down. - Government infrastructure program and greater FDI/PPP participation expected to gradually crowd in private investment and help realize a growth potential of about 6-6½ percent over the medium term. - Inflation projections: - Headline inflation forecast to average 6.0 percent in 2023 and converge to the target band in Q1 2024, based on October 2023 WEO assumptions and an expected normal rice harvest in Q4 2023, though reduced rice stocks and disincentives to import add uncertainties. - Core inflation likely to remain above the upper target band in 2023 and fall within the range by Q1 2024, based on IMF QPM, econometric model, and QIPF forecasts predicated on ex-ante real interest rates remaining above neutral and the observed moderate minimum wage hike being followed by other regions. - External position: - CA deficit expected to narrow to 3.0 percent of GDP in 2023 and 2.6 percent of GDP in 2024 from 4.5 percent of GDP in 2022, supported by lower global commodity prices, a pick-up in electronics exports H2 2023, and higher service exports driven by a rebound in the global capex cycle. - Fiscal outlook: - Fiscal consolidation expected to continue in 2024. - Fiscal outturn expected to fall below the deficit ceiling of 6.1 percent of GDP from a deficit of 7.3 percent of GDP last year, mainly due to lower transfers to local government units (LGUs). - Revenue collection in 2023 so far better than targeted but projected to be lower than in 2022 as a percent of GDP due to the second tranche of personal income tax rate reduction and transition from monthly to quarterly VAT payment. - Proposed FY2024 budget approved by the House in September (in line with MTFF) aims for a deficit of 5.1 percent of GDP, with consolidation from higher tax revenues and restraint in current expenditure. - IMF staff projects a similar deficit but with higher non-tax revenues and higher interest payments reflecting elevated global and domestic interest rates. ### Risks: tilted to the downside - Growth risks (Annex III): - Persistently high global and local inflation could necessitate further monetary tightening, amplifying financial vulnerabilities from higher corporate leverage and balance-sheet mismatches. - Abrupt global slowdown (including in China) could reduce goods and services exports. - Sharp swings in market sentiment and risk premia could cause sudden tightening of financial conditions, capital outflows, and peso depreciation. - Intensified geopolitical tensions and fragmentation could disrupt supply chains and investment. - Upside scenario: a more resilient US economy could boost electronics and service exports and domestic demand. - Inflation risks (Annex IV): - Upside risks from higher global oil prices affecting transportation and electricity; petitions for price rises have increased. - Higher global or domestic food prices, particularly rice, could result from typhoons, El Niño, or export bans by rice-exporting countries. - Risk of second-round effects from wages and political pressure to raise the minimum wage further (a proposal to raise the minimum wage by 26 percent—PHP150—was not approved in the last congressional session). - Authorities’ risk assessment: - Authorities acknowledge downside risks to growth and upside risks to inflation. - They emphasize supply-side measures to protect purchasing power and the transmission of BSP monetary tightening to reduce inflation. - Expectation that acceleration of public spending in H2 2023 could improve growth performance. ### Policy discussions and recommendations - General assessment: - Authorities handled the COVID exit appropriately via monetary tightening and fiscal consolidation, containing inflation and increasing policy space. - Policy mix: - Consensus on maintaining a sufficiently tight monetary stance until inflation is firmly within the target range; readiness to hike further if upside risks materialize. - Tight monetary policy helps mitigate risks from second-round effects, rising food prices, risk-off sentiment, and non-linear exchange rate pass-through. - Fiscal consolidation under the MTFF complements monetary policy and rebuilds buffers to respond to adverse shocks (including climate shocks). - An even more ambitious revenue mobilization strategy would enhance social spending required for poverty reduction. - Financial stability: - High interest rate environment increases urgency for strengthening systemic risk monitoring and financial supervision, reviewing bank resolution framework components, expanding the macroprudential toolkit, and calibrating it to address real estate exposures. - Structural reforms and long-term growth: - Reaping the demographic dividend requires sustained efforts to reduce infrastructure and education gaps, promote foreign investment, strengthen governance, and harness the digital economy. - Complementary actions: address supply-side issues in agriculture, strengthen social safety nets, and implement a multi-pronged approach to climate risks. *Source: IMF staff report excerpt (Philippines).* ### 18. Higher interest rates and fiscal consolidation are supporting disinflation by taming ### 18. Higher interest rates and fiscal consolidation are supporting disinflation by taming ### Role of interest rates and fiscal consolidation - Higher interest rates and fiscal consolidation are supporting disinflation by taming demand pressures and anchoring inflation expectations. - The IMF’s QIPF and QPM model-based decompositions provide a read on the pace of interest rate transmission and the role of rate hikes and exchange rate flexibility in stabilizing inflation and mitigating output gap volatility. - Quantitative models clarify that staying the course of policy is advisable even with interrelated disturbances (shocks to commodity prices, wage pressures, non-linear exchange rate pass-through) that could dislodge expectations from the central bank’s target zone. - Prudent fiscal policy: - rebuilds buffers for future stimulus, - helps reduce inflationary pressures, - augments interest rate hikes, - creates more conventional policy space. ### Foreign exchange intervention (FXI) — use cases and guidance - Allowing the exchange rate to absorb shocks remains crucial. - FXI may be appropriate under certain circumstances to smooth destabilizing premia and address risks to price stability. - Evidence of heightened volatility in FX markets, measured by 3-month UIP premia, motivates a “use case” where FXI could reduce “excessive” depreciation in illiquid FX markets after large risk-off shocks. - Large non-fundamental disturbances are potentially problematic given non-linear pass-through to inflation expectations and in the presence of FX mismatches. - Given that the 2022 external sector position is assessed to be moderately weaker than the level implied by fundamentals and desirable policies, and the Philippines has an inflation-targeting monetary policy framework: - deployment of FXI, if any, should be temporary and not a substitute for warranted macroeconomic policy adjustments. ### Authorities’ views on FX and models - The BSP is an inflation-targeting central bank and views the interest rate as its main policy instrument; other policy levers are secondary. - The authorities state FX interventions are exclusively aimed at ensuring orderly market conditions and preventing sharp exchange rate movements from unduly influencing inflation or inflation expectations. - The authorities appreciate the Integrated Policy Framework (IPF) analysis but consider the IPF relatively new and plan further study of its application. - The authorities encourage further discussion of model structure and parameters, and are interested in differences between the BSP’s QPM (customized with IMF ICD TA) and the IMF’s QIPF. - The authorities highlight the importance of nonlinear exchange rate passthrough: small exchange rate fluctuations have no effect on inflation expectations, but movements exceeding a certain threshold can dislodge expectations and may justify smoothing exchange rate volatility. ### Monetary policy: maintaining a restrictive stance - Recommendation: The BSP should stay the course until inflation fully returns to the target. - Policy actions and status: - BSP hiked policy rates by 425 basis points cumulatively in 2022 and early 2023 before pausing in May. - Resumed in late October with an off-cycle 25 basis point hike due to continued inflationary pressures. - Assessment and guidance: - With real rates above neutral (estimated between 1-2 percent), staff’s assessment is that the BSP has reached a sufficiently tight stance to bring headline inflation down to the target band by Q1 2024. - As risks to the inflation outlook, including second-round effects, remain firmly tilted to the upside, the BSP should stand ready to raise interest rates further should upside risks continue and maintain a higher-for-longer policy rate path until inflation firmly falls within the target range. - The reduction of tariffs on imported food items could help mitigate pressures on domestic food prices given their high level in some sectors (Annex IV). ### Operational framework refinements - Over the medium term, the BSP aims to reduce the reserve requirement which is high compared to regional peers and poses an indirect tax on financial intermediation. - BSP cut the reserve requirement to 9.5 percent at end-June but combined this with the expiry of a pandemic-era measure that allowed banks to count loans provided to SMEs towards meeting their reserve requirements. - The BSP could manage liquidity more flexibly by expanding market-based operations like reverse repurchase operations (RRPs). - Following Fund TA, the BSP moved to a variable rate RRP and introduced 56-day BSP bills to help manage liquidity and provide a market-determined benchmark for pricing short term instruments. - As the BSP exits extraordinary liquidity support measures and lets maturing treasury securities run off, clearer communication on the desired size of its balance sheet in normal times and use of its treasury securities portfolio would be helpful. ### Yield curve development and coordination with the BTr - Issue: large discrepancy between yields on BSP bills and Treasury bills, creating challenges for the banking sector in pricing debt instruments. - Bloomberg valuation tool (BVAL) relies exclusively on government bond yields; banks have started using the RRP rate explicitly for pricing working capital loans. - Recommendations to develop a smooth yield curve: - BTr should refrain from keeping supply at the short end artificially low by transitioning to a price-taker model during bond auctions. - Reduce the number of individual bond series and consolidate maturities into a reduced number of benchmark bonds to concentrate trading activity. - Harmonize approved participants across markets; current exclusion of non-banks from the BSP bill market is a major driver of the yield discrepancy. - Address obligations and performance of primary dealers, including market-making and facilitating the use of repos of government securities. ### Authorities’ monetary policy views (additional) - BSP agrees maintaining a restrictive stance is appropriate until inflation falls firmly within target, particularly given upside risks to electricity and transportation prices. - BSP intends to utilize its holdings of government securities to support monetary operations and enhance transmission. - BSP is working on expanding the list of market participants with access to BSP bills and has requested follow-up TA from the IMF on developing the benchmark yield curve. - The BTr views the yield differential as partly due to excess structural liquidity which will decline over time. ### Financial sector policies: safeguarding financial stability - Overall systemic risk: moderate, reflecting a well-capitalized and liquid banking system, but pockets of vulnerabilities remain. - Observations: - Banks' high share of holdings in held-to-maturity (HTM) portfolios and a stable deposit base have helped weather rising interest rates. - Closing of the credit gap and conservative loan-value ratios (60 percent for most loans) reduced credit costs. - Ratio of non-performing loans (NPLs) on residential real estate remains above the pre-pandemic level despite recent decline. - As interest rates on loans taken during COVID-19 reset, NPLs could increase further, especially in commercial real estate (CRE) where vacancy rates remain elevated and some developers have high leverage. - Despite the regulatory limit for real estate loans (25 percent of total loans), a prolonged CRE slowdown would still affect banks’ profitability. - Foreign exchange mismatches may grow as corporates increased external borrowing while hedging markets remain underdeveloped. - Recommendations: - Consider introducing a sectoral systemic risk buffer (SyRB) for real estate exposures or increase relevant risk weights. - BSP should move toward a positive neutral countercyclical capital buffer (CCyB) over the medium term and could communicate its intention early to signal commitment. - Expand supervisory colleges’ coverage to improve coordinated oversight of financial conglomerates and address data gaps on large conglomerates. - Expand stress testing capabilities, focusing on highly leveraged sectors. - Improve the corporate insolvency framework by introducing out-of-court restructuring and settlement options. - Ensure robust regulation for digital banks, EMIs, and VASPs (in line with the IMF-FSB Synthesis Paper on Policies for Crypto-assets) before lifting moratoria. ### Bank resolution, PCA, and AML/CFT - Bank resolution: - Current system is outdated and relies on finding a willing rescuer for a distressed bank. - BSP’s intention to establish a separate resolution unit and draft a resolution manual is welcome. - PCA framework timelines, notably overly long, warrant reform. - BSP efforts to improve emergency liquidity assistance (ELA) and lender of last resort (LOLR) frameworks can complement resolution work. - AML/CFT: - Philippines placed on the list of jurisdictions under increased monitoring in June 2021; deadline to complete full action plan by January 2023 was missed. - Authorities committed to implementing the action plan; some progress made (e.g., enhanced understanding of targeted financial sanctions). - FATF determined at the June 2023 plenary that deficiencies remain. - Key remaining FATF gaps: - effective risk-based supervision of designated non-financial businesses and professions, - mitigating risks associated with casino junkets, - enhancing law enforcement access to beneficial ownership information, - investigating and prosecuting complex money laundering cases, - increasing identification, investigation, and prosecution of terrorism financing cases. - Reforming the bank secrecy law would enhance the BSP’s supervisory powers and strengthen AML/CFT effectiveness. ### Authorities’ views on vulnerabilities and reform - Authorities view vulnerabilities in conglomerate and real estate sectors as contained, while open to strengthening prudential frameworks. - BSP highlights: - real estate loan growth has recently slowed and NPLs are slightly lower than last year, - existing real estate loan limit and real estate stress test limits perform a similar role to a SyRB, - authority exists to require banks to increase or hold capital beyond minimum thresholds, - circular requiring all banks to develop recovery plans commensurate to risk profile and systemic importance, - moving forward on revamping the bank resolution framework and drafting a resolution manual. - PCA timelines updated in November 2021 and limited to two years. - On AML/CFT, authorities reiterate commitment to completing all FATF action items and express optimism substantial progress could be made by early 2024. ### Fiscal policy: consolidation under the Medium-Term Fiscal Framework (MTFF) - MTFF objectives: - anchor debt sustainability and restore fiscal space, - reach the 3 percent deficit target in 2028, - bring national government debt-to-GDP ratio to less than 60 percent over the medium term, - allocate at least 5 percent of GDP annually to infrastructure spending. - Assessment: - Pace of fiscal consolidation in the MTFF is appropriate. - Front-loaded consolidation starting in 2022–23 is expected to bring national government debt down to below 59 percent of GDP in 2027 as recommended in the 2022 Article IV consultation. - Authorities, with Fund TA, are enhancing macro-fiscal modeling capacity to better align fiscal and macroeconomic projections. - Suggestion: identify the 60 percent of GDP debt ceiling as a fiscal anchor and use the fiscal deficit as an operational target. - Sovereign Risk and Debt Sustainability Framework (SRDSF): - Points to an overall low risk of sovereign stress (Annex VII). - Fiscal space narrowed since the pandemic but some remains; adherence to MTFF deficit targets would enhance space. - Gross financing needs estimated to average at 9.3 percent of GDP over the medium-term. - Bond Sinking Fund had around 3.2 percent of GDP of assets at end-2022. - Importance of enhancing debt management capacity and deepening fixed-income market to ensure stable financing, including from foreign investors. - Publishing a medium-term debt strategy would strengthen debt management by providing clear borrowing objectives and intentions. ### Revenue mobilization and MTFF complements - National government tax-to-GDP ratio: 14.6 percent of GDP in 2022. - VAT collection is particularly weak, capturing only a third of its potential tax base. - Recommendation: introduce a tax-policy oriented medium-term revenue strategy with more ambitious tax measures to protect and finance social spending and recover from natural disasters while keeping the consolidation path unchanged. - Timely implementation of tax policy measures identified in the FY2024 budget is critical. - Additional measures to enhance revenue generation could include: - broadening the VAT and corporate income tax (CIT) bases by rationalizing exemptions, - evaluating implementation of the 2021 Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), - incentivizing investment through expensing of capital spending. - Rationalization of the mining fiscal regime to simplify royalty and tax structure by introducing progressivity and reducing incentives for aggressive tax planning while maintaining a competitive investment climate. - Ongoing efforts to improve tax administration include digital tax filing and electronic payments: - Bureau of Internal Revenue’s Digitalization Program, - Bureau of Customs’ Computer-Aided Risk Management System. - Upcoming Fund-led TA on assessing tax administration performance using the Tax Administration Diagnostic Assessment Tool (TADAT) will help pinpoint areas for further enhancement. ### List of proposed revenue measures (In percent of GDP, cumulative) - VAT on digital service providers: 0.06 0.06 0.06 (2024 2025 2026) - Passive income and financial intermediary taxation: 0.01 0.00 -0.01 - Excise tax on single-use plastics: 0.02 0.02 0.02 - Excise tax on pre-mixed alcoholic beverages: 0.001 0.001 0.001 - Excise tax on sweetened beverages and junk food: 0.29 0.31 0.34 - Mining fiscal regime: 0.05 0.04 0.04 - Excise tax on pick-ups: 0.02 0.02 0.02 - Motor vehicles road user's tax: 0.05 0.1 - Total: 0.45 0.53 0.58 - Note: IMF staff projections for 2024-2026 GDP are used to calculate the percentage of GDP. *Source: IMF staff and Philippines authorities (content unit 1phlea2023002).* ### 35. Implementing expenditure reforms will help reach the deficit targets. During 2018-2022, ### 1phlea2023002 - 35. Implementing expenditure reforms will help reach the deficit targets. During 2018-2022, ### Expenditure reforms, pensions, and decentralization - Military and uniformed personnel (MUP) and veterans pension payments grew at an average of 12 percent annually during 2018-2022. - Reform options identified: - Institute a contributory MUP pension system. - Stop indexing pensions to salaries of current personnel. - These reforms would create additional fiscal space. - Fiscal decentralization challenges and needs: - The Mandanas-Garcia ruling effectively raised the share of total revenues allocated to the LGUs, necessitating stepped-up capacity building on budgeting, execution, and reporting at the local level. - Developing realistic transition plans in fiscal decentralization is critical. - Collect fiscal data from the barangays and set up a unit in the Department of Finance to monitor fiscal risks from the LGUs. - Barangay context: - Barangay is the smallest administrative division in the Philippines. There were 42,027 barangays in the Philippines as of April 2023. ### Public Financial Management (PFM) and procurement reforms - Momentum in PFM reforms: - Key legislative initiatives: Progressive Budgeting for Better and Modernized Governance and National Government Rightsizing Program to improve fiscal transparency and efficiency. - Digital transformation reinitiated with Fund TA support for an Integrated Financial Management Information System and use of data analytics tools to inform budget decision-making. - Importance of proper sequencing, timely implementation, and drafting a PFM reform action plan. - Procurement and transparency: - Plan to amend the Government Procurement Reform Act to enhance the legal and institutional framework. - Implementation of the modernized Philippine Government Electronic Procurement System (PhilGEPs) has improved access to procurement information and transparency. - Ongoing need for close monitoring of the number of bidders and use of data analytics to address remaining weaknesses. ### Oversight of GOCCs, PPPs, and Social Security Institutions (SSIs) - Fiscal risks and oversight: - An informative Fiscal Risks Statement with detailed analysis is published annually, but more can be done. - Improving GOCC oversight requires: - Establishment of a cross-agency platform to strengthen coordination across oversight agencies. - Improvement in the database and tools for financial analysis and reporting of the GOCCs. - Development of a framework for issuing guarantees to the GOCCs. - Public-Private Partnerships (PPPs): - Reemphasis on financing infrastructure gaps through PPPs; requires close attention to project selection, clear value-for-money assessments, and reporting of fiscal risks through a complete fiscal register on all PPPs. - The new PPP Code codifies fiscal risk assessment in the early stage of PPPs. - IMF stands ready to provide further TA on quantifying fiscal costs. - Social Security Institutions: - The Philippines’ three SSIs have improved disclosure of contract liabilities. - Despite positive operating balances, their defined benefit nature warrants close monitoring and analysis of actuarial soundness as the population ages. - The three SSIs are the Government Service Insurance System, Social Security System, and Philippine Health Insurance Corporation. ### Authorities’ views on revenue and expenditure - Revenue measures under active consideration or advanced stages: - VAT on digital service providers (DSPs), Package 4 of the Comprehensive Tax Reform Program (P4). - Excise taxes on single-use plastics, sweetened beverages, junk food, and pre-mixed alcoholic beverages. - Adjustment of the motor vehicle road user’s tax. - Rationalization of the mining fiscal regime. - Legislative and administrative actions: - Authorities requested Fund TAs on tax expenditure assessments and a VAT diagnostic to help broaden the VAT and CIT bases. - Ease of Paying Taxes Act expected to improve compliance and tax administration. - Authorities receptive to establishing a more formal debt anchor along with an operational deficit target and will explore publication of a MTDS. - Actively communicating medium-term borrowing strategy and targets through investor relations engagements. - Commitment to PFM and MUP pension reform: - Several PFM legislative initiatives and MUP pension reform bills filed; National Government Rightsizing Program and MUP Pension System Reform bills passed by the Lower House earlier this year. - Recent enactment of the Automatic Income Classification of LGUs Act on October 26, 2023 expected to enable LGUs to unlock full economic potential. - Passage of the PPP Code expected to bolster PPP role without resulting in additional fiscal risks. ### Structural policies: productivity, digital economy, and investment - Raising growth potential requires sustained efforts to raise productivity by reducing infrastructure and education gaps and promoting foreign investment. - Trade and supply-side reforms needed: - Maximize benefits from RCEP and foreign investment by addressing supply-side issues in agriculture, removing non-tariff barriers, boosting responsible mining for green minerals such as nickel, and improving the ease of doing business. - Renewed push on trade facilitation and establishment of green lanes for flagship infrastructure projects. - Maharlika Investment Corporation (MIC): - Draft Implementing Rules and Regulations (IRR) under review require MIC to comply with GOCC governance and procurement rules, be subject to a joint Congressional oversight committee, and preclude issuance of bonds guaranteed by the government. - Finalizing strategic investment policy after review of IRRs and establishment of a Board of Directors is a priority. - Digitalization: - Digitalization key to supporting service sector-led growth, financial inclusion, and government efficiency. - Need to upskill labor to leverage AI tools and develop digital infrastructure outside urban centers. - A whole-of-government approach to digital transformation to anchor the Philippine Development Plan objectives. ### Poverty, inequality, and social protection - Poverty trends and targets: - Poverty rate declined from 42.5 percent of the population in 1985 to 16.7 percent in 2018, then increased to 18.1 percent in 2021. - Poverty threshold (National Poverty Line) was set at PHP12,030 per month for 2021, compared to PHP10,756 in 2018. - Authorities aim to reduce the poverty rate to single-digit levels by 2028 through sustained growth, job creation, and social protection. - Social programs and pilots: - Conditional cash transfer programs, in-kind food support, and strong remittance flows helped contain the pandemic-related increase in poverty. - Food STAMP Program (delivered through Electronic Benefit Transfer cards) piloted to expand coverage and improve delivery; complements the Pantawid Pamilyang Pilipino Program (4Ps). - Inequality and labor participation: - Top 1 percent of earners capture 17 percent of national income compared to 14 percent by the bottom 50 percent. - Policies should support job creation in middle-skilled occupations and inclusive rural development. - Female labor force participation stood at 51 percent in 2021 compared to 75 percent for male participation. - Authorities aim to increase the female labor participation rate to 52-54 percent by 2028. ### Climate vulnerability, mitigation, and public investment - Climate and emissions: - The economy is highly vulnerable to extreme weather-related events; adaptation should focus on resilient infrastructure and support for vulnerable households while considering debt sustainability. - Estimated 1.98 metric tons of carbon dioxide equivalent per capita emitted in 2020 versus a global average of 4 metric tons per capita. - Nationally Determined Contribution (NDC) targets cutting greenhouse gas emissions 75 percent below baseline levels in 2030, conditional on external support. - Renewable targets and mitigation tools: - Authorities aim to increase share of renewables in the energy mix from 22 percent currently to 35 percent by 2030 and 50 percent by 2040. - Introduction of a carbon tax recommended, with revenues used to partially compensate affected households and business. - Measures to facilitate foreign ownership in renewable energy and operationalization of the Philippine Sustainable Finance Roadmap and Sustainable Finance Guiding Principles underway. - Analytical tools: - IMF Debt Investment Growth and Natural Disasters (DIGNAD) simulations provide a baseline for climate adaptation needs. - A climate public investment management assessment (C-PIMA) would facilitate green PFM practices and resilient infrastructure construction. ### Authorities’ assessments on growth and reforms - Growth and trade: - Authorities estimate RCEP implementation could raise real GDP by 1.9 percent and lower poverty by 3.6 percentage points by 2031. - Establishment of an Inter-agency Technical Committee on Non-Tariff Measures and Anti-Red Tape Authority initiatives to streamline business processes and link to the ASEAN Single Window. - Digitalization and skills: - Authorities emphasize improving connectivity, upskilling labor to meet AI challenges, establishment of an AI Council, and engagement with the IT Business Process Association of the Philippines on boosting digital skills in students. - Social protection and targeting: - Authorities developing a community-based monitoring system to generate disaggregated data for targeting and poverty analysis. - 4Ps facilitates access to health and education; Food STAMP program expected to reduce involuntary hunger and ensure complementarity. ### Staff appraisal: macro stance, financial stability, AML/CFT, and fiscal consolidation - Macro and monetary policy: - Authorities handled the COVID exit appropriately with structural reforms; monetary policy rates raised decisively to fight inflation, complemented by fiscal consolidation under the MTFF. - Growth expected to bottom out in 2023 with rebound supported by acceleration in public investment and improved external demand for service exports. - Inflation projected to gradually approach the target in early 2024, though recurrent supply shocks pose risks. - Recommendation: Monetary policy should maintain a higher-for-longer policy rate path until inflation fully returns to target; BSP should stand ready to raise rates further if upside risks materialize, communicate desired BSP balance sheet size in normal times, and continue coordination with the BTr to develop the benchmark yield curve. - Financial sector: - Banking sector is well-capitalized and liquid but pockets of vulnerabilities remain (exposure to commercial real estate and leveraged corporates); close monitoring and supervisory actions warranted. - BSP should continue strengthening financial supervision, regulation, and the bank resolution framework. - AML/CFT: - Efforts to progress on outstanding AML/CFT issues need stepping up to support swift exit from the FATF gray list. - Key remaining gaps: effective risk-based supervision of designated non-financial businesses and professions, risks from casino junkets, law enforcement access to beneficial ownership information, and investigation/prosecution of complex money laundering cases. - Fiscal consolidation and recommendations: - Fiscal consolidation under the MTFF is on track; pace appropriate to reach fiscal targets. - MTFF could be complemented by a tax-policy oriented medium-term revenue strategy with more ambitious tax measures to create fiscal space. - Important measures: reform MUP pension system, improve expenditure efficiency, curtail contingent liabilities, effectively manage decentralization and PPPs to control spending, enhance governance, and reduce fiscal risks. - Long-term growth: - Reaping demographic dividend requires reducing infrastructure and education gaps, promoting foreign investment, harnessing the digital economy, addressing agricultural supply-side issues, removing non-tariff barriers, boosting responsible mining, reducing governance and corruption vulnerabilities, and improving ease of doing business. - Policies should remain focused on reducing poverty and addressing inequality through quality job creation, education attainment, and enhanced social protection programs. *IMF staff summary of the Philippines Article IV consultation materials included in content unit 1phlea2023002.* ### 54. Policies to address climate risks should take a multi-pronged approach. Adaptation ### 54. Policies to address climate risks should take a multi-pronged approach. Adaptation ### Climate and green finance policy recommendations - Adaptation efforts should focus on: - increasing public investment for resilient infrastructure; - supporting the most vulnerable households while paying due regard to debt sustainability. - Transition to renewable energies should build on: - a recent measure to facilitate foreign ownership in the renewable energy sector; - ongoing efforts of the BSP to stimulate green finance. ### Article IV schedule - It is expected that the next Article IV consultation take place on the standard 12-month cycle. ### Growth drivers and outlook (high-level findings) - The Philippines is one of the fastest recovering countries in ASEAN-5. - Recovery drivers and developments: - Pent-up demand drove the rebound, with cooling from policy tightening in Q2 2023. - Service sector pickup following full reopening, including recovery in contact-intensive industries (e.g., accommodation, transport, construction). - PMI has been moving in line with the slowdown of growth. - Labor market improved with unemployment rate and underemployment rate close to their historical lows. ### Inflation and commodity risks - Headline inflation decelerated from the peak in January, but recently ticked up due mainly to resurgence of supply-driven shocks. - Key risks: - Key food prices including vegetables and rice, and commodity prices—especially crude oil—remain volatile. - Core inflation remains persistent but gradually eased reflecting decelerating service inflation. - Short-term inflation expectations have edged up recently. ### Monetary and financial conditions - The interbank and short-term T-bill rates have largely followed the BSP’s rates. - Bank reserves fell following the reduction in the reserve requirement ratio. - The BSP is letting its government securities portfolio run off. - The stock market has not recovered pre-pandemic levels; the exchange rate has only partly reversed the depreciation that occurred in late 2022 but the EMBI spread is low. - The yield curve has moved up and flattened but not inverted, influenced by the rise in U.S. yields. ### Macrofinancial linkages - Credit growth has started ticking down due to the BSP’s monetary tightening campaign, which has helped close the credit gap. - 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 have weathered the increase in interest rates but loan growth has slowed. - The share of bank loans to micro, small and medium enterprises is still lower than pre-pandemic. ### External sector assessment — key points and metrics - NIIP widened to -9.9 percent of GDP in 2022 from -7.2 percent of GDP in 2021, explained by widened CA deficit and drops in foreign reserves. - Foreign reserves held by the BSP accounted for about 42 percent of total external assets in 2022 (down from 45 percent in 2021). - Key components of external liabilities: FDI (28 percent of GDP) and portfolio investment (20.3 percent of GDP). - Total external debt slightly increased to 27.5 percent of GDP in 2022 from 27.0 percent of GDP in 2021. - FX reserves: GIR declined to US$96.1 billion (23.8 percent of GDP) at end-2022 from US$108.8 at end-2021. - Reserves were about 7.6 months of imports of goods and services as of end-2022, or about 196 percent of the IMF’s reserve adequacy metric. ### Current account and real exchange rate assessments - CA deficit widened to 4.5 percent of GDP in 2022 from 1.5 percent of GDP in 2021; expected to narrow to 3.0 percent of GDP in 2023. - From an S-I perspective, CA deficit driven by domestic demand-led recovery; public sector started fiscal consolidation by rewinding pandemic-related measures. - External Balance Assessment (EBA) model estimates: - cyclically adjusted CA of −3.5 percent and a CA norm of -1.3 percent of GDP in 2022; - with a COVID-19 adjustor (0.4 percent of GDP attributed to transportation), staff estimates a CA gap of -1.7 percent of GDP for 2022. - Peso real effective depreciation of 1.7 percent in 2022; nominal peso depreciated 9.6 percent versus the US dollar. - Staff CA gap of -1.7 percent of GDP implies a REER gap of 5 percent (using an estimated elasticity of 0.33). REER index and level models point to 2022 REER gaps of 18 percent and 8 percent, respectively. ### Financial flows and vulnerabilities - Net financial flows increased to 3.2 percent of GDP in 2022 from 1.6 percent of GDP in 2021 due to net inflows of debt securities in foreign portfolio investment and residents’ repayment of bank loans, despite slowdown of net FDI inflows to 1.3 percent of GDP in 2022 from 2.5 percent of GDP in 2021. - Inflows of debt securities increased to 0.4 percent of GDP in 2022 from -0.4 percent of GDP in 2021 due to increases in general government debt. - Assessment: as a small open economy, the Philippines is exposed to cross-border capital flow volatility; expectations and global risk appetite can have outsized influence on capital flows. ### Fiscal and medium-term indicators (selected figures) - Demographics and social indicators: - Population (2022): 111.6 million; - Life expectancy at birth (2020): 72.1. - Poverty below $1.90 a day (2021): 3 percent; - Poverty below the national poverty line (2021): 18.1 percent. - Inequality (2021, income shares): Top 10 percent: 32.5; Bottom 20 percent: 6.5. - IMF quota: SDR 2,042.9 million. - Selected macro projections (Real GDP, annual percent change): - 2020: -9.5 - 2021: 7.7 - 2022: 7.6 - 2023 (Est.): 5.3 - 2024 (Proj.): 6.0 - 2025 (Proj.): 6.1 - Output gap (percent, +=above potential): - 2020: -8.5 - 2021: -3.5 - 2022: 0.4 - 2023: 0.0 - 2024: 0.1 - 2025: 0.1 - Unemployment rate (percent of labor force): - 2020: 10.4 - 2021: 7.8 - 2022: 5.4 - 2023: 4.7 - 2024: 5.1 - 2025: 5.6 - Consumer prices (period average): - 2020: 2.4 - 2021: 3.9 - 2022: 5.8 - 2023: 6.0 - 2024: 3.7 - 2025: 3.0 - Claims on private sector (in percent of GDP): - 2020: 49.9 - 2021: 48.9 - 2022: 47.7 - 2023: 48.3 - 2024: 48.3 - 2025: 48.6 - National government overall balance (in percent of GDP): - 2020: -7.4 - 2021: -8.3 - 2022: -7.2 - 2023: -5.7 - 2024: -5.0 - 2025: -4.6 - National government gross debt (in percent of GDP): - 2020: 54.6 - 2021: 60.4 - 2022: 60.9 - 2023: 61.1 - 2024: 61.1 - 2025: 60.9 - Current account balance (in percent of GDP): - 2020: 3.2 - 2021: -1.5 - 2022: -4.5 - 2023: -3.0 - 2024: -2.6 - 2025: -2.3 - Gross reserves (US$ billions): - 2020: 110.1 - 2021: 108.8 - 2022: 96.1 - 2023: 98.1 - 2024: 93.4 - 2025: 89.4 - Nominal GDP (US$ billions): - 2020: 361.8 - 2021: 394.1 - 2022: 404.3 - 2023: 434.9 - 2024: 471.8 - 2025: 510.3 ### Institutional and modelling developments - BSP forecasting and policy analysis: - The BSP modernized its FPAS by reviewing and extending the semi-structural quarterly projection model (QPM) beginning January 2021 with Fund TA. - The original QPM (PAMPh v1.0) was developed with assistance from the Global Projections Model Network (GPMN). - The QPM has been extended to include richer disaggregation, fiscal policy and macrofinancial linkages, and tools such as foreign exchange interventions (FXI). - Benefits and role of QPM: - Full operationalization of the QPM will enhance the BSP’s ability to evaluate the potential impact of policy decisions across monetary, financial supervision, and macroprudential sectors. - The QPM and the quantitative model for the integrated policy framework (“QIPF”) can be complementary: - Semi-structural QPM: easier to fit to country characteristics, useful for routine policy analysis and quicker implementation. - Full DSGE QIPF: more micro-founded, suited for structural shifts and welfare-based analysis, but requires higher technical capacity. *Source: 1phlea2023002 - 54. Policies to address climate risks should take a multi-pronged approach. Adaptation* ### 4. The IMF country team maintains their own version of the QPM. This allows the team to ### The IMF country team maintains their own version of the QPM. This allows the team to ### Role and advantages of the country-team QPM - Produces baseline forecasts and risk scenarios as needed for regular surveillance. - Complements the existing spreadsheet-based macroframework by offering a more rigorous macroeconomic model for forecasting. - Allows the country desk to analyze the impact of different policy responses to shocks in a theoretically consistent way. - Offers an integrated way of thinking about policy responses and trade-offs between different tools. - Future plan: forecasts produced by the QPM will be combined with those from the existing macroframework through the IMFE platform. ### Use of QPM for 2023 staff visit policy discussions - The QPM was used extensively for policy discussions with the authorities during the 2023 staff visit. - Familiarity: Both the country team and the authorities were familiar with the model following extensive CD engagement. - Context: Discussions occurred against a backdrop of a surge in inflation and the federal reserve’s abrupt monetary tightening campaign in 2022 which had led to a sharp depreciation of the Peso. - Authorities’ view: Any overshooting of the exchange rate was seen by the authorities as complicating the trade-off with higher policy rates as an important ingredient to maintain a healthy interest rate differential with the U.S. and FXI to smooth excessive volatility or abrupt changes in the exchange rate. - Scenario work: Three scenarios discussed: - BSP passively follows the model’s optimal path. - Federal Reserve would not cut rates before end-2024. - BSP copies the higher-for-longer strategy. - Outcome: Centering discussions around model results helped convey the message that monetary policy would have to stay tighter for longer in the Philippines. - Figure referenced: Figure 1 shows the simulated core inflation and exchange rate paths. ### Integration with QIPF and analysis of shocks (Article IV consultation) - Greater integration between the QPM and QIPF was used during the 2023 Article IV consultation. - Minimum wage scenario: - One risk scenario studied was a positive shock to wages motivated by a proposal submitted to Congress entailing a substantial raise in the minimum wage amid continued improvements in the Philippines’ labor market conditions. - Because the QPM does not feature a labor market block, the QIPF was used to provide estimates for the impact of the wage shock on domestic demand and inflation. - The QPM then served as a useful tool to study the appropriate monetary policy response to the minimum wage shock. - Figure referenced: Figure 2a. Philippines: Minimum Wage Shock (Article IV). - Other shocks analyzed with QPM: - Abrupt tightening of global financial conditions. - Sustained oil price shock. - Figure referenced: Figure 2b. Philippines: Oil Price Shock (Article IV). - Authorities’ request: The authorities requested a more in-depth comparison between the QPM and the QIPF which future work will focus on. ### Risk Assessment Matrix (RAM) — selected highlights and policy recommendations - Purpose: The RAM shows events that could materially alter the baseline path and reflects staff views on sources of risks and overall level of concern as of the time of discussions with the authorities. - Interpretation of likelihood labels: “low” indicates a probability below 10 percent, "medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. - Global risks and recommendations: - Intensification of regional conflicts - Likelihood: High - Expected impact: Medium. Philippines has little direct trade with Ukraine or Russia. However, 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’s economic activity, inflation, trade, and capital flows. - Policy recommendation: Use available fiscal space effectively to provide targeted support if domestic demand weakens significantly. Provide targeted support to viable firms, while facilitating the exit of unviable ones. Ensure banking sector remains stable and markets remain liquid, while working to increase financial sector resilience. - Commodity price volatility - Likelihood: High - Expected impact: Medium. Increased pressure on CPI inflation may risk destabilizing inflation expectations and require a more aggressive monetary policy response. - Policy recommendation: 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, instead provide targeted transfers to low- income households. - Abrupt global slowdown or recession - Likelihood: Medium - Expected impact: Medium. Lower GDP growth, due to weaker investment and exports; a decline in capital inflows, leading to currency depreciation and tighter domestic credit conditions; higher poverty rate. - Policy recommendation: Allow the exchange rate to act as a shock absorber while using foreign exchange intervention to counter disorderly market conditions that can unduly influence the overall outlook for inflation and dislodge the public’s inflation expectations. Use available fiscal space effectively to provide targeted support. Ensure banking sector remains stable and markets remain liquid, while working to increase financial sector resilience. Provide targeted support to viable firms, while facilitating the exit of unviable ones. - Systemic financial instability - Likelihood: Medium - Expected impact: Medium. An increase in capital outflows that lead to large exchange rate depreciation and volatility; tighter financial conditions; and upward pressures on inflation through exchange rate passthrough. - Policy recommendation: Markets should be kept liquid. The exchange rate should remain flexible, and market driven. Provided the monetary policy stance remains adequate to address inflation risks, and considering Philippines’ shallow FX markets, the use of FXI may be appropriate under certain circumstances. - Deepening geoeconomic fragmentation - Likelihood: High - Expected impact: Medium. Weaker exports; reduced FDI inflows; increased uncertainty leading to weaker investment. - Policy recommendation: 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. Further progress on open trade policy (including lifting non-tariff barriers) and diversification of FDI source countries. - Domestic risks and recommendations: - 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. - Policy recommendation: Tighten monetary policy to bring about a sustained reduction in actual inflation and use monetary policy communication, to influence inflation expectations. Accelerate reforms to reduce supply constraints, 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 recommendation: Potential capital adequacy issues should be recognized 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 - Likelihood: High - Expected impact: High. Disruption in economic activity in the affected region; poor agriculture production; damage to properties; and higher food inflation, with larger impact on low-income households in rural areas. - Policy recommendation: 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. ### Addressing food inflation and productivity - Recent developments and statistics: - Food inflation ranked second amongst ASEAN peers in 2021. - Onion prices rose from around 70 pesos a kilo in April 2022 to as much as 700 pesos in December 2022. - Rice inflation soared to 17.8 percent in September 2023, marking the highest rate since March 2009. - Structural challenges hampering agriculture: - (a) low farm/labor productivity; - (b) low access to credit and insurance, particularly among smallholder primary producers; - (c) unsustainable farming practices and underutilized agro-forestry and blue economy potential; - (d) weak export performance; - (e) low investments in the Agriculture, Forestry, and Fisheries (AFF) sector; - (f) inadequate infrastructure; - (g) fragmentation of agricultural lands; - (h) high vulnerability to multidimensional shocks. - Short-term policy responses in 2023: - Targeted time-bound cash transfers to the 7.6 million poorest households. - Fertilizer discount voucher program for farmers. - Temporary domestic rice cap (Executive Order 39) effective from September 5 to October 4, 2023: - Price cap limits at 41 pesos per kilogram for regular-milled rice and 45 pesos per kilogram for well-milled rice. - Financial aid: 15,000 pesos allocated to small rice retailers and store owners affected by the rice cap. - Release of 12.1 billion pesos for the Rice Farmers Financial Assistance (RFFA) program to assist about 2.4 million small rice farmers, sourced from the excess tariff collection generated from rice importations in 2022. - Allocation of 705 million pesos, also from excess rice tariff collection, to the Palayamanan Plus (or Crop Diversification) Program for conditional cash assistance to eligible rice farmers. - For fiscal year 2023, the administration increased the Department of Agriculture’s budget by 42.5 percent to ensure food security and enhance agricultural productivity. - Institutional and longer-term measures: - Philippine Development Plan (2023-2028) measures: modernize agriculture and the agribusiness sector by expanding market access, improving resilience of AFF value chains, and strengthening agricultural institutions. - Formalization of the Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO) in May 2023, tasked with identifying timely measures to keep inflation within the government’s target, especially for food and energy. The IAC-IMO’s approach includes close monitoring of inflation drivers, assessment of demand and supply of goods, and data-sharing among government agencies. - Trade and structural reform recommendations: - Facilitate cheaper imports of food items by reducing tariff and non-tariff barriers, including those linked to phytosanitary restrictions. - Reference reform: the 2019 Rice Tariffication Law (RTL) liberalized trade by imposing tariffs in lieu of quantitative restrictions and established a Rice Competitiveness Enhancement Fund (RCEF). - RTL outcomes: lowered retail rice prices, generated PHP46.6 billion in rice import duties in its first three years, and continues to directly benefit rice farmers through RCEF assistance. - Recommend expanding long term public-private partnerships to attract investment and enable value chain development and upgrading. - Consider promoting land consolidation through amending the Comprehensive Agrarian Reform Law to address fragmentation of agricultural lands. ### Implementation of main recommendations of the 2022 Article IV Consultation — selected actions since 2022 - Monetary policy - Recommendation: Further monetary tightening may be needed to keep inflation expectations well anchored; improve BSP’s communication and operational framework to reduce uncertainty and improve policy transmission. - Actions: - The Bangko Sentral ng Pilipinas raised its policy rate to 6.5 percent, in line with staff recommendations. - Staff assess that the monetary policy stance is now tight enough to bring inflation back to the target band by early next year, though the BSP should stand ready to continue hiking should upside risks to the inflation outlook materialize. - BSP has received TA from the IMF Monetary and Capital Markets Department (MCM) and implemented recommendations such as change in the time of the RRP auction and the move to a variable rate RRP, with concrete plans for remaining recommendations. - Financial sector policies - Recommendations: Enhance BSP’s capacity to conduct financial stability risk assessment; strengthen the bank resolution framework; enhance AML/CFT effectiveness and amend bank secrecy law. - Actions: - BSP conducts regular systemic risk analysis, though data gaps remain. - BSP has concrete plans to address MCM TA recommendations on the bank resolution framework, including establishing a separate resolution section within the BSP and drafting a resolution manual. - The deadline to complete the FATF action plan by January 2023 was missed. While some progress has been made, more work needs to be done to leave the grey list. - Fiscal policy - Recommendations: Enhance revenue mobilization; augment the MTFF with explicit fiscal anchor and a medium-term revenue strategy; improve expenditure control and efficiency; strengthen oversight of GOCCs. - Actions: - Authorities working with Congress to legislate several tax policies, including introduction of VAT on digital service providers (DSPs), P4, excise taxes on single-use plastics and junk food, increase in excise taxes on premixed alcoholic, and sweetened beverages, adjustment of motor vehicle road user’s tax, and rationalization of the mining fiscal regime. Some measures are in advanced stages, e.g., VAT on DSPs, and P4. - Fiscal consolidation is expected to continue in line with MTFF targets. - Authorities are working to reform the MUP pension system and increase LGU capacity to deliver public services. Initiatives include Progressive Budgeting for Better and Modernized Governance and the National Government Rightsizing Program, implementation of cash budgeting system, and digitalization of the PFM system. - Annual Fiscal Risks Statement provides detailed analysis of key fiscal risks; authorities are working to enhance GOCC oversight with Fund TA. - Structural policies - Recommendations: Reduce infrastructure and education gaps; harness digital economy benefits; establish integrated climate policy including carbon pricing. - Actions: - Authorities target at least a 5 percent infrastructure disbursements-to-GDP ratio every year by implementing flagship projects approved by the NEDA Board, including through PPPs. - Commission on Higher Education and IT Business Process Association exploring joint projects to boost digital skills of students. - Progress on digitalization: financial management information systems and tax registration/filing/payment processes; submission to Congress of an E-governance Act formulating the E-Government Master Plan. - Climate policy: authorities developing National Adaptation Plan and NDC Implementation Plan in the context of COP28 and considering a carbon pricing scheme with support from development partners. Financial Sector Forum finalizing a local sustainable finance taxonomy. Authorities expressed interest in applying the Debt-Investment-Growth and Natural Disasters (DIGNAD) toolkit to consider benefits of resilient infrastructure investments. *Prepared by Hannah Lyn Go, Ragnar Gudmundsson, and Lara Mariele Marco (all APD) — content extracted from the provided IMF PDF content unit.* ### Annex VI. Implementation of FSAP Recommendations ### Annex VI. 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: Dividend prohibitions have been very limited and are 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: The approach for macroprudential stress tests was discussed and approved at the level of the Financial Stability Policy Committee (FSPC) and the Financial Stability Coordination Council (FSCC). The approach embeds network modelling into the stress tests to account for nonlinearities that would impact banks and NFCs disproportionately. The credit risk component of macroprudential stress test (MaPST) has been completed. The BSP is currently working on the market risk and liquidity risk phases of the stress tests. - 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: Under the current legal framework, the Council does not have sufficient legal basis to implement 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 existing GaR model is currently being refined, with the BSP refocusing on enhancing fixed-threshold models to better incorporate non-stationarities/learning. ### Financial Sector Supervision - Recommendation: Lapse or limit the use of issued regulatory forbearance measures (BSP). Timing: ST - Update: The BSP has unwound the temporary relief measures, and most have expired/lapsed as of end-June 2023 except for: - i) capital relief on the treatment of provisioning requirements (4Q 2023), - ii) ceilings on credit card transactions (subject to review every 6 months), - iii) relief on the recognition of losses from sale/transfer of non-performing assets (NPAs) under the Financial Institutions Strategic Transfer (FIST) Act (Q2 2027), - iv) temporary regulatory relief (i.e., reduction in the annual supervisory fees for 2022 and 2023) for banks that offer basic deposit accounts (BDA) (Q4 2023), - v) Relief measures allowing thrift, rural and cooperative banks to utilize MSME loans and eligible loans to large enterprises as alternative compliance with the reserve requirement (RR), subject to conditions (4Q 2025). This measure expired for universal and commercial banks on June 30, 2023. For thrift, rural and cooperative banks, outstanding MSME and LE loans as of June 30, 2023 shall remain eligible as alternative compliance with the RR until such loans are fully paid, but not later than December 31, 2025, subject to conditions. - 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: The draft Circular covering the proposed amendments to the guidelines governing the transfer of significant ownership in banks and quasi-banks (QBs) was re-exposed for comments on July 13, 2023. The BSP is currently evaluating the comments/inputs/feedback received from the industry and other pertinent stakeholders. - 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 BSP was consistently appointed as one of the lead supervisors of the Supervisory College in the three reviews conducted so far. - Recommendation: Update the large exposure requirements (to be applicable on a solo and consolidated level) and enhance large and related party exposure reporting requirements (BSP). Timing: ST - Update: BSP’s Circular No. 1150 dated August 23, 2022 aligns the definition of large exposures with the Basel framework and sets the large exposures monitoring threshold at 25 percent of Tier 1 capital on both solo and consolidated basis. The issuance also requires the submission of semestral report on large exposures to the BSP which will commence in the first quarter of 2024 with reference period ending December 2023. On related party reporting requirements, the BSP is currently drafting the amendments to the existing prudential Report on Conglomerate Structure and Report on Material Related Party Transactions (RPT). The Report on Conglomerate Structure will be enhanced to include information on: (a) total assets of the entities forming part of the conglomerate; (b) extent of shareholdings of the controlling entities in the controlled corporations; and (c) major lines of business or activities that the member corporations are engaged in. - 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: Proposed amendments to the Bank Secrecy Law (House Bill No. 7446) were approved on May 8, 2023 and were transmitted and received by the Senate on May 9, 2023. Counterpart legislations were also filed in the Senate under Senate Bill (SB) Nos. 1839, 1068, 596, and 56, which are still pending. - 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: This FSAP recommendation requires legislative action from both Houses of Congress. ### Anti–Money Laundering / Combatting the Financing of Terrorism (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: The authorities consider this recommendation addressed; for details please see the 2022 Article IV staff report. - 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: The AMLC has implemented strategies to increase registration of covered persons with the AMLC from 7,018 (as of December 31, 2022) to 8,899 (as of August 31, 2023). The AMLC and BSP created a working group to review and leverage on the CDD conducted by banks to determine their DNFBP clients to ensure banks only deal with AMLC-registered DNFBPs. The Code of Professional Responsibility and Accountability (CPRA) of the law profession (A.M. No. 22-09-01-SC) has been amended to expressly include the duty to report transactions to the AMLC. The AMLC continuously conducts outreach to address various concerns of covered persons. - Recommendation: Enhance the accuracy and availability of beneficial ownership information of companies (SEC). Timing: MT - Update: The SEC has conducted outreach and used social media to inform stakeholders about the Electronic Filing and Submission Tool, a portal where all reporting requirements, including beneficial ownership (BO) information, are uploaded and filed. The SEC has entered into data sharing agreements with relevant authorities allowing them to access BO information directly as opposed to through AMLC. In addition, the SEC increased existing penalties and introduced new ones for failure to comply with BO disclosing obligations. ### Crisis Management, Resolution, and Safety Net - Recommendation: Ensure timely corrective actions and resolution of weak banks (BSP, PDIC). Timing: ST - Update: The PCA policy provides a maximum allowable PCA period of two (2) years within which a PCA bank should address supervisory concerns which warranted its initiation into the PCA framework. Granting a period of more than one (1) year shall only be in consideration of the complexity and depth of the supervisory issues. (This was reduced from the previous maximum period of three (3) years.) - Recommendation: Implement resolvability assessments and resolution plans, starting with D-SIBs (PDIC, BSP). Timing: ST - Update: An IMF TA mission assessed the BSP’s resolution framework against the FSB Key Attributes. Considering IMF TA recommendations, the BSP will review the Prompt Correction Action timeline, set definition of point of non-viability, and create a Resolution Group/Unit. It shall then establish resolution tools, draft a Resolution Manual and Guidelines on Resolvability Assessment, conduct resolvability assessment of domestic Systemically Important Banks, and draft and submit a bill on resolution to Congress. - Recommendation: Make the legal framework for ELA more specific regarding the conditions under which it can be provided and avoid assistance without collateral (BSP). Timing: ST - Update: As provided under Sections 84 to 88 of R.A. No. 7653, no emergency loan or advance may be granted except on a fully secured basis (subject to predetermined haircuts) and the Monetary Board may prescribe additional conditions. The BSP is currently receiving technical assistance on updating the ELA and lender of last resort (LOLR) functions. - Recommendation: Designate and provide the PDIC with powers to act as resolution authority (PDIC, BSP, DoF). Timing: MT - Update: With the 2022 amendment of the PDIC charter, powers of the PDIC on bank resolution, including granting consent to mergers and acquisitions, and the issuance of cease-and-desist orders pertaining to deposit-related unsafe and unsound banking were centralized with the BSP. - Recommendation: Expand and operationalize bank resolution tools (particularly P&A) beyond liquidation (PDIC). Timing: MT - Update: The BSP is working on a plan to implement recommendations made by MCM TA in January 2023 regarding the bank resolution framework. ### 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). Timing: MT - Update: The BSP is conducting a climate transition risk stress testing exercise in collaboration with the World Bank. The completion and finalization of a related report is targeted by the Q4 2023. The BSP is also exploring the establishment of a data catalogue to provide banks with information as to which data are available and where they can be sourced. The BSP participates in capacity-building activities such as webinars and trainings conducted by the World Bank, IMF and Network for Greening the Financial System on climate and/or nature-related financial risks. *Source: Annex VI. Implementation of FSAP Recommendations (authorities’ updates as presented in the source document).* ### 5. Debt consolidation across sectors: ### 1phlea2023002 - 5. Debt consolidation across sectors ### Coverage and consolidation of public debt - Reported coverage in the SRDSA: national government debt. - Explicit reported values (as presented): - "Budget. central govt3.24.37.5" - "Extra-budget. funds0" - "Social security funds0" - "State govt.0" - "Local govt.0" - "Nonfin pub. corp.0" - "Central bank0" - "Oth. pub. fin. corp0" - "Total03.24.3000007.5" - Commentary: - "The coverage in this SRDSA is national government debt." - "Debt held by Bond Sinking Funds is about 3 percent of GDP and intra-sector bond holding about 4 percent of GDP." - "Total consolidated general government debt was 54 percent of GDP at end-2022, about 7 percentage points of GDP lower than the national government debt." ### Public debt projections and baseline scenario (selected series) - Public debt (Percent of GDP), Actual and Projection: - 2022: 60.9 - 2023: 61.1 - 2024: 61.1 - 2025: 60.9 - 2026: 60.3 - 2027: 58.8 - 2028: 56.9 - 2029: 55.1 - 2030: 53.2 - 2031: 51.4 - 2032: 49.5 - Change in public debt (Percent of GDP): - 2022: 0.5 - 2023: 0.1 - 2024: 0.1 - 2025: -0.2 - 2026: -0.6 - 2027: -1.5 - 2028: -1.9 - 2029: -1.9 - 2030: -1.9 - 2031: -1.8 - 2032: -1.9 - Contribution of identified flows (Percent of GDP): - 2022: 1.0 - 2023: 0.3 - 2024: 0.1 - 2025: -0.2 - 2026: -0.7 - 2027: -1.4 - 2028: -1.8 - 2029: -1.8 - 2030: -1.8 - 2031: -1.8 - 2032: -1.8 - Primary deficit (Percent of GDP): - 2022: 4.9 - 2023: 3.2 - 2024: 2.2 - 2025: 1.7 - 2026: 1.2 - 2027: 0.5 - 2028: 0.2 - 2029: 0.1 - 2030: 0.0 - 2031: 0.1 - 2032: 0.0 - Noninterest revenues (Percent of GDP): - 2022: 16.1 - 2023: 15.7 - 2024: 16.4 - 2025: 16.7 - 2026: 17.0 - 2027: 17.3 - 2028: 17.4 - 2029: 17.4 - 2030: 17.4 - 2031: 17.4 - 2032: 17.4 - Noninterest expenditures (Percent of GDP): - 2022: 21.0 - 2023: 18.9 - 2024: 18.6 - 2025: 18.4 - 2026: 18.2 - 2027: 17.8 - 2028: 17.7 - 2029: 17.5 - 2030: 17.5 - 2031: 17.5 - 2032: 17.4 - Automatic debt dynamics (Percent of GDP): - 2022: -3.2 - 2023: -3.0 - 2024: -2.2 - 2025: -2.0 - 2026: -2.0 - 2027: -2.1 - 2028: -2.1 - 2029: -1.9 - 2030: -1.9 - 2031: -1.9 - 2032: -1.9 - Real interest rate and relative inflation (Percent): - Combined series: -0.9 0.1 1.2 1.5 1.6 1.5 1.5 1.5 1.4 1.3 1.2 - Real interest rate: -0.6 -0.1 1.1 1.4 1.5 1.4 1.4 1.4 1.3 1.2 1.1 - Relative inflation: -0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 - Real growth rate (Percent): - 2022: -4.3 - 2023: -3.1 - 2024: -3.5 - 2025: -3.5 - 2026: -3.6 - 2027: -3.6 - 2028: -3.5 - 2029: -3.4 - 2030: -3.3 - 2031: -3.2 - 2032: -3.1 - Other identified flows (Percent of GDP): - 2022: -0.7 - 2023: 0.1 - 2024: 0.1 - 2025: 0.1 - 2026: 0.1 - 2027: 0.1 - 2028: 0.0 - 2029: 0.1 - 2030: 0.1 - 2031: 0.1 - 2032: 0.1 - Contingent liabilities (Percent of GDP): 0.0 for all listed years. - Contribution of residual (Percent of GDP): -0.5 -0.2 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 - Gross financing needs (Percent of GDP): - 2022: 10.6 - 2023: 11.4 - 2024: 10.0 - 2025: 9.6 - 2026: 8.3 - 2027: 8.6 - 2028: 7.9 - 2029: 8.6 - 2030: 7.7 - 2031: 8.1 - 2032: 7.6 - Gross financing needs — of which debt service (Percent of GDP): - 2022: 5.7 - 2023: 8.2 - 2024: 7.8 - 2025: 7.9 - 2026: 7.1 - 2027: 8.1 - 2028: 7.6 - 2029: 8.5 - 2030: 7.7 - 2031: 8.0 - 2032: 7.6 - Local currency and foreign currency composition of gross financing needs (Percent of GDP): - Local currency: 4.5 7.0 6.0 6.3 5.8 6.7 6.0 6.9 6.1 6.5 6.2 - Foreign currency: 1.1 1.3 1.8 1.6 1.3 1.4 1.7 1.6 1.6 1.5 1.4 - Memo indicators: - Real GDP growth (percent): 7.6 5.3 6.0 6.1 6.2 6.3 6.4 6.4 6.4 6.4 6.4 - Inflation (GDP deflator; percent): 5.5 4.8 3.0 2.7 2.5 2.5 2.5 2.5 2.5 2.5 2.5 - Nominal GDP growth (percent): 13.5 10.4 9.3 8.9 8.9 9.0 9.1 9.1 9.1 9.1 9.1 - Effective interest rate (percent): 4.3 4.6 5.0 5.1 5.1 5.0 5.1 5.2 5.1 5.1 4.9 - Commentary on projections: - "Public debt will rise slightly but then decline, reflecting expectations of a narrowing of primary deficits and favorable interest-growth differential. Gross financing needs are expected to remain manageable." ### Risk assessment and financing stress indicators - Debt Fanchart / Long-term risk indicators (selected values as presented): - "Fanchart width36.60.5" - "Probability of debt non-stabilization (percent) 3.20.0" - "Terminal debt-to-GDP x32.90.7" - "Debt fanchart index (DFI)1.3" - Risk signal: "Moderate" - Gross Financing Needs (GFN) Module: - "Average baseline GFN9.33.2 (percent of GDP)" - "Banks' claims on the gen .19.26.2 (pct bank assets)" - "Chg. In banks' claims in7.22.4 stress (pct banks' assets)" - "GFN financeability index (GFI)11.8" - Risk signal: "Moderate" - Medium-term Risk Analysis: - Final assessment: "Prob. of missed crisis, 2023-2028, if stress not predicted: 9.1 pct." - "Prob. of false alarms, 2023-2028, if stress predicted: 42.0 pct." - Signal classification notes: comparisons are to a peer group "emerging markets, non-commodity exporter, surveillance." - Commentary on risk modules: - "The Debt Fanchart module indicates a moderate risk around the projected debt baseline. In the GFN Financeability Module, a combination of increased GFN due to the pandemic and a relatively high initial bank holdings of public debt result in a moderate risk under macro-fiscal and debt holder shock. Taken together, the MTI produces a mechanical 'low' signal." ### Capacity development implications and policy priorities related to debt consolidation - Contextual drivers: - "Public debt has risen sharply because of the pandemic, now exceeding the indicative threshold of 60 percent of GDP." - Restoring buffers and mobilizing financing are priorities. - Identified priority workstreams for Fund capacity development (selected items): - Implementation of monetary policy: focus on inflation forecasting, integrated policy analysis, central bank communication, financial stability, digital money and cybersecurity, climate-related financial risks. - Financial supervision and regulation: strengthen bank supervisory framework, conglomerate supervision, supervisory colleges, resolution planning, stress-testing and climate risk assessment capacity. - Systemic risk analysis: training/TA on financial market analysis and stress testing. - Tax policy and administration: mobilize more revenues; items include possible introduction of carbon taxation; finalize revenue administration reform after TADAT assessment; support on VAT gap and tax expenditure analysis. - Public financial management (PFM): improve efficiency of public expenditures, GOCCs oversight, PPP management, digitalization, fiscal transparency, public investment management, strengthen MTFF and fiscal policy communication. - Macro-fiscal frameworks: develop macroeconomic projection tool (MPT) for forecasting and policy analysis; two-year capacity plan and first TA mission in June 2023. - Government finance statistics: strengthen GFS and Public Sector Debt Statistics (PSDS), align sectoral coverage across outputs, review GOCCs inclusion, enhance coordination among Department of Finance, Bureau of the Treasury, BSP, and Philippine Statistics Authority. - Additional CD areas relevant to debt consolidation and stress resilience: - Bank resolution, crisis management, and corporate restructuring: implement FSAP recommendations, enhance lender of last resort and collateral frameworks. - Anti-money laundering and combating financing of terrorism: assistance relevant given grey-listing as of January 2023 and objective of exiting in 2024. - Debt management and capital market development: strengthen debt management capacity; accelerate capital market development; improve liquidity management and develop Open Market Operations instruments. - Public investment management, including for GOCCs: update 2018 PIMA; apply Climate-PIMA for resilient infrastructure and green PFM practices. - Promoting the digital economy, fintech, and central bank digital currencies: support BSP payments and currencies sector, research academy, pilot wholesale CBDC project; digitalization of IFMIS. *Source: IMF staff report excerpt (Chapter 5 and related annexes).* ### 2. The digital economy is estimated by the government to have contributed about ### 2. The digital economy is estimated by the government to have contributed about ### Digital economy contribution and industry implications - The digital economy is estimated by the government to have contributed about 10 percent of GDP in 2022. - Generative AI can enable productivity gains of up to 14 percent for customer support agents. - Industry leaders emphasize: - Upskilling the labor force to remain competitive. - Creating higher value-added content to strengthen the Philippines’ position as a BPO hub. ### Financial inclusion and banking access - Digitalization is expected to facilitate access to banking amid a still high unbanked population. - Banked population change: - Number of banked Filipinos increased from 20.9 million to 42.9 million between 2019 and 2021. - E-money accounts represented most new accounts. ### Government digitalization, IDs, and public service efficiency - Digitalization can improve transparency and efficiency of government services at central and local levels by: - Improving public spending efficiency. - Strengthening accountability. - Reducing the scope for corruption. - Policy actions and initiatives: - Executive Order No. 29 (issued in June 2023) to expedite the digitalization and reengineering of PFM processes to streamline government transactions. - Ongoing issuance of the biometric-based Philippine Identification System. - Development of a community-based monitoring system to develop registries and identify program beneficiaries to facilitate better targeting and faster delivery of social protection programs. ### Digital infrastructure, connectivity, and education - Broadband and price indicators: - Broadband coverage was low, with only 17.7 percent of households having internet access in 2019. - In 2023 the average price of one gigabyte of data was higher than in most other ASEAN countries. - Government aims and targets: - With support from the World Bank, the government aims to keep the cost of mobile broadband services at 2 percent of per capita income and to reduce the cost of fixed broadband services. - Education and skills alignment: - Government efforts should focus on ensuring relevance of the curriculum and readying schools for hybrid and tech learning. - Facilitate private sector links with tertiary institutions to better match student skills and employer needs. - The Technical Education and Skills Development Authority, Commission on Higher Education, and IT Business Process Association are currently exploring joint projects to strengthen the digital skills of students. ### Social protection (SP) and digitalization of SP systems - SP institutional background: - The Social Protection Operational Framework and Strategy (2009) aims to increase financing and ensure efficient public spending for SP programs; improve poverty targeting; and strengthen governance, monitoring, and evaluation. - The Pantawid Pamilyang Pilipino Program (4Ps) was institutionalized in 2019 under Republic Act No. 11310. 4Ps is a conditional cash transfer (CCT) program. - 4Ps scale and fiscal allocations: - 4Ps coverage expanded from 6,000 poor households in its first year to 4.4 million poor households (current coverage). - Budgetary allocations for 4Ps increased from PHP50 million in 2007 to PHP78 billion in 2017 and PHP113 billion in the proposed FY2024 budget. - Poverty and program effectiveness: - Poverty rate fell from 47.1 percent in 2007 to 18.1 percent in 2021. - It is estimated that 4Ps reduced the national poverty rate by 1.5 percentage points, lifted 1.5 million people out of poverty, and reduced national income inequality by 0.6 percentages points in 2015. - SP spending levels and comparisons: - Philippine government SP expenditure increased to 2.7 percent of GDP in 2022 from 1.3 percent GDP in 2015. - Comparators: China SP spending 3.0 percent of GDP; Thailand SP spending 4.9 percent of GDP. - SP coverage: Philippines 36.7 percent; China 70.8 percent; Thailand 68.0 percent. - Further scaling up SP programs would require revenue mobilization to create more fiscal space. - Efficiency and disaster readiness recommendations: - Improve SP spending efficiency and accelerate program implementation to shield vulnerable sectors and the poor from economic shocks amid limited fiscal space. - Chapter 3 of the Philippine Development Plan 2023-2028 highlights digitalization as essential for SP efficiency via improved targeting and timely delivery. - Adoption of the national ID system and development of digital platforms will improve targeting and coordination among stakeholders. - Utilization of digital payment methods will ensure seamless and fast transactions. - Develop an early warning system to support contingency financing mechanisms and disaster response readiness to reduce shock impacts and aid fiscal buffer rebuilding. - Increased investments in human capital to help lessen long-run SP fiscal burden. *Source: IMF staff report content as provided.* ### 1. The Philippine Statistics Authority released the 2023 Q3 national account data which ### 1. The Philippine Statistics Authority released the 2023 Q3 national account data which ### Recent Macroeconomic Developments - Q3 2023 growth rebounded to 5.9 percent (y/y) from 4.3 percent in Q2 2023, largely supported by a pick-up of government spending. - The Philippine economy grew by 7.6 percent in 2022, exceeding the 6.5-7.5 percent assumption for 2022. - Q3 2023 growth was broad-based with all major economic sectors posting positive performance. - Labor market: unemployment returned to pre-pandemic level; labor market conditions remain favorable. ### Inflation and Monetary Policy - Average inflation rate: 5.8 percent in 2022 and 6.4 percent for the first 10 months of 2023. - Inflation path: started around 3.0 percent in early 2022; peaked at 8.7 percent in January 2023; eased from 6.1 percent in September 2023 to 4.9 percent in October 2023. - BSP policy actions: - Raised policy rates successively by 425 basis points until reaching 6.25 percent in March 2023. - On 26 October 2023, BSP Monetary Board raised the target reverse repurchase rate by 25 basis points to 6.50 percent; overnight deposit and lending facilities to 6.0 percent and 7.0 percent respectively. - On November 16, the Monetary Board kept the BSP’s Target Reverse Repurchase Rate unchanged at 6.5 percent following its off-cycle 25 basis point hike in late October. - BSP guidance: - Keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident. - Continue to be data-dependent and stand ready to implement follow-through monetary policy action as necessary. ### Fiscal Performance and Policy - 2022: fiscal deficit narrowed with unwinding of pandemic spending and improved revenue effort. - Revenues (first nine months of 2023): total revenues reached ₱2.84 trillion, higher by 6.8 percent year-on-year. - Tax revenues growth: 6.4 percent. - Non-tax revenues (including grants) growth: 10.5 percent. - Government disbursement: accelerated from 93.4 percent of the program as of June 2023 to 98.9 percent as of September 2023. - Debt and fiscal targets: - Debt-to-GDP ratio as of end September 2023: 60.2 percent, below the MTFF target of 61.2 percent. - MTFF targets include: maintain annual economic growth rate between 6.0 and 7.0 percent in 2023 and between 6.5 and 8.0 percent from 2024 to 2028. - Infrastructure investments target: 5 to 6 percent of GDP annually. - Fiscal consolidation aims: bring down debt-to-GDP ratio from 60.9 percent as of end 2022 to less than 60 percent by 2025; cut the deficit-to-GDP ratio from 7.3 percent as of end 2022 to 3.0 percent by 2028. - Revenue measures: - Proposed tax revenue measures expected to boost revenue collections by 0.5 percent to 0.6 percent from 2024 to 2028. - Planned tax measures include: value added tax on digital service providers; excise taxes on premixed alcoholic beverages; excise taxes on food and beverages with high sugar, fat, or sodium content; excise taxes on environmentally damaging products and activities such as single-use plastics and mining. - Public expenditure management reforms: - Progressive Budgeting for Better and Modernized Governance Act to improve service delivery. - National Government Rightsizing Program to regularize, merge, restructure, abolish, or transfer government agencies. ### Financial Sector Conditions and Stability - Banking sector (September 2023): - Banks’ assets: ₱24.0 trillion, up 9.0 percent year-on-year. - Loans share of assets: 52.5 percent. - Banks’ loans: ₱13.1 trillion, up 7.8 percent year-on-year. - Non-performing loan (NPL) ratio: 3.4 percent. - NPL coverage ratio: 103.6 percent. - Financial system strengths: strong balance sheets, profitable operations, sufficient capital and liquidity buffers, ample provision for probable losses. - Supervisory enhancements: - Establishment of a supervisory college. - Introduction of the Comprehensive Credit and Equity Exposures Report. - Enhanced Prompt Corrective Action (PCA) framework with plans for a technical working group and creation of a Resolution Unit. - Ongoing initiative to draft a resolution manual and revamp the bank resolution framework. ### Outlook, Risks, and Policy Directions - Growth outlook: - Authorities optimistic that the 6.0-7.0 percent target growth rate for 2023 is attainable. - Momentum expected from catch-up expenditure plans, infrastructure, transport, labor and employment, social protection, and education programs. - Inflation risks: - Balance of risks to inflation outlook leans toward the upside due to higher transport charges, electricity rates, international oil prices, and minimum wage adjustments outside the National Capital Region. - Downside tempering factors: weaker-than-expected global recovery and government measures to mitigate El Niño effects. - Expectation that inflation rate will return to the target range of 2.0 to 4.0 percent with proactive measures by the Inter-Agency Committee on Inflation and Market Outlook and appropriate BSP actions. - Policy pillars for near term growth: - Managing inflation to reinforce its general decline. - Deploying a catch-up plan to accelerate government spending. - Pursuing reforms and rolling out strategic public infrastructure projects. - Medium-term outlook aligned with Philippine Development Plan (PDP) 2023-2028 headline targets. ### Structural Reforms and Strategic Initiatives - Infrastructure: - Infrastructure Flagship Projects: list of 197 projects totaling to around ₱8.7 trillion. - Projects aim to improve physical and digital connectivity; upgrade health, transport, agriculture and energy sectors; and strengthen infrastructure against climate-related risks. - Trade and export strategy: - 2023-2028 Philippine Export Development Plan aims to shift exports to high-value products and services. - Potential export performers include natural fiber-based textiles, aquaculture products, coconut water, and purple yam. - Entry into force of Regional Comprehensive Economic Partnership for the Philippines on 2 June 2023 estimated impacts by 2031: - Improve the trade balance by as much as US$128 million. - Raise real GDP by 1.9 percent. - Lower poverty by 3.6 percent. - Digital connectivity: - National Broadband Program focusing on fiber optic cables, cable landing stations, and accelerating tower build up. - Climate resilience: - PDP 2023-2028 priorities include: boosting multi-stakeholder partnership on adaptation and disaster risk reduction; improving national and local climate and risk data and information management system; scaling up sustainable finance and aligning priorities. - AML/CFT: - Measures to address FATF grey list deficiencies; adoption of the National Anti-Money Laundering/Combating the Financing of Terrorism (AML/CTF) Strategy for 2023-2027. ### Authorities’ Position and IMF Engagement - Authorities broadly agree with staff appraisal and note that most policy recommendations are already being implemented. - Authorities appreciate IMF support in surveillance, capacity development, and policy dialogue, and value Fund advice for identifying risks and recommending policy responses. *Statement by Ms. Yati Kurniati, Executive Director for the Philippines and Ms. Maria Teresa Duenas, Senior Advisor to Executive Director; November 27, 2023.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1phlea2023002.pdf_