## 1phlea2024001-print-pdf ## Source details **Canonical URL:** [1phlea2024001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1phlea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1phlea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1phlea2024001-print-pdf.pdf.json) --- ### Recent developments - Growth: - Moderated from 7.6 percent in 2022 to 5.5 percent in 2023. - 2024 first three quarters averaged 4.6 percent (seasonally-adjusted annualized rate) and 5.8 percent (y/y). - Real GDP: 2021: 5.7; 2022: 7.6; 2023: 5.5; 2024: 5.8; 2025: 6.1; 2026: 6.3 (national account table). - Demand composition: - Private consumption subdued amid higher rice and other food prices; public consumption expanded. - Gross fixed capital formation remains restrained relative to pre-pandemic level despite strong rebound in public construction. - FDI showed signs of recovery in 2024H1 but remains below pre-pandemic levels. - Inflation and monetary policy: - Core inflation: 2.4 percent (y/y) in October 2024. - Headline inflation: 2.3 percent (y/y) in October 2024. - Year-to-date average headline inflation: 3.3 percent (within BSP’s target band of 3.0 percent ± 1.0 percentage point). - BSP reduced policy rate by 25 basis points in August 2024 and another 25 basis points in October 2024. - BSP announced a significant reduction in bank reserve requirements in September 2024 (reduced by 100-250 basis points depending on bank type; universal and commercial banks from 9.5 percent to 7 percent), effective October 25, 2024. - Labor market: - Unemployment rate declined to 3.7 percent in September (from 4.5 percent a year ago). - Underemployment about 11.9 percent; hours worked remain below pre-pandemic averages. - Real wages recovered in 2023-24 and rose slightly above pre-pandemic levels in July 2024. - External and reserves: - Current account deficit narrowed to 2.7 percent of GDP in 2023 from 4.5 percent in 2022. - Gross international reserves (GIR): US$103.8 billion at end-2023; US$112.4 billion at end-October 2024; US$93.0 billion in September 2022. - GIR as of end-2023: 196 percent of the IMF’s ARA metric, covering 7.8 months of imports. - Fiscal: - National government overall balance (IMF definition): -8.3 (2021); -7.2 (2022); -6.1 (2023); projected -5.6 (2024). - National government gross debt: 60.4 (2021); 60.9 (2022); 60.1 (2023); 61.2 (2024); 62.0 (2025). ### Outlook and projections - Growth: - Real GDP expected: 5.8 percent in 2024 and 6.1 percent in 2025. - Potential output estimated between 6.0 to 6.3 percent over the medium term; medium-term potential growth support cited from PPP acceleration and FDI after reforms. - Inflation: - Projected decline to 3.2 percent on average in 2024 from 6.0 percent in 2023, supported by reduction in rice tariffs and other non-monetary measures. - Average inflation projected: 3.2 percent in 2024; 2.8 percent in 2025. - External sector: - Current account deficit: -2.7 percent of GDP in 2023; expected to narrow to -2.0 percent in 2024 and -1.9 percent in 2025. - Public debt and financing: - Public debt (percent of GDP) actual and projections: 2023: 60.1; 2024: 61.2; 2025: 62.0; 2026: 61.7; 2027: 60.8; 2028: 59.5; 2029: 58.0; 2030: 56.4; 2031: 54.9; 2032: 53.3; 2033: 51.8. - Gross financing needs (GFN) (Percent of GDP): 2023: 9.0; 2024: 12.2; 2025: 10.1; 2026: 8.7; 2027: 9.5; 2028: 9.3; 2029: 7.4; 2030: 9.3; 2031: 8.8; 2032: 8.7; 2033: 7.9. - Debt service (Percent of GDP): 2023: 6.5; 2024: 9.5; 2025: 7.5; 2026: 7.5; 2027: 7.0; 2028: 8.3; 2029: 8.4; 2030: 6.7; 2031: 8.7; 2032: 8.2; 2033: 8.2. ### Risks to the outlook - Downside growth risks: - Recurrent commodity price volatility; new supply shocks. - Escalation of geopolitical tensions; regional conflicts. - Monetary policy in advanced economies remaining too tight for longer. - Slowdown in major economies; major natural disasters or extreme climate events. - Stalled reform momentum or lower-than-expected payoffs from reforms. - Inflation upside risks: - New supply shocks and recurring commodity price volatility. - External/financial risks: - Exposure to cross-border capital flow volatility; expectations about domestic prospects and global risk appetite can cause swings in capital flows. ### Executive Board assessment and policy guidance — monetary and financial sector - Monetary policy guidance: - BSP has room to ease the policy rate gradually towards a neutral stance; continued gradual reduction in the policy rate is appropriate with inflation and inflation expectations returning toward target and output gap turning negative. - Data-dependent approach and careful communication recommended to manage expectations amid uncertainty and supply-side shocks. - Exchange rate should act as shock absorber; temporary FX intervention (FXI) may be appropriate under certain circumstances. - Establish a credible yield curve to develop the fixed-income market and improve monetary policy transmission; reactivating the interest rate swap (IRS) market recommended. - Financial sector guidance: - Systemic risks moderate but pockets of vulnerabilities remain: commercial real estate vacancies and rents, elevated non-performing housing loans, rapid growth in consumer loans (~25 percent annual growth; consumption loans ~10.6 percent of total bank loans as of end-June 2024). - Systemwide NPLs contained at 3.5 percent; residential real estate NPLs: 6.8 percent. - Recommendations: - Adjust macroprudential policy in line with financial cycle developments and move toward a positive neutral level for the countercyclical capital buffer (CCyB). - Strengthen capacity to assess financial stability risks and resolve troubled financial institutions; update bank resolution framework and develop a resolution manual. - Replace cap on commercial real estate exposures with a sectoral systemic risk buffer. - Sustain AML/CFT reforms; reform bank secrecy law to enhance supervisory powers. ### Fiscal policy guidance and priorities - Near-term stance: - More gradual pace of consolidation in revised fiscal program appropriate to support a soft landing. - 2025 budget proposes a broadly neutral fiscal stance; additional tax measures should be considered to create space for priority spending. - Revenue mobilization priorities: - Implement previously planned excise tax measures; enhance VAT efficiency; improve tax administration; ensure effective control of tax incentives. - Tax-to-GDP ratio was 14.1 percent in 2023; mobilizing revenue critical. - Expenditure priorities: - Reform military and uniformed personnel (MUP) pension system; improve expenditure efficiency; manage fiscal risks from decentralization and PPPs. - Target to reduce current spending (excluding capital transfers to LGUs) by 1.2 ppt of GDP from 2024 to 2028; capital spending to increase to 6 percent of GDP (including capital transfers to LGUs). - Medium-term fiscal framework: - MTFF revised targets: reduce fiscal deficit (authorities’ definition) from 5.3 percent of GDP in 2025 to 3.7 percent of GDP in 2028 (pace unchanged at 0.5 ppt per year). - Staff projects similar deficit path but assumes smaller revenue increases and less scope to reduce current spending, accommodating a lower path for capital spending. ### Tax administration and revenue mobilization (diagnostics and recommendations) - IMF-led TADAT assessment (May-June 2024) findings: - BIR improvements in digitalization (IRIS, ORUS, e-filing) and enterprise risk management, but overall performance well below international good practice. - Key gaps: lack of effective CRM framework; low use of third-party data; digitalization trailing peers. - Estimated yields from reforms: - Improving overall tax administration strength from 40th to 60th percentile could yield increase in tax revenues by 1.8 percent of GDP (Adan et al, 2023). - Combined reforms (CRM, third-party data matching, e-invoicing) could produce revenue gains up to 1.8 percent of GDP. - Digitalization: increasing e-filing adoption by half could boost tax revenues by 1.6 percent of GDP; mandatory e-filing impact larger. - Recommended sequencing and elements: - Reintroduce CRM and prioritize digitalization and service orientation over next two years; implement CRM, third-party data, and enhanced analytics over around 5 years. - Prerequisites: political support, administrative restructuring, legal changes for data sharing, privacy safeguards, and enhanced staff analytical capacity. ### Financial safety nets, crisis management, and FSAP implementation - Macroprudential and supervisory updates: - Capital adequacy ratios: 16.1 percent (solo) and 16.6 percent (consolidated) as of June 2024. - Temporary relief measures mostly expired as of September 2024; some relief measures remain (e.g., FIST Act recognition relief until 2Q 2027 for specified cases). - BSP approved “Strengthened Systemic Risk Oversight and Supervision” as a strategic objective (May 2024). - Resolution and crisis management: - Steps to establish BSP Resolution Group, develop resolution framework, and draft legislative proposals; TWG on Resolution completed gap analysis in April 2024. - Prompt Corrective Action (PCA) policy maximum period reduced to two years. - BSP developing comprehensive operational framework for LOLR. - AML/CFT progress: - Authorities substantially completed action plan to exit FATF grey list; onsite visit warranted to verify implementation; authorities optimistic exit in February 2025 following January onsite visit. - Registration of covered persons reached 12,297 or 96.98 percent of identified population by June 2024. ### Debt sustainability and DSA highlights - Coverage: national (central) government debt; consolidated general government debt 53.6 percent of GDP at end-2023. - Baseline DSA projections: - Public debt ratio peaks around 2025 at 62.0 percent of GDP then declines to 51.8 percent by 2033. - Primary deficit (percent of GDP): 2023: 3.5; 2024: 2.7; 2025: 2.6; 2026: 1.7; 2027: 1.2; 2028: 0.9; 2029: 0.7; 2030: 0.6; 2031: 0.6; 2032: 0.5; 2033: 0.6. - Automatic debt dynamics, real interest rate, relative inflation, and real GDP growth series preserved in table form (see source tables). - Risk assessment: - Debt fanchart index (DFI): 1.3 — Risk signal: Moderate. - GFN financeability index (GFI): 11.9 — Risk signal: Moderate. - Medium-term combined MTI: mechanical "low" signal; probability of missed crisis 2024-2029 if stress not predicted: 9.1 percent; probability of false alarms 42.0 percent. - Memo indicators: - Nominal GDP (US$ billions): 394.1 (2021); 404.4 (2022); 437.1 (2023); 469.5 (2024); 506.0 (2025); 548.4 (2026). - Real GDP growth (percent) (memo): 5.5 (2023); 5.8 (2024); 6.1 (2025); 6.3 (2026–2029). ### Structural reforms, human capital, and digitalization - Structural priorities: - Upgrade infrastructure (electrical grids, roads, ports, logistics), accelerate renewable energy, address land fragmentation and low agricultural productivity, enhance governance, promote FDI, and harness the digital economy. - Complement reforms with strengthened social protection and climate adaptation measures. - Human capital: - Potential demographic dividend window of about twenty years; priority investments in nutrition, health, and education. - 90 percent learning poverty rate among primary school-age children (standardized exams highlight low educational outcomes). - Female labor force participation: 53.4 percent in September 2023; male: 74.7 percent. - Digitalization and markets: - BSP completed proof of concept for wholesale CBDC (“Project Agila”). - Capital market development plan to broaden institutional and retail investor base; moratorium on digital banks lifting in January 2025. ### Climate change, marine ecosystems, and green transition - Marine and fisheries: - Climate change impacts on marine capture fisheries projected to reduce fisheries' GDP by 9 percent (mitigation scenario) to 18 percent (extreme scenario up to 2060). - Conserving coastal ecosystems (salt marshes, mangroves, seagrass) recommended for carbon storage, storm protection, and co-benefits. - Tourism and ocean health: - Ocean Health Index: 58 out of 100 in 2023 (global average 73). - Domestic tourism expenditure share to Household Final Consumption Expenditure has been increasing since 2021. - Climate targets and financing: - NDC target: cutting greenhouse gas emissions 75 percent below baseline levels in 2030, conditional on external support. - Renewable share targets: increase from 22 percent currently to 35 percent by 2030 and 50 percent by 2040. - Financing NDC and adaptation would benefit from incentivizing green financing and introducing carbon pricing; authorities note need to reduce power costs via grid investments before potential carbon taxation. - National Adaptation Plan 2023-2050 published; Philippines selected as host country for the Board of the Loss and Damage Fund. ### IMF capacity development (CD) and forward-looking support - CD areas and priorities: - Monetary policy and inflation forecasting; integrated policy framework support. - Financial supervision: conglomerate supervision, stress testing, resolution planning, climate risk assessment. - Debt management and capital market development: benchmark yield curve, liquidity management, OMO instruments. - Tax policy and administration: VAT diagnostic support, medium-term revenue strategy, tax expenditure review. - PFM and public investment management: IFMIS rollout, PIMA updates, green PFM practices. - Government finance statistics improvements and PSDS enhancements. *Source: IMF staff report for the 2024 Article IV consultation — Philippines (selected excerpts contained in the provided PDF content).* ### 2.4 percent (year-on-year) respectively in October 2024. The current account deficit ### 1phlea2024001-print-pdf - 2.4 percent (year-on-year) respectively in October 2024. The current account deficit ### Recent developments - Growth moderated from 7.6 percent in 2022 to 5.5 percent in 2023; in 2024 the first three quarters averaged 4.6 percent (seasonally-adjusted annualized rate) and 5.8 percent (y/y). - Private consumption was subdued amid higher rice and other food prices; public consumption expanded. - Gross fixed capital formation remains restrained relative to its pre-pandemic level despite a strong rebound in public construction. - Foreign direct investment (FDI) showed signs of recovery in 2024H1 from a low base in 2023, but remains below pre-pandemic levels. - Inflation developments: - Core inflation declined to 2.4 percent (y/y) in October 2024. - Headline inflation declined to 2.3 percent (y/y) in October 2024. - Year-to-date average headline inflation was 3.3 percent, within the BSP’s target band of 3.0 percent ± 1.0 percentage point (ppt). - Monetary policy actions in 2024: - BSP reduced its policy rate by 25 basis points in August 2024 and another 25 basis points in October 2024. - In September 2024, the BSP announced a significant reduction in bank reserve requirements. ### Outlook and projections - Growth projections: - Real GDP is expected to reach 5.8 percent in 2024 and pick up to 6.1 percent in 2025. - Potential output is estimated to be between 6.0 to 6.3 percent over the medium term. - Inflation projections: - Inflation is projected to decline to 3.2 percent on average in 2024 from 6.0 percent in 2023, supported by the reduction in rice tariffs and other non-monetary measures to reduce food prices. - External sector projections: - The current account deficit narrowed to 2.7 percent of GDP in 2023 from 4.5 percent and is expected to narrow further amid lower commodity prices, a gradual pick-up in tourism and business process outsourcing sector receipts. - The current account deficit is expected to narrow to 2.0 and 1.9 percent in 2024 and 2025. - Financial system: - The banking system has weathered the high interest environment with sufficient liquidity and capital buffers. - Medium-term growth support: - Growth in 2024–25 is expected to be supported by disinflation and gradually declining borrowing costs as monetary policy normalizes. ### Risks to the outlook - Near-term growth risks are tilted to the downside, including: - Recurrent commodity price volatility. - New supply shocks. - An escalation of geopolitical tensions. - Monetary policy stance in advanced economies turning out to be too tight for longer. - A growth slowdown in major economies. - Major natural disasters or extreme climate events. - Stalled reform momentum or lower than expected payoffs from reforms. - Inflation upside risks: - New supply shocks and recurring commodity price volatility represent upside inflation risks. ### Executive Board assessment and policy guidance - Monetary policy: - The BSP has room to ease the policy rate gradually towards a neutral stance. - With inflation and inflation expectations returning towards target and the output gap turning negative, a continued gradual reduction in the policy rate is appropriate. - A data-dependent approach and careful communication are important to manage expectations amid uncertainty and more frequent supply-side shocks. - The exchange rate should continue to play its role as a shock absorber; FXI may be appropriate under certain circumstances. - Establishing a credible yield curve is important to develop the fixed-income market and improve monetary policy transmission. - Financial sector policy: - Systemic risks are moderate but pockets of vulnerabilities remain (commercial real estate vacancies and rents, elevated non-performing housing loans, rapid growth in consumer loans). - The BSP should be ready to adjust macroprudential policy in line with developments in the financial cycle and move toward a positive neutral level for the countercyclical capital buffer. - Strengthen capacity to assess financial stability risks and resolve troubled financial institutions. - Continue efforts to strengthen financial supervision and regulation and sustained reforms to enhance AML/CFT effectiveness. - Fiscal policy: - A more gradual pace of consolidation in the revised fiscal program is appropriate, supported by a concrete and sustainable plan to raise tax revenues and implement expenditure reforms. - The 2025 budget proposes a broadly neutral fiscal stance; additional tax measures should be considered to create more space for spending in priority areas. - Tax reform priorities could include implementing previously planned excise tax measures, enhancing value-added tax efficiency, improving tax administration, and ensuring effective control of tax incentives. - Reform the military and uniformed personnel pension system, improve expenditure efficiency, and effectively manage fiscal risks. - Curtailing contingent liabilities and effectively managing decentralization and PPPs would help reduce fiscal risks and improve governance. - Structural policy: - Unlocking medium-term growth potential depends on comprehensive and well-sequenced structural reforms. - Priority reforms: upgrade infrastructure, invest in healthcare and education, address land fragmentation and low productivity in agriculture, enhance governance, promote foreign investment, harness the digital economy. - Complement reforms with strengthened social protection programs and robust climate adaptation measures. ### Key statistics and selected indicators (as presented) - Demographic: - Population (2023): 111.9 million - Life expectancy at birth (2022): 72.2 - Poverty: - Below $2.15 a day (2021): 3 - Below the national poverty line (2023): 15.5 - Inequality (2021, income shares): - Top 10 percent: 32.5 - Bottom 20 percent: 6.5 - IMF quota: SDR 2,042.9 million - Main export products: electronics, mineral, agro-based products, equipments, and chemicals - National account (annual percentage change): - Real GDP: 2021: 5.7; 2022: 7.6; 2023: 5.5; 2024: 5.8; 2025: 6.1; 2026: 6.3 - Consumption: 4.7; 7.7; 4.7; 5.4; 5.8; 6.0 - Private consumption: 4.2; 8.3; 5.6; 5.2; 6.3; 6.5 - Public consumption: 7.2; 5.1; 0.6; 6.4; 3.0; 3.3 - Gross fixed capital formation: 9.8; 9.8; 8.2; 8.3; 8.6; 8.9 - Final domestic demand: 5.7; 8.1; 5.4; 6.0; 6.4; 6.6 - Net exports (contribution to growth): -2.3; -2.2; 0.0; -1.0; -1.0; -1.1 - Real GDP per capita: 4.9; 6.7; 4.6; 4.6; 5.0; 5.2 - Output gap (percent, +=above potential): -3.5; 0.4; 0.2; -0.2; -0.1; 0.0 - Labor market: - Unemployment rate (percent of labor force): 7.8; 5.4; 4.4; 4.0; 4.5; 4.5 - Underemployment rate (percent of employed persons): 15.9; 14.2; 12.3; ...; ...; ... - Employment growth: 11.7; 6.6; 2.8; 1.6; 1.6; 1.6 - Prices: - Consumer prices (period average): 3.9; 5.8; 6.0; 3.2; 2.8; 3.0 - Consumer prices (end of period): 3.1; 8.1; 3.9; 2.6; 3.1; 3.0 - Core consumer prices (period average): 3.0; 3.9; 6.6; 2.9; 2.9; 2.9 - Money and credit (end of period): - Overnight reverse repo rate (policy rate): 2.0; 5.5; 6.5; ...; ...; ... - Claims on private sector (in percent of GDP): 49.9; 48.9; 48.3; 49.3; 50.8; 52.2 - Claims on private sector (yoy growth rate): 3.8; 11.1; 9.1; 11.0; 11.9; 11.9 - Monetary base: 5.8; 5.1; 5.5; 7.6; 8.5; 9.0 - Broad money: 8.0; 8.0; 7.4; 8.8; 8.4; 8.6 - Public finances (in percent of GDP): - National government overall balance1/: -8.3; -7.2; -6.1; -5.6; -5.6; -4.6 - Revenue and grants: 15.5; 16.1; 15.7; 16.6; 15.8; 15.8 - Total expenditure: 23.8; 23.2; 21.8; 22.2; 21.4; 20.5 - National government gross debt: 60.4; 60.9; 60.1; 61.2; 62.0; 61.7 - Balance of payments (in percent of GDP): - Current account balance: -1.5; -4.5; -2.7; -2.0; -1.9; -1.8 - FDI, net: -2.5; -1.4; -1.2; -1.2; -1.3; -1.5 - Total external debt: 27.0; 27.5; 28.7; 28.9; 28.5; 27.5 - Gross reserves: - Gross reserves (US$ billions): 108.8; 96.1; 103.8; 113.3; 115.9; 117.5 - Gross reserves (percent of short-term debt, remaining maturity): 512.3; 381.3; 384.7; 466.4; 443.8; 451.3 - Memorandum items: - Nominal GDP (US$ billions): 394.1; 404.4; 437.1; 469.5; 506.0; 548.4 - Nominal GDP per capita (US$): 3,580; 3,645; 3,906; 4,148; 4,424; 4,745 - GDP (in billions of pesos): 19,411; 22,028; 24,319; 26,432; 28,691; 31,260 - Real effective exchange rate (2010=100): 111.1; 109.3; 113.1; ...; ...; ... - Peso per U.S. dollar (period average): 49.3; 54.5; 55.6; ...; ...; ... - Sources for indicators: Philippine authorities; World Bank; and IMF staff estimates and projections. - Note: 1/ IMF definition with privatization receipts, equity, and net lending excluded. *Source: IMF staff report for the 2024 Article IV consultation — Philippines (selected excerpts).* ### 4. Labor market conditions have continued to improve. The unemployment rate declined ### 4. Labor market conditions have continued to improve. The unemployment rate declined ### Labor market conditions - Unemployment rate declined to 3.7 percent in September (from 4.5 percent a year ago) and remains below pre-pandemic levels. - Employment gains were primarily in the construction sector; large job losses were seen in agriculture, reflecting the impact of El Niño. - Underemployment rate (employed persons seeking longer working hours or additional jobs) remains high at about 11.9 percent (Figure 3). - Hours worked remain below pre-pandemic averages. - Real wages recovered in 2023-24 from an all-time low in 2022 and rose slightly above pre-pandemic levels for the first time in July 2024. ### External position and reserves - External position in 2023 assessed to be broadly in line with fundamentals and desirable policies. - Current account deficit narrowed to 2.7 percent of GDP in 2023 from 4.5 percent of GDP in 2022. - Gross international reserves (GIR): - US$112.4 billion at end-October 2024, - US$103.8 billion at end-2023, - US$93.0 billion in September 2022 (low). - GIR as of end-2023: 196 percent of the IMF’s ARA metric, covering 7.8 months of imports. - Exchange rate continued to depreciate in 2024 amid volatility and shifting expectations around US monetary policy. ### Domestic financial conditions - Domestic financial conditions have been restrictive due to domestic monetary policy tightening and global financial conditions. - Real short-term rate continued to rise in 2023 as the policy rate remained stable and inflation declined, contributing to a slowdown in credit growth in 2023. - Credit growth has since picked up but remains below its historical average. - Corporate and sovereign spreads remain historically low; term spread has declined with 10-year sovereign bond yields at 5.9 percent (Figures 5-6). - Reserve requirement reduction (note): bank reserve requirements are reduced by 100-250 basis points depending on bank type (from 9.5 percent to 7 percent for universal and commercial banks), effective October 25, 2024. ### Fiscal position - National government fiscal deficit narrowed to 6.1 percent of GDP in 2023 from 7.2 percent of GDP in 2022. - Narrowing driven by lower current spending—largely due to lower transfers to the local government units (LGUs)—which more than offset a one-off negative cash flow impact from the transition from monthly to quarterly VAT payments (about 0.4 percent of GDP). - National government debt declined from 60.9 percent of GDP at end-2022 to 60.1 percent of GDP at end-2023. - Selected fiscal table highlights (in percent of GDP unless otherwise noted): - Revenues: 16.1 (Actual 2023); BESF 2024: 15.3; BESF Actual: 15.2; BESF: 15.7 - Tax revenues: 14.6 (Actual 2023); BESF 2024: 14.6; BESF Actual: 14.4; BESF: 14.1 - Expenditure: 23.2 (Actual 2023); BESF 2024: 21.3; BESF Actual: 21.2; BESF: 21.8 - Current expenditure: 18.6 (Actual 2023); BESF 2024: 17.2; BESF Actual: 17.0; BESF: 16.9 - Capital expenditure: 4.6 (Actual 2023); BESF 2024: 4.1; BESF Actual: 4.2; BESF: 5.0 - Overall balance 1/: -7.2 (2022), -6.0 (BESF 2024), -6.0 (Actual), -6.1 (BESF) - Overall balance (authorities' definition): -7.3 (2022), -6.1 (BESF 2024), -6.1 (Actual), -6.2 (BESF) - Primary balance 1/: -4.9 (2022), -3.5 (BESF 2024), -3.5 (Actual), -3.5 (BESF) - Nominal GDP (in billions of peso): 22,028 (2022), 23,755 (2023), 24,522 (Actual), 24,319 (BESF) ### Outlook: growth and inflation projections - Growth projections: - 5.8 percent in 2024, - 6.1 percent in 2025. - Drivers: gradual monetary policy easing amid a small negative output gap; consumption buoyed by lower food prices and upcoming midterm elections; investment pickup supported by sustained public investment push and gradually declining borrowing costs. - Inflation projections: - Average 3.2 percent in 2024, - Average 2.8 percent in 2025. - Medium-term: potential growth expected to reach 6.0-6.3 percent, supported by acceleration of PPP projects and FDI after recent legislative reforms. ### External outlook and authorities’ views - Current account deficit expected to narrow to: - 2.0 percent of GDP in 2024, - 1.9 percent of GDP in 2025. - Supporting factors: lower commodity prices, gradual pick-up in tourism and BPO receipts, slightly higher inward remittances, improved FDI inflows relative to 2023. - Authorities’ official growth target ranges: - 6.0-7.0 percent for 2024, - 6.5-7.5 percent for 2025. - Authorities expect private consumption growth to pick up in 2025 and private investment to grow strongly over the medium term as monetary easing and reforms (e.g., CREATE MORE Act) take effect. ### Risks to the outlook - Near-term growth risks tilted to the downside: - Recurrent commodity price volatility and new supply shocks (may necessitate tighter monetary policy). - Escalation of geopolitical tensions or regional conflicts disrupting trade, remittances, FDI, and financial flows. - Prolonged tight monetary policy in advanced economies causing capital outflows and tighter financial conditions. - Slowdown in major economies with adverse spillovers. - Major natural disasters or extreme climate events causing disruption and higher fiscal expenditure. - Weaker private domestic demand if reform momentum stalls or payoffs are lower. - Upside risks: - Faster-than-expected acceleration of private investment through PPPs and higher inward FDI. - Inflation risks: - Have receded but remain to the upside due to potential commodity price volatility, geopolitical tensions, extreme climate events, and supply shocks. - Measures to contain food prices have contributed to lower inflationary risks, but food prices continue to pose risks (e.g., due to La Niña). ### Policy discussions and recommendations - Overall stance: calibrate fiscal and monetary policies to achieve a soft landing. - Monetary policy: - Continued reduction in the policy rate and a data-dependent approach are appropriate as inflation returns to target and a negative output gap opens. - BSP has room to gradually reduce the policy rate and move toward a neutral stance, while ensuring inflation and inflation expectations remain anchored. - Ex-ante real rate: 3.3 percent in August; real neutral rate estimates vary between 1-2 percent (IMF Country Report No. 2018/287) to 2-3 percent (BSP, 2024). - Careful communication and forward guidance recommended to manage expectations amid uncertainty. - Exchange rate should act as shock absorber; temporary foreign exchange intervention (FXI) may be appropriate in certain circumstances per the IMF’s Integrated Policy Framework. - Ensure coordination across BSP toolkit, including communicating a strategy for balance sheet size in normal times and factoring reserve requirement ratio (RRR) changes into overall policy stance. - Reactivating the interest rate swap (IRS) market and establishing a benchmark yield curve recommended to develop fixed income and money markets and improve monetary transmission; coordinated actions by Bureau of the Treasury and BSP are essential. - Fiscal policy: - More gradual pace of fiscal consolidation appropriate to support a soft landing. - Sustaining fiscal consolidation over the medium term is critical to replenish fiscal space; should be supported by a concrete and sustainable plan to improve revenue mobilization and implement expenditure reforms. - Financial sector: - Remains resilient but continued vigilance warranted against vulnerabilities. - Reforms to enhance AML/CFT effectiveness should be sustained. - Long-term focus: - Enhance growth potential through long-term investments in human and physical capital and structural reforms to raise productivity growth. ### Authorities’ views (selected) - BSP agrees there is scope to gradually reduce the policy rate toward neutral, taking a data-dependent approach and being careful in “looking through” supply shocks. - BSP policy on FXI: intervene only in cases of broad market distress that could impact inflation and inflation expectations; provide dollar liquidity when necessary to meet legitimate demand. - BSP acknowledges importance of communicating a strategy for its balance sheet and is working on a disclosure policy to better communicate the composition of its bond portfolio. - The announced RRR reduction expected to lower financial intermediation costs and align ratios with regional peers. *From: 1phlea2024001-print-pdf* ### 21. The authorities emphasize the importance of establishing a benchmark yield curve to ### 1phlea2024001-print-pdf - 21. The authorities emphasize the importance of establishing a benchmark yield curve to ### Monetary and market development - Authorities emphasize establishing a benchmark yield curve to strengthen monetary policy transmission and foster capital market development. - Recent initiatives announced: - Enhance the Peso Interest Rate Swaps market. - Enable a repo market for government securities. - BSP exploring measures to broaden access to monetary instruments: - Expand eligible counterparties. - Assess eligibility of BSP bills as collateral. - Enhance flexibility in auctions to optimize absorption. - BSP working on shifting from “tagging” government securities to banks to full delivery of these securities to allow banks to trade these securities and expand the market. ### Financial sector policies — system-wide assessment - Overall systemic risk: moderate and broadly unchanged since last year. - Banking system: well-capitalized, liquid, and profitable; supported by generally conservative lending standards and a stable deposit base. - Systemwide non-performing loans (NPLs): contained at 3.5 percent. - Residential real estate NPLs: 6.8 percent (above pre-pandemic levels). - Real estate loans: 20.0 percent of banks’ loan books system-wide as of end-June 2024. - Consumption loans: rapid growth of about 25 percent annually; represent about 10.6 percent of total bank loans as of end-June 2024. - External borrowing by corporates: increased slightly in recent years but remains stable as a share of GDP (under 10 percent). - Hedging markets: remain underdeveloped. - Banks’ holdings of government securities: have increased since the pandemic. - Credit growth: healthy; the credit gap is estimated to have closed. - Residential real estate prices: have held up despite increase in interest rates. ### Financial sector vulnerabilities and recommendations - Pockets of vulnerabilities: - Commercial real estate: parts have persistently high vacancies and falling rents. - Real estate and consumption loan concentrations warrant close monitoring. - Exposures to corporates, including through complex conglomerate structures, require attention. - Macroprudential policy recommendations: - BSP should be ready to adjust macroprudential policy in line with financial cycle developments to preempt build-up of vulnerabilities. - Move toward a positive neutral level for the countercyclical capital buffer (CCyB) and develop a CCyB decision framework in parallel. - Gradual phase-in of higher capital requirements during the expansion phase to mitigate excessive credit growth and strengthen loss-absorption capacity. - Replace the cap on commercial real estate exposures with a sectoral systemic risk buffer to provide price-based incentives to align loan portfolios and capital buffers with systemic risk. - Supervision and resolution recommendations: - Continue efforts to update the bank resolution framework and develop a resolution manual. - Improve emergency liquidity assistance (ELA) and lender of last resort (LOLR) frameworks. - Formalize and expand supervisory colleges for conglomerate supervision; address data gaps within and between conglomerates; understand financial linkages including through non-bank financial institutions. - Develop capacity for regular stress tests. - Implement capital restoration plans for two state-owned banks after their contribution to the Maharlika Investment Corporation’s (MIC) start-up capital and exit regulatory relief as soon as possible. - Ensure MIC establishment does not come at the cost of a resilient financial system, sound regulatory framework, and level-playing-field. - AML/CFT: - Sustained reforms to enhance AML/CFT effectiveness are critical. - FATF initial determination in October 2024: Philippines has substantially completed its action plan to exit the grey list; an onsite visit is warranted to verify implementation and sustained commitment. - Keep up with evolving FATF requirements ahead of the next mutual evaluation in 2027. - Reforming the bank secrecy law will enhance BSP supervisory powers and strengthen AML/CFT effectiveness. ### Digitalization, inclusion, and market development - BSP completed a proof of concept for wholesale CBDC (“Project Agila”). - Capital market development plan: reforms to broaden institutional and retail investor base. - Moratorium on digital banks lifting in January 2025; careful supervision of new entrants will be important. ### Authorities’ views (financial sector) - Authorities view vulnerabilities in the real estate market as limited due to prudential measures and active monitoring. - BSP observations: - Vacancies from exiting POGOs likely to be absorbed by traditional residents; developers can adjust project completion timelines. - Quality of loans satisfactory with a high NPL coverage ratio. - Banks have sufficient capital buffers to withstand a material downturn in the property sector per BSP real estate stress tests. - CCyB approach: intend to establish a decision framework before progressing towards a positive neutral CCyB; view current high capital buffers as adequate in the interim. - Resolution framework: aim to submit legislative proposals by mid-2025 and facilitate establishment of a resolution unit. - Data on conglomerates: authorities recognize difficulties and are addressing the challenge. - State-owned banks: despite capital requirements well above regulatory minima, pursue capital-management strategies such as potential non-payment of dividends to the national government. - FATF grey list exit: authorities optimistic Philippines will exit the grey list in February 2025 following an FATF onsite visit in January; committed to meeting evolving FATF requirements for the 2027 mutual evaluation. ### Fiscal policy — near term - Fiscal consolidation in 2024: proceeding moderately; broadly appropriate. - Fiscal deficit (GFS definition): projected to decline from 6.1 percent of GDP in 2023 to 5.6 percent of GDP in 2024, implying a 0.8 ppt of GDP consolidation in the primary balance. - 2024 spending: higher than 2024 BESF due to higher interest payments, capital spending, and use of goods and services; partly offset by higher non-tax revenues, including one-off remittances and higher dividend payments. - Tax revenues: lower, partly reflecting withdrawal of earlier-planned excise tax measures and delays in implementing other budgeted tax initiatives. - 2025 BESF aims to maintain fiscal deficit at 5.6 percent of GDP (GFS definition). - Projected increases in compensation of employees and transfers to LGUs together: 0.7 ppt of GDP (noted necessity for significant restraint in spending on goods and services to meet current spending targets). - Staff projects a small increase in tax revenues; non-tax revenues expected higher than in BESF. - Recommendation: enhance overall revenue target with additional tax measures (for example, previously planned excise tax measures as inflation recedes) to meet deficit target and create space for priority spending. ### Fiscal policy — medium term and structural reforms - MTFF revised targets: reduce fiscal deficit (authorities’ definition) from 5.3 percent of GDP in 2025 to 3.7 percent of GDP in 2028 (up from earlier target of 3 percent of GDP); pace of medium-term consolidation unchanged at 0.5 ppt of GDP per year. - Under baseline: national government debt projected to fall to below 60 percent of GDP by 2028, supported by favorable interest rate-growth differential. - Sovereign Risk and Debt Sustainability Framework (SRDSF): indicates low risk of sovereign stress. - Gross financing need: increased to about 12 percent of GDP in 2024 and projected to average about 9.5 percent of GDP over the medium-term. - Bond Sinking Fund: size designed to match 12 months’ worth of redemption for maturing treasury bonds (2.9 percent of GDP at end-2023). - Medium-term consolidation should be supported by: - Sustainable plan to raise tax revenues and implement expenditure reforms. - Target to reduce current spending (excluding capital transfers to LGUs) by 1.2 ppt of GDP from 2024 to 2028, mainly on goods and services and compensation of employees. - Capital spending to increase to 6 percent of GDP (including capital transfers to LGUs). - Revenues projected to increase by 0.8 ppt of GDP over the same period, anchored around improving tax collection efficiency. - Staff projections: assume similar deficit path but envisage a smaller increase in revenues and less scope to reduce current spending, accommodated by a lower path for capital spending. ### Revenue mobilization and expenditure reforms — specific priorities - Mobilizing revenue is critical given low tax-to-GDP ratio: 14.1 percent of GDP in 2023. - Recent measures: introduction of VAT on non-resident digital service providers and a withholding tax on online sellers’ income. - Priority tax reforms recommended: - Excise taxation. - Enhancing VAT efficiency (improve low refund rates, introduce anti-avoidance and anti-evasion measures, rationalize zero-rating and exemptions). - Improve tax administration and fiscal governance: timely implementation of compliance risk management, systematic use and analysis of third-party data, and digitalization. - Consider carbon taxation (with revenues partly used to address distributional implications), coordinated with renewable energy investment and competition enhancement. - CREATE MORE Act concerns: - Aims to attract investment and improve ease of doing business but may increase tax holidays and affect predictability and buoyancy of revenues. - Enhancing regulatory oversight role of the Fiscal Incentives Review Board (FIRB) is welcome; revenue implications of the law should be better quantified and incorporated into the medium-term fiscal program. - Prefer cost-based mechanisms (e.g., expensing of capital spending) rather than expanding tax holidays. - Spending-side reforms: - Reduce current spending through reforms in military and uniformed personnel (MUP) pensions: introduce contributory system and stop indexing pensions to salaries of current personnel. - Enhance local capacity to budget, execute, and report in the decentralization process. ### Medium-term fiscal framework, PFM, and fiscal risks - MTFF enhancements recommended: - Clarify the medium- to long-term deficit target and the fiscal anchor guiding the MTFF. - Consider supporting MTFF with a robust legal framework to make it more binding and enhance credibility by embedding the fiscal anchor in a formal fiscal rule. - Public finance management (PFM) reforms underway: - Rolling out Integrated Financial Management Information System (IFMIS). - Progress on 2018 Public Investment Management Assessment (PIMA) recommendations. - Passage of the New Government Procurement Act and finalization of the PFM Reforms Roadmap 2024-2028. - Shift from obligation-based to cash-based budget for multiyear capital projects; improve project appraisal and selection and infrastructure maintenance. - PPPs and GOCCs: - As PPPs gain importance, careful project selection with value-for-money assessments and comprehensive fiscal risk reporting are necessary. - New PPP Code strengthened fiscal risk management, but a robust gateway process is needed for implementation stage and for PPPs without government undertakings. - Strengthen oversight of government-owned and controlled corporations (GOCCs) via better cross-agency coordination and upgraded financial analysis and reporting, including for PPPs. *Source: IMF staff report excerpt (pages and paragraphs as provided).* ### 35. The authorities remain committed to fiscal consolidation and recognize the need to ### 1phlea2024001-print-pdf - 35. The authorities remain committed to fiscal consolidation and recognize the need to ### Fiscal consolidation and revenue mobilization - Authorities are committed to fiscal consolidation and recognize the need to raise additional revenues to support high quality social and development spending. - The authorities have requested IMF TA on a medium-term revenue strategy. - Policy options under consideration and authorities’ positions: - Reconsidering previously shelved excise tax measures (authorities open to reconsideration). - Improving the efficiency of the VAT system (authorities open but consider removing VAT exemptions politically infeasible). - Prioritizing enhancements in tax administration (authorities believe efforts should prioritize this). - Priority tax bills are on track to become effective in 2025. - CREATE MORE Act expected by authorities to attract more investments. - Strengthened quasi-judicial functions of the FIRB will oversee administration and granting of tax incentives by investment promotion agencies. - Authorities do not see scope to introduce carbon taxation given existing taxes on petroleum and energy. - Staff recommendation highlights: - Consider additional tax measures to create more fiscal space, including previously planned excise tax measures, enhancing VAT efficiency, improving tax administration, and ensuring effective control of tax incentives. - Reform the MUP pension system, improve expenditure efficiency, and manage fiscal risks. ### Expenditure controls and public financial management (PFM) - Authorities are enforcing expenditure controls and enhancing PFM: - Significant reductions made to unprogrammed appropriations in the proposed 2025 budget to reduce overspending risk. - If revenues fall short, priorities will be infrastructure investment targets and social spending. - Savings from current MUP bill proposals are unlikely to be substantial because benefits for existing pensioners will continue to be indexed to salaries of active personnel. - Operationalization efforts this year for the New Government Procurement Act and the PFM Reforms Roadmap 2024-2028. - Procurement for IFMIS software is in progress, with plans to deploy the system in five departments by end-2024. - Low utilization of budget appropriation for LGUs, particularly in capital expenditures; anticipates devolved functions and services will be completely assumed by LGUs by 2028 (phased transition). ### Structural policies and growth potential - The Philippine economy holds significant potential due to natural resources, untapped blue economy, and a demographic dividend. - Potential growth assessment: - Currently projected potential growth: 6.0-6.3 percent. - Feasible target with reforms: 7.0-7.5 percent. - Key structural reform priorities to boost investment and productivity: - Investments in critical infrastructure: upgrade electrical grids, accelerate renewable energy investments, improve road transportation, logistics, maritime ports, and support digital infrastructure to crowd in private investment, attract FDI, facilitate trade, and diversify the economy. - Improve governance, especially at the local government level, open telecommunications to greater competition, legislate Progressive Budgeting for Better and Modernized Governance, pursue National Government Rightsizing Program, continue digitalization of PFM, procurement, frontline services, and courts; reduce corruption; improve contract and property rights enforcement. - Address supply-side issues in agriculture and fisheries: reduce land fragmentation, increase access to credit and insurance, and further reduce tariff and non-tariff barriers. ### Human capital, labor, and inclusion - Demographic window and human capital needs: - Authorities have about twenty years to take advantage of a young population; sustained investments in nutrition, health, and education are required. - Standardized exams indicate low educational outcomes, with a 90 percent learning poverty rate among primary school-age children. - Female labor force participation: 53.4 percent in September 2023 versus 74.7 percent for males. - Strengthened social protection programs alongside reforms can help reduce poverty and inequality by creating quality jobs and raising productivity. ### Artificial Intelligence (AI) impacts and policy implications - AI exposure and labor market implications (staff estimates): - 36 percent of jobs in the Philippines are “highly exposed” to AI. - More than half of the highly-exposed jobs are also “highly complementary” where AI can support rather than replace tasks. - Low-complementarity jobs at risk of replacement by AI: 14 percent of the total workforce. - AI exposure by gender: approximately half of all jobs held by women are highly exposed, compared to a quarter for men. - Policy implications: - Invest in digital infrastructure and education, strengthen social safety nets, modernize education curriculums, and scale up upskilling (including teacher training and private-sector partnerships). - National AI Strategy Roadmap 2.0 and private partnerships expected to mitigate negative impacts. ### Climate change, green transition, and financing - Climate risks and adaptation needs: - Warming trend and upward trend in heavy precipitation expected to continue, increasing flood risk. - Adaptation priorities: resilient infrastructure, support for vulnerable households, and adoption of green PFM practices, including a climate public investment management assessment (C-PIMA). - NDC targets and renewable energy goals: - NDC target: cutting greenhouse gas emissions 75 percent below baseline levels in 2030, conditional on external support. - Increase share of renewables in the energy mix from 22 percent currently to 35 percent by 2030 and 50 percent by 2040. - Financing and policy tools: - Financing the NDC and adaptation/mitigation objectives would benefit from incentivizing green financing and introducing carbon pricing; authorities note need to reduce the cost of power through grid investments and reforms before potential carbon taxation. - Additional financial support from development partners and the private sector is essential. - Authorities’ climate actions: - Implementation focus on the 2023-2050 National Adaptation Plan covering five cross-sectoral strategies: (i) strengthening infrastructure resilience; (ii) safeguarding livelihoods; (iii) empowering local governments and communities; (iv) mainstreaming integrated adaptation governance; and (v) scaling up nature-based solutions. - The Philippines selected as host country for the Board of the Loss and Damage Fund; authorities working with development partners to develop natural disaster insurance mechanisms and mobilize climate financing. - Prior to exploring carbon taxation, authorities aim to reduce power costs via grid investments and promote greater energy sector competition; strategic investments by the recently created MIC in the energy sector set to begin by end-2024. ### Financial sector, monetary policy, and reserves - Staff assessment and recommendations: - BSP has room to ease the policy rate gradually towards a neutral stance as inflation and expectations return to target and the output gap turns negative; gradual, data-dependent rate reductions and careful communication recommended. - Exchange rate should continue to act as a shock absorber; FXI may be appropriate under certain circumstances. - Establishing a credible yield curve is important for fixed-income market development and monetary policy transmission. - Monitor systemic risks: banking system has sufficient liquidity and capital buffers and low NPLs, but pockets of vulnerability persist (commercial real estate vacancies, elevated non-performing housing loans, rapid consumer loan growth). - BSP should be ready to adjust macroprudential policy and move toward a positive neutral level for the CCyB; strengthen capacity to assess financial stability risks and resolve troubled institutions. - Selected metrics: - The Philippines’ foreign reserves increased slightly to US$104 billion at end-2023. - BSP reduced the reserve requirement ratio to 7 percent in September 2024 (remains one of the highest in the region). ### Staff appraisal: outlook, risks, and priorities - Growth and inflation outlook: - Growth expected to pick up modestly in 2024-25; inflation should remain within the BSP’s target range. - Growth supported by consumption acceleration as food prices ease and by increased investment through public investment and more accommodative financial conditions. - Risks: - Near-term growth risks tilted to the downside: external risks (commodity price volatility, geopolitical tensions) and domestic risks (lower-than-expected payoffs from reforms). - Upside inflation risks from new supply shocks and recurring commodity price volatility. - Fiscal stance and priorities: - The more gradual pace of consolidation in the revised fiscal program is appropriate; the 2025 budget proposes a broadly neutral fiscal stance. - Support consolidation with a concrete and sustainable plan to raise tax revenues and implement expenditure reforms. - Structural reform priority summary: - Upgrade infrastructure, invest in healthcare and education, address land fragmentation and low agricultural productivity, enhance governance, and expand digitalization to improve access to quality education, promote financial inclusion, and enhance public spending efficiency. - Process note: - Next Article IV consultation expected to take place on the standard 12-month cycle. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1phlea2024001-print-pdf.pdf* ### Annex I. Implementation of Main Recommendations of the ### Annex I. Implementation of Main Recommendations of the 2023 Article IV Consultation ### Monetary Policy - Recommendation: Maintain a restrictive monetary policy stance until inflation fully returns to target; remain vigilant to surges in commodity prices and potential second‑round effects; communicate the desired size of the BSP balance sheet in normal times and continue coordination with the BTr to further develop the benchmark yield curve. - Actions: - The Bangko Sentral ng Pilipinas maintained its policy rate at 6.5 percent, in line with staff recommendations, before cutting the policy rate by 25bps in August and October. - The BSP’s restrictive stance has caused inflation and inflation expectations to fall substantially, bringing them within the target. - Progress on the operational framework: refining the variable rate RRP facility; working with industry to create an enhanced peso interest rate swap market and expand a repo market for government securities. - As BSP holdings of government securities purchased during COVID-19 mature, the BSP could usefully communicate a strategy for the size of its balance sheet in normal times. Further work on developing the yield curve also remains. ### Financial Sector Policies - Recommendations: Continue to strengthen financial supervision and regulation; strengthen the bank resolution and corporate insolvency framework; make progress on outstanding AML/CFT issues to exit the FATF grey list; reform the bank secrecy law. - Actions: - In May 2024, the BSP Monetary Board approved “Strengthened Systemic Risk Oversight and Supervision” as one of the BSP’s Strategic Objectives under its Enterprise Strategy to foster an integrated approach on macroprudential policy. - BSP actions on bank resolution: establishment of a separate resolution unit; drafting a resolution manual and legislative protocols on resolution; addressing IMF TA recommendations. - AML/CFT: Authorities have made significant progress toward exiting from the FATF grey list and strengthening the overall AML/CFT framework but need to maintain momentum to keep up with evolving FATF requirements. ### Fiscal Policy - Recommendations: Timely implement tax policy measures identified in the FY2024 budget; complement the MTFF with a tax-policy-oriented medium-term revenue strategy; reform MUP pension system; improve expenditure efficiency; effectively manage decentralization; strengthen oversight of GOCCs, PPPs, and SSIs to enhance governance and reduce fiscal risks. - Actions: - Authorities are working with Congress to legislate several tax policies, including Package 4 of the Comprehensive Tax Reform Program, excise tax on single-use plastics, the motor vehicle road user’s charge, and rationalization of the mining fiscal regime. They are already in the advanced stages and most are expected to be passed before year-end. - The VAT on digital services was signed into law in early October 2024. - Fiscal consolidation is expected to continue in line with the revised targets identified in the MTFF. - Authorities are working to reform the MUP pension system and increase capacity for LGUs to deliver public service; working with Congress to legislate the Progressive Budgeting for Better and Modernized Governance, and the National Government Rightsizing Program. The digitalization of the PFM system continues. - Authorities are working to enhance oversight of the GOCCs. ### Structural Policies - Recommendations: Sustain efforts to reduce infrastructure and education gaps, promote foreign investment, strengthen governance, harness the digital economy to boost growth potential and inclusivity; focus on reducing poverty and addressing inequality via quality jobs, educational attainment, and enhanced social protection; address climate risks through a multi‑pronged approach. - Actions and outcomes: - Infrastructure: 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. - Investment climate and FDI: Intensified economic diplomacy initiatives and business-friendly administrative reforms (e.g., Green Lanes for Strategic Investments; establishment of a One-Stop Shop for Strategic Investments) attracting higher FDI pledges. - Digitalization: Progress on digitalization of financial management information systems and digitalization of tax registration, filing, and payment processes. The E-Governance Act approved by the House is pending in the Senate. - Skills and education: Technical Education and Skills Development Authority partnered with Microsoft Philippines; established seven Regional Technical and Vocational Education and Training centers nationwide. - Poverty and social protection: - 2023 Full Year Official Poverty Statistics: poverty incidence among the population dropped to 15.5 percent from 18.1 percent in 2021. - Food STAMP program expanded beyond pilot to cover 150,000 beneficiaries as of July 2024, aiming to reach one million beneficiaries by 2027. - Climate and sustainability: - Authorities published in 2024 their National Adaptation Plan and NDC Implementation Plan. - Following COP28, they secured a seat on the Board of the Loss and Damage Fund, which will be hosted in Manila. - The Financial Sector Forum published a local sustainable finance taxonomy covering climate change and mitigation objectives. ### External Sector: Key Metrics and Assessments (Annex II) - Net international investment position (NIIP): widened to -11.7 percent of GDP in 2023 from -10.1 percent of GDP in 2022. - Foreign reserves held by the BSP: accounted for about 43 percent of total external assets in 2023, up from 42 percent in 2022. - Key components of external liabilities in the NIIP: FDI (28 percent of GDP), portfolio investment (19.6 percent of GDP), other investment (19.2 percent of GDP). - Total external debt: increased to 28.7 percent of GDP in 2023 from 27.6 percent of GDP in 2022. - Assessment: Composition of NIIP and relatively low external debt indicate a sustainable external position with relatively low vulnerabilities. FX reserves are substantially larger than short-term external liabilities (26.0 percent of FX reserves), and FDI accounts for 41.9 percent of total liabilities. - Current account (CA): - CA deficit narrowed to 2.7 percent of GDP in 2023 from 4.5 percent of GDP in 2022. - Drivers: declining goods trade deficit (partly due to lower commodity prices) and strong services exports; rise in private and public savings; decline in private investment; public investment broadly unchanged from 2022. - Projection: CA deficit expected to narrow further to -2.0 percent of GDP in 2024, supported by continued strength in services exports including tourism, and falling food prices. - EBA and staff estimates for 2023: cyclically adjusted CA −2.3 percent; CA norm -1.2 percent of GDP; staff CA gap -1.1 percent of GDP (versus -1.7 percent of GDP in 2022). - Real effective exchange rate (REER): - Peso appreciated by 3.4 percent in real effective terms in 2023. - Staff CA gap of -1.1 percent of GDP implies a REER gap of 3 percent (applying an estimated elasticity of 0.33). - The REER index and level models point to 2023 REER gaps of 14.8 percent and 7.4 percent, respectively. - Capital and financial accounts: - Net financial inflows: 3.5 percent of GDP in 2023 (up from 3.4 percent in 2022). - Net FDI inflows slowed to 1.1 percent of GDP in 2023 from 1.4 percent of GDP in 2022. - Net inflows of debt securities in foreign portfolio investment declined to 0.02 percent of GDP in 2023 from 0.4 percent of GDP in 2022 due to a decline in general government debt and other sector debt; offset by an increase in debts of deposit-taking corporations. - Assessment: Philippines is exposed to cross-border capital flow volatility; expectations about domestic prospects and global risk appetite have outsized influence on capital flows. - FX intervention and reserves: - Exchange rate arrangement: de facto classified as floating; BSP intervenes in spot and forward markets to smooth excessive volatility. Intervention data are not published. - Peso depreciated by 4.95 percent relative to the US dollar in 2023. - Gross international reserves (GIR): US$103.8 billion in 2023 (23.7 percent of GDP) from US$96.1 billion at end-2022. - Reserves adequacy: about 7.8 months of imports of goods and services, or about 196 percent of the IMF’s reserve adequacy metric. Assessment: Reserves are adequate. ### Key Risks and Policy Recommendations (Annex III Risk Assessment Matrix) - Global risks - Intensification of regional conflicts - Likelihood: High - Expected impact: Medium. Potential higher commodity prices and tighter global financial conditions could affect Philippine activity, inflation, trade, and capital flows. - Policy recommendation: Use fiscal space for targeted support if domestic demand weakens; support viable firms and facilitate exit of unviable ones; ensure banking sector stability and market liquidity; increase financial sector resilience. - Commodity price volatility - Likelihood: High - Expected impact: Medium. Could destabilize inflation expectations and delay monetary easing. - Policy recommendation: Stand ready to delay policy rate cuts or tighten monetary policy if needed; avoid subsidies and lowering taxes; provide targeted transfers to low-income households. - Global growth surprises (slowdown / acceleration) - Likelihood: Medium - Expected impact: High. Slowdown: lower GDP growth, capital inflows decline, currency depreciation, tighter credit, higher poverty. Acceleration: higher GDP growth via exports, FDI, capital inflows. - Policy recommendation: Let the exchange rate act as shock absorber; use FX intervention to counter disorderly conditions; use fiscal space for targeted support if slowdown; ensure banking sector stability and financial resilience; provide targeted support to viable firms. - Monetary policy miscalibration - Likelihood: Medium - Expected impact: Medium. Could cause capital outflows, exchange rate volatility, tighter financial conditions. - Policy recommendation: Keep exchange rate flexible and market driven; monetary policy should remain ready to stay tighter for longer if inflation persists; FX intervention may be appropriate under certain circumstances given shallow FX markets. - Deepening geoeconomic fragmentation - Likelihood: High - Expected impact: Medium. Weaker exports, reduced FDI, increased uncertainty, weaker investment. - Policy recommendation: Accelerate ASEAN trade integration; pursue new high-quality regional trade agreements; implement structural reforms to reduce trade costs and promote competition and financial deepening; lift non-tariff barriers and diversify FDI source countries. - Domestic risks - Private investment accelerates faster than anticipated - Likelihood: Medium - Expected impact: Medium. Could boost infrastructure, productivity, and growth. - Policy recommendation: Careful selection and sequencing of projects to support development objectives while minimizing fiscal risks and contingent liabilities. - Projected pickup in domestic demand does not materialize / reform momentum stalls - Likelihood: Medium - Expected impact: Medium. Growth below baseline. - Policy recommendation: Continue priority reforms, including opening the economy, business sector reforms, and improving governance to support domestic demand. - Natural disasters - Likelihood: High - Expected impact: High. Disruption to activity, agriculture, property damage, higher food inflation, larger impact on low-income rural households. - Policy recommendation: Provide targeted assistance to affected groups and sectors; if slowdown is significant, provide relief to banks in affected regions while monitoring credit risk; prioritize public investment in disaster-resistant infrastructure and sustainable growth. *Source: Annex I (and related Annexes II–III) of the 2023 Article IV Consultation implementation update as contained in the provided PDF content.* ### Annex IV. Implementation of FSAP Recommendations ### Annex IV. 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: Capital adequacy ratios stand at 16.1 percent (solo) and 16.6 percent (consolidated) as of June 2024, i.e., well above the BSP and BIS minimum thresholds equal to 10 and 8 percent respectively. - Update: Dividend prohibitions are handled on a case-by-case basis considering a bank’s internal capital targets, stress testing results, and risk profile. Banks applying for relief measures may be restricted from making dividend or other 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. (Per BSP Memorandum No. M-2020-039.) - 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: May 2024 Monetary Board approval of the 2024-2029 Enterprise Strategy, which lists Strengthened Systemic Risk Oversight and Supervision as one of five strategic objectives. - Update: BSP aims to establish an integrated systemic risk management framework encompassing governance, macroprudential supervision, surveillance tools, and crisis management. - 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 lacks sufficient legal basis to implement a comply-or-explain mechanism. Executive Order No. 144 conveys power to the Council to issue directives or policy regulations to meet its purpose of enhancing financial stability. - Recommendation: Expand macroprudential policy toolkit and establish operational procedures to set them in a more systemic risk-based manner (BSP). Timing: MT - Update: BSP is exploring recalibration of the CCyB and providing the mechanism on how to operationalize it. - Update: BSP stress tests are being integrated to analyze vulnerabilities originating outside the banking sector, with potential introduction of sector-specific policies. ### Financial Sector Supervision - Recommendation: Lapse or limit the use of issued regulatory forbearance measures (BSP). - Update: Temporary relief measures have been unwound; most expired/lapsed as of September 2024 except: - ceilings on credit card transactions (subject to review every 6 months); - relief on recognition of losses from sale/transfer of nonperforming assets under the Financial Institutions Strategic Transfer (FIST) Act (2Q 2027); - relief allowing thrift, rural and cooperative banks to utilize MSME loans and eligible loans to large enterprises as alternative compliance with the reserve requirement subject to conditions (4Q 2025). - Note: BSFIs are allowed to defer recognition of losses arising from the sale/transfer of NPAs under the FIST Act up to a maximum period of five years from the date of sale/transfer, subject to prior BSP approval and disclosure requirements (Per BSP Memorandum No. 2022-028 dated June 6, 2022). - Note: Relief measure expired for universal and commercial banks on June 30, 2023; outstanding MSME and LE loans of thrift, rural and cooperative banks as of June 30, 2023 remain eligible until 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 assess suitability of beneficial owners of banks (BSP, DOF). Timing: ST - Update: Draft Circular on proposed amendments to guidelines governing transfer of significant ownership in banks and quasi-banks was re-exposed for comments on July 13, 2023. BSP is evaluating comments/inputs/feedback. - Recommendation: Strengthen sectoral supervision, appoint BSP as lead supervisor of financial conglomerates and conduct more frequent and comprehensive risk-assessment of FCs (BSP, IC, SEC, FSF). Timing: ST - Update: BSP stays informed of NBFI developments through regular FSF meetings. FSF completed three Supervisory Colleges with BSP acting as Lead Supervisor; the fourth Supervisory College commenced in August 2024 and is expected to be completed by February 2025. - Recommendation: Update large exposure requirements (solo and consolidated) and enhance large and related party exposure reporting requirements (BSP). Timing: ST - Update: Pursuant to BSP Memorandum No. M-2024-013 dated 26 April 2024, BSP started to receive large exposure reports of covered banks and quasi banks in May 2024; BSP is evaluating submissions. - Update: BSP working on proposed Circular to amend prudential Reports on Conglomerate Structure and Material Related Party Transactions (RPT) to request information on: (1) total assets of entities forming part of the conglomerate; (2) extent of shareholdings of controlling entities in controlled corporations; (3) major lines of business or activities. Electronic submission will be required to facilitate validation and complemented by a supervisory college among FSF members. - Recommendation: Amend 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 third reading on May 8, 2023, and referred to the Senate Committee on Banks, Financial Institutions and Currencies on May 15, 2023. - Update: Counterpart legislations were filed in the Senate under SB Nos. 1839, 1068, 596, and 56, still pending and included among the 20 priority measures of the current administration. - Recommendation: Provide 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: Recommendation may require legislative amendments. BSP conducting a study on potential structure of a proposed financial conglomerate model. - Update: Technical Working Group established in June 2023 to finalize implementing guidelines of Section 23 of Republic Act No. 7653 (Authority to Obtain Data and Information). Guidelines targeted for submission to the Monetary Board for approval in October 2024. ### 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: Authorities consider this recommendation addressed; 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: AMLC implemented strategies to increase DNFBP registration; registration of covered persons reached 12,297 or 96.98 percent of the identified population by June 2024. - Update: AMLC and BSP created a working group to leverage banks’ customer due diligence to determine DNFBP clients to ensure banks only deal with AMLC-registered DNFBPs. CPRA of the law profession amended to expressly include duty to report transactions to AMLC. - Update: AMLC and DILG signed a Joint Memorandum Circular to enhance DNFBP registration in highly urbanized cities, requiring LGUs to submit semi-annual reports on businesses with permits for AMLC cross-verification with SEC list; JMC mandates DNFBPs present proof of AMLC registration when seeking permits from LGUs. - Update: BSP, SEC, and IC have directed Financial Institutions to require DNFBPs to show proof of AMLC registration. PAGCOR implemented risk-based supervision frameworks, enforcement actions, and collaboration with law enforcement. - Recommendation: Enhance accuracy and availability of beneficial ownership information of companies (SEC). Timing: MT - Update: SEC conducted outreach and used social media to inform stakeholders about eFAST portal where reporting requirements, including beneficial ownership (BO) information, are uploaded and filed. - Update: SEC entered into data sharing agreements allowing relevant authorities to access BO information directly. SEC increased penalties and introduced new ones for failure to comply with BO disclosure obligations. - Update: SEC implemented Memorandum Circular No. 19, Series of 2023, outlining guidelines for placing corporations in delinquent status for failing to submit reportorial requirements under Sections 21 and 177 of the Revised Corporation Code. ### Crisis Management, Resolution, and Safety Net - Recommendation: Ensure timely corrective actions and resolution of weak banks (BSP, PDIC). Timing: ST - Update: Prompt Corrective Action (PCA) policy provides a maximum allowable PCA period of two (2) years within which a PCA bank should address supervisory concerns. 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 years.) - Recommendation: Implement resolvability assessments and resolution plans, starting with D-SIBs (PDIC, BSP). Timing: ST - Update: IMF conducted a TA mission to assess BSP resolution framework against FSB Key Attributes. Following IMF TA recommendations, BSP will: review PCA timeline; set definition of a point of non-viability; create a Resolution Group/Unit; establish resolution tools; draft a Resolution Manual and Guidelines on Resolvability Assessment; draft guidelines on resolvability assessment of domestic Systemically Important Banks; and draft and submit a legislative proposal on resolution to Congress. - Recommendation: Make legal framework for ELA more specific regarding conditions and avoid assistance without collateral (BSP). Timing: ST - Update: Following IMF Technical Assistance (September 25 to October 6, 2023), BSP Department of Loans and Credit is developing a comprehensive operational framework on its Lender of Last Resort (LOLR) function. - Recommendation: Designate and provide the PDIC with powers to act as resolution authority (PDIC, BSP, DOF). Timing: MT - Update: 2022 amendment of the PDIC charter centralized powers on bank resolution with the BSP; resolution powers now rest with the Monetary Board. IMF recognized this amendment in the August 2023 IMF TA Report on Bank Resolution and Financial Crisis Management. - Recommendation: Expand and operationalize bank resolution tools (particularly P&A) beyond liquidation (PDIC). Timing: MT - Update: 2022 amendment removed PDIC resolution functions to centralize functions under BSP. In February 2024, BSP’s FSS created a technical working group (TWG) on Resolution to develop resolution framework. - Update: April 2024: TWG completed gap analysis to be proposed as part of legislative measures to strengthen resolution authority and powers of the BSP. - Update: BSP 2024-2029 Enterprise Strategy Strategic Objective 2 deliverables related to resolution: - (1) constitution of the BSP Resolution Group; - (2) development of the BSP Resolution Framework; - (3) development of resolution-related legislative proposals. - Update: Work on all three deliverables is ongoing. ### 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: BSP set a meeting with the Philippine Space Agency to explore additional tools and data for supervisory and surveillance purposes. - Update: Following a World Bank climate risk stress test for the Philippine banking sector, the WB conducted workshops for the BSP technical team on frameworks for transition risk stress tests related to climate change. - Update: BSP will collaborate with the BAP Risk Management Committee to develop supplementary guidance on climate stress testing with Philippine-specific scenarios. - Update: BSP will enhance prudential reports to collect relevant data for surveillance and analysis of emerging risks/trends from climate change and other environmental and social factors. - Update: BSP plans to update disclosure requirements on sustainable finance on the adoption of IFRS-ISSB by banks. _Annex IV. Implementation of FSAP Recommendations — Authorities’ updates as presented in the source._ ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPS ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPS ### Coverage and scope - Chosen coverage: national (central) government debt. - Other: 1a. If central government, are non-central government entities insignificant? Yes - Commentary: The coverage in this SRDSA is national government debt. Debt held by Bond Sinking Funds was 2.9 percent of GDP and intra-sector bond holding 4.5 percent of GDP at end-2023. Total consolidated general government debt was 53.6 percent of GDP at end-2023, about 6.5 percentage points of GDP lower than the national government debt. - Note on exclusions: Analysis excludes other debt flows from the Bond Sinking Fund (2.9 percent of GDP assets at end-2023), which can further lower actual debt-to-GDP in the case of net drawdowns. ### Subsectors included in baseline coverage - Subsectors captured in the baseline: - 1 Budgetary central government: Yes - 2 Extra budgetary funds (EBFs): No - 3 Social security funds (SSFs): No - 4 State governments: No - 5 Local governments: No - 6 Public nonfinancial corporations: No - 7 Central bank: No - 8 Other public financial corporations: No ### Debt consolidation and intra-government holdings - Holder / Issuer consolidation (percent of GDP) — reporting on intra-government debt holdings (selected entries preserved as presented): - Budget. central govt: 2.9 (holder?) / 4.5 / 7.3 (layout in source shows "2.94.57.3") - Extra-budget. funds: 0 - Social security funds: 0 - State govt.: 0 - Local govt.: 0 - Nonfin pub. corp.: 0 - Central bank: 0 - Oth. pub. fin. corp: 0 - Total: 02.94.500.00 007.3 - Reporting basis indicators present: Basis of recording (Non-cash basis 4/; Cash basis), Valuation of debt stock (Nominal value 5/; Face value 6/; Market value 7/), and instrument categories (Currency & deposits; Loans; Debt securities; Other accounts payable 2/; IPSGSs 3/). (Source lists these recording/valuation terms without numeric consolidation beyond the table snippets.) ### Public debt structure and projections — baseline scenario (selected statistics preserved exactly) - Public debt (Percent of GDP), actual and projections: - Actual 2023: 60.1 - 2024: 61.2 - 2025: 62.0 - 2026: 61.7 - 2027: 60.8 - 2028: 59.5 - 2029: 58.0 - 2030: 56.4 - 2031: 54.9 - 2032: 53.3 - 2033: 51.8 - Change in public debt (Percent of GDP, year-on-year): - 2024: -0.8 - 2025: 1.1 - 2026: 0.8 - 2027: -0.3 - 2028: -0.9 - 2029: -1.3 - 2030: -1.5 - 2031: -1.6 - 2032: -1.5 - 2033: -1.6 - 2034: -1.5 - Contribution of identified flows (Percent of GDP): - 2024: -0.2 - 2025: 0.9 - 2026: 0.8 - 2027: -0.3 - 2028: -0.9 - 2029: -1.2 - 2030: -1.4 - 2031: -1.5 - 2032: -1.5 - 2033: -1.6 - 2034: -1.4 - Primary deficit (percent of GDP): - 2023: 3.5 - 2024: 2.7 - 2025: 2.6 - 2026: 1.7 - 2027: 1.2 - 2028: 0.9 - 2029: 0.7 - 2030: 0.6 - 2031: 0.6 - 2032: 0.5 - 2033: 0.6 - Noninterest revenues (percent of GDP): - 2023: 15.7 - 2024: 16.6 - 2025 onward: 15.8 (2025), 15.8 (2026), 15.8 (2027), 15.9 (2028), 16.0 (2029), 16.0 (2030), 16.0 (2031), 16.0 (2032), 16.0 (2033) - Noninterest expenditures (percent of GDP): - 2023: 19.2 - 2024: 19.3 - 2025: 18.5 - 2026: 17.5 - 2027: 17.5 - 2028: 17.1 - 2029: 16.8 - 2030: 16.7 - 2031: 16.6 - 2032: 16.6 - 2033: 16.5 - Automatic debt dynamics (percent of GDP): - 2023: -2.8 - 2024: -2.0 - 2025: -1.8 - 2026: -2.0 - 2027: -2.2 - 2028: -2.2 - 2029: -2.2 - 2030: -2.2 - 2031: -2.1 - 2032: -2.1 - 2033: -2.1 - Real interest rate and relative inflation (percent): - 2023: 0.2 - 2024: 1.3 - 2025: 1.7 - 2026: 1.6 - 2027: 1.5 - 2028: 1.4 - 2029: 1.4 - 2030: 1.3 - 2031: 1.3 - 2032: 1.2 - 2033: 1.2 - Real interest rate (percent): - 2023: 0.0 - 2024: 1.2 - 2025: 1.6 - 2026: 1.5 - 2027: 1.4 - 2028: 1.3 - 2029: 1.3 - 2030: 1.2 - 2031: 1.2 - 2032: 1.1 - 2033: 1.1 - Relative inflation (percent): - 2023: 0.2 - 2024: 0.1 - 2025: 0.1 - 2026: 0.1 - 2027: 0.1 - 2028: 0.1 - 2029: 0.1 - 2030: 0.1 - 2031: 0.1 - 2032: 0.1 - 2033: 0.1 - Real GDP growth (percent): - 2023: -3.2 - 2024: -3.3 - 2025: -3.5 - 2026: -3.7 - 2027: -3.7 - 2028: -3.6 - 2029: -3.5 - 2030: -3.5 - 2031: -3.4 - 2032: -3.3 - 2033: -3.2 - Other identified flows (percent of GDP): - 2024: 0.2 - 2025: -0.1 - 2026: 0.0 - 2027: 0.1 - 2028: 0.0 - 2029: 0.0 - 2030: 0.1 - 2031: 0.1 - 2032: 0.1 - 2033: 0.1 - Contribution of residual (percent of GDP): - 2024: -0.6 - 2025: 0.2 - 2026 onward: 0.0 except small negatives of -0.1 in some years per table ("-0.1" entries across projection) - Gross financing needs (GFN) (Percent of GDP): - 2023: 9.0 - 2024: 12.2 - 2025: 10.1 - 2026: 8.7 - 2027: 9.5 - 2028: 9.3 - 2029: 7.4 - 2030: 9.3 - 2031: 8.8 - 2032: 8.7 - 2033: 7.9 - Of which: debt service (Percent of GDP): - 2023: 6.5 - 2024: 9.5 - 2025: 7.5 - 2026: 7.5 - 2027: 7.0 - 2028: 8.3 - 2029: 8.4 - 2030: 6.7 - 2031: 8.7 - 2032: 8.2 - 2033: 8.2 - Debt service by currency (Percent of GDP): - Local currency (selected years): 5.2 (2023), 7.7 (2024), 5.9 (2025), 5.6 (2026), 6.8 (2027), 6.9 (2028), 4.8 (2029), 7.0 (2030), 6.6 (2031), 6.7 (2032), 5.9 (2033) - Foreign currency (selected years): 1.3 (2023), 1.8 (2024), 1.6 (2025), 1.3 (2026), 1.5 (2027), 1.5 (2028), 1.9 (2029), 1.7 (2030), 1.6 (2031), 1.5 (2032), 1.5 (2033) - Memo indicators: - Real GDP growth (percent): 5.5 (2023), 5.8 (2024), 6.1 (2025), 6.3 (2026), 6.3 (2027), 6.3 (2028), 6.3 (2029), 6.4 (2030), 6.4 (2031), 6.4 (2032), 6.4 (2033) - Inflation (GDP deflator; percent): 4.6 (2023), 2.8 (2024), 2.3 (2025), 2.5 (2026), 2.5 (2027), 2.5 (2028), 2.5 (2029), 2.5 (2030), 2.5 (2031), 2.5 (2032) - Nominal GDP growth (percent): 10.4 (2023), 8.7 (2024), 8.5 (2025), 9.0 (2026), 9.0 (2027), 9.0 (2028), 9.0 (2029), 9.1 (2030), 9.1 (2031), 9.1 (2032) - Effective interest rate (percent): 4.7 (2023), 4.9 (2024), 5.2 (2025), 5.2 (2026), 4.9 (2027), 4.9 (2028), 4.8 (2029), 4.8 (2030), 4.8 (2031), 4.7 (2032), 4.7 (2033) - Commentary summary: 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. ### Realism and risk analysis (medium-term) - Realism analysis conclusion: Does not point to major concerns — past forecast errors do not reveal systematic biases and projected fiscal adjustment and debt reduction are within norms. Authorities remain committed to fiscal consolidation. - Debt fanchart and GFN financeability indicators: - Debt fanchart index (DFI) value: 1.3 — Risk signal: Moderate (per provided thresholds). - Average baseline GFN: 9.5 (percent of GDP) with module contribution 3.3. - Initial Banks' claims on the general government (pct bank assets): 19.9 - Change in banks' claims in stress (pct bank assets): 6.7 2.2 (table shows "6.72.2") - GFN financeability index (GFI): 11.9 — Risk signal: Moderate. - Medium-term index: Risk signal: 5/ Final assessment: Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct. Prob. of false alarms, 2024-2029, if stress predicted: 42.0 pct. - Commentary: Debt Fanchart module indicates moderate risk around the projected debt baseline. GFN Financeability Module points to moderate risk due to increased GFN (pandemic response) and relatively high initial bank holdings of public debt. Combined MTI produces a mechanical "low" signal. Analysis excludes other Bond Sinking Fund flows. ### Long-term risk analysis and scenarios - Long-term projection notes: - Baseline extension and custom scenarios shown for GFN-to-GDP and Total Public Debt-to-GDP ratios; sample numeric highlights include a Custom baseline projection change "6.4% -0.6% -2.5% 2.5%" displayed in figure annotations. - Climate change scenarios: - Commentary: Investment to address climate adaptation and mitigation will increase long-term financing needs. Analysis does not account for the growth effect of investment in climate change adaptation or mitigation. - Commentary: Increased GFN due to pandemic fiscal response is expected to decline over medium- to long-term horizons. Maintenance of a Bond Sinking Fund with 2.9 percent of GDP assets at end-2023 helps mitigate refinancing risks. ### Tax administration reforms (Annex VI) — implications for debt outlook - Context and findings: - Philippines saw notable improvement in tax administration during 2010-2015; pace slowed since then. - Increase in national government tax-to-GDP ratio from 11.7 percent to 13.0 percent over 2009-15 attributed largely to revenue administration reforms and tax simplification. - Stagnation since 2015: absent tax policy reforms, tax-to-GDP in 2022 would have remained the same as in 2017. - National government fiscal deficit-to-GDP ratio increased to 8.3 percent in 2021 from 3.3 percent in 2019; debt-to-GDP rose to 60.9 percent at end-2022 from 39.6 percent at end-2019. - Medium-term fiscal framework introduced in 2022 aims to achieve a deficit-to-GDP ratio of 3 percent by 2028; target has been revised up to 3.7 percent of GDP recently. - VAT gap and compliance: - Overall VAT gap persisted at around 6 percent of GDP (per source statement). - VAT policy gap (World Bank, 2012-2020): between 2.9 and 3.2 percent of GDP. - VAT policy gap (IMF RA-GAP, 2008-2015): between 2.8 and 3.2 percent of GDP. - VAT compliance gap (World Bank, 2012-2020): between 2.9 and 3.3 percent of GDP. - VAT compliance gap (IMF RA-GAP, 2008-2015): between 3.0 and 3.9 percent of GDP. - IMF estimates (2008–2015): compliance gap fell from 3.9 to 3.0 percent of GDP. - World Bank estimates showed slower compliance gap decline from 3.2 percent of GDP in 2016 to 2.9 percent of GDP in 2020. - Reform priorities and expected yield: - Key reforms recommended: compliance risk management (CRM), systematic use and analysis of third-party data, and digitalization of tax administration. - 2024 IMF TA on VAT diagnostic and strategy: emphasizes adoption of CRM across BIR processes, easing refunds, and boosting revenues. - Recent Ease of Paying Taxes Act: removed personal liability of BIR staff and introduced a risk-based approach to VAT refund approval; diagnostic recommends proper implementation and reduced emphasis on internal revenue targets to build taxpayer confidence. - Expected impact: Improved CRM-based targeting, better voluntary compliance via greater confidence in refunds, and digital underpinnings (third-party information sharing and analytics) can help reduce VAT gap. - Policy implication for debt sustainability: Strengthened tax administration and recovery of VAT compliance gaps would support revenue mobilization necessary to achieve fiscal consolidation targets and lower public debt trajectories consistent with the baseline projections. *Source: IMF staff estimates and projections; content as presented in the provided chapter.* ### 5. Upon request by the authorities, an IMF-led Tax Administration Diagnostic ### Upon request by the authorities, an IMF-led Tax Administration Diagnostic Assessment Tool (TADAT) assessment mission with participation of World Bank and ADB visited Manila in May-June 2024 ### Assessment mission and recent developments - An IMF-led TADAT assessment mission with participation of World Bank and ADB visited Manila in May-June 2024 to provide an assessment baseline of tax administration performance for determining reform priorities. - The BIR has made notable improvements since the 2015 TADAT, driven by digitalization, including: - e-filing and collection systems improvements. - Further digitalization initiatives: internal revenue information system (IRIS) and online registration and update system (ORUS). - Implementation of enterprise risk management (ERM). ### Current performance, gaps, and drivers of underperformance - Despite improvements, overall performance remains well below international good practice and regional peers. - Removal of all CRM mechanisms in 2017 adversely impacts tax administration functions that require specialized taxpayer segmentation and related data analysis. - Key gaps identified: - Lack of an effective CRM framework. - Low use of third-party data. - Digitalization level trailing leading Asia-Pacific peers. - Need for robust and systemic data analytics and matching of third-party data to drive compliance and revenue outcomes. - TADAT scope note: The 2024 TADAT focuses on core taxes (value-added tax, corporate income tax, personal income tax, and pay-as-you-earn) administered by the BIR; it does not examine the Bureau of Customs (BOC), which collects about a quarter of total tax revenues in the Philippines. ### Operational strength and comparative indicators - IMF cross-country ISORA-based operational strength index (scale 0 to 1): - Philippines overall index score: 0.59. - East Asia and Pacific Region: 0.57. - Emerging markets: 0.59. - Malaysia: 0.78. - Singapore: 0.86. - Component comparisons: - CRM framework omission erodes about 0.10 from the Philippines score. - Use of third-party data scores: Singapore 0.09; Malaysia 0.07; Philippines 0.02. - Digitalization scores: Singapore 0.13; Philippines 0.10. - Projection: With reform focus and a reform timeframe of about 7 years, the Philippines’ score could be raised closer to Singapore levels. ### Estimated revenue yields from reforming tax administration - Cross-country analysis (Adan et al, 2023): - Improving overall tax administration strength from the 40th percentile to the 60th percentile could yield an increase in tax revenues by 1.8 percent of GDP. - Full impact may take time; tax yields increase over time to more than 3 percent of GDP after the sixth year following a far-reaching and comprehensive reform. - Potential gains from combined reforms: - If CRM, third-party data matching, and related reforms produce effects similar to Philippine reforms in 2008-2015 (VAT Gap decrease of 0.9 percent of GDP), and mandatory e-invoicing and other digitalization reforms mirror Peru’s experience (0.9 percent of GDP), total revenue gains from an ambitious reform implementation could be as high as 1.8 percent of GDP. - Digitalization-specific results from cross-country and case studies (Nose and Mengistu, 2023; Nose and Mengistu, Exploring the Adoption of selected Digital Technologies in Tax Administration (2023)): - Increasing e-filing adoption by half could boost tax revenues by 1.6 percent of GDP. - Impact of e-filing on revenues is larger (close to 5 percent of GDP) when e-filing is mandatory. - Case study country estimates (selected): - Bellon and others (2022), e-invoice, Peru: Revenue (in percent of GDP) 0.93. - Fan and others (2020), e-invoice, China: Revenue (in percent of GDP) 1.56. - Mascagni, Mengistu, and Woldeyes (2021), EFDs, Ethiopia: Revenue (in percent of GDP) 0.88. - Eissa and Zeitlin (2014), EFDs, Rwanda: Revenue (in percent of GDP) 0.68. - Santoro, Amine, and Magongo (2022), e-filing, Eswatini: 4.00 (impact is on taxable income; note on insignificant impact on tax payments due to country’s low enforcement capacity). ### Key reform elements and policy recommendations - Customer/Compliance Relationship Management (CRM): - Reintroduce CRM for taxpayer segmentation and tailored compliance treatments. - Reserve tax audits and on-site verifications for highest-risk cases (deliberate tax evasion, avoidance by large enterprises, persistent non-compliers). - Use less intrusive, lower-cost methods (third-party data-matching verification, filing reminders, digital/social media channels) for low-risk issues. - Third-party data and risk-based analytics: - Implement robust third-party data matching and risk-based analysis to enable desk-based verification and free resources for higher-risk cases. - Enhance systemic data analytics to drive compliance and revenue outcomes. - Digitalization: - Prioritize and accelerate digitalization initiatives (IRIS, ORUS, eFPS, taxpayer ledger portal, online permit applications, electronic invoicing pilot). - Consider mandatory e-invoicing once pilot is successful (Peru case: firms declared higher sales by 6.6 percent, higher deductions on VAT-paid inputs by 4.5 percent, net VAT liability increased by 7.2 percent). - Invest in complementary infrastructure and institutional quality: electricity, high-speed internet, secure servers, information and data security architecture, ERM framework, internal and external audit of digital systems. - Enhance staff skills toward data and analytic capabilities; consider other institutions (e.g., National Tax Research Center) for analytics the BIR lacks mandate for (such as tax gap estimation). - Service orientation and e-services: - Expand e-services and web-based taxpayer assistance to reduce compliance costs and enhance compliance for individuals and small businesses, including: - simplified web-based returns and filing/payment for small micro taxpayers; - tools and calculators on the administration's website; - integrated taxpayer accounts for a "whole" taxpayer view across major taxes; - online services for account updates, access to history, payment/filing arrangements; - electronic invoicing, digital mailbox capability, electronic management of tax arrears; - electronic application, processing and tracking of tax disputes. - If fully implemented in consonance with CRM, third-party information matching, greater transparency, and service improvements, potential gains in the medium term (3-5 years) could be as high as 1.8 percent of GDP. ### Sequencing, implementation timeframe, and prerequisites - Sequenced reform plan (priorities and ease of implementation): - Implementation-Easier, Priority-High (to be prioritized earliest and implemented over the next two years): Digitalization; Service Orientation. - Implementation-More Difficult, Priority-High: CRM; Use of Third-Party Data and Enhanced Analytics; Compliance Risk Management; Public Accountability. - Moves toward CRM-based approaches should commence at the earliest with a phased implementation timeframe of around 5 years. - Prerequisites and enablers for reform success: - Political support and stakeholder buy-in through extensive consultations and communication from an early stage. - Administrative restructuring: BIR’s current decentralized structure with audit selection at regional level will need adjustment. - Legal and procedural adjustments for third-party information sharing (e.g., allow automated data matching). - Privacy and data security safeguards and systems. - Improved coordination, governance, and analytical capabilities within the BIR. - Complementary institutional arrangements where BIR lacks mandate (e.g., National Tax Research Center for tax gap estimation). ### Digitalization: status, potential, and constraints - Current digitalization status: - BIR has e-registration and e-filing availability; e-invoicing is being piloted. - New IRIS helps make BIR’s vast data stores more accessible for monitoring internal practices and KPIs. - ISO certification for service standards is being expanded; new ERM system rolled out. - Potential impact: - Greater use of e-services and web-based assistance can reduce cost of compliance and enhance compliance for individuals and small businesses. - If implemented with CRM and third-party matching, medium-term (3-5 years) gains could be as high as 1.8 percent of GDP. - Constraints and required complements: - Need electricity, high-speed internet, secure servers, and appropriate information and data security architecture. - Need robust internal audit activity, regular external audit specific to digital systems, and regular monitoring by senior management. - Need to enhance skills of existing staff and re-orient human capital mix toward data and analytic capabilities. *Source: IMF TADAT mission report and associated analyses as presented in the provided content.* ### 5. Conserving marine ecosystems plays an integral role in protecting coastal ### 1phlea2024001-print-pdf - 5. Conserving marine ecosystems plays an integral role in protecting coastal ### Conserving marine ecosystems: impacts and recommendations - Climate change impacts on marine capture fisheries in the Philippines are projected to cause a 9 percent (mitigation scenario) to 18 percent (extreme scenario up to 2060) decrease in fisheries' GDP. - Conserving and cultivating coastal ecosystems (salt marshes, mangroves, and seagrass beds) will: - absorb large quantities of carbon dioxide from the atmosphere and store it; - protect communities and infrastructure against intensifying storms; and - provide co-benefits to people and nature. - Key threats and near-term actions: - Overfishing is identified as a major threat to ocean health; addressing overexploitation in the near term is critical to promote future sustainability of the fisheries sector under climate change (mitigation). - Fishermen can diversify their portfolio strategies to enhance adaptive capacity and minimize variability in income (adaptation). ### Tourism industry: contribution, vulnerabilities, and sustainability needs - The sustainable development of the tourism industry can boost economic activity by creating demand for consumption and investment. - Recent PSA data indicate: - the share of domestic tourism expenditure to Household Final Consumption Expenditure has been increasing since 2021; - the share of tourism Gross Fixed Capital Formation (GFCF) to total GFCF improved in 2023. - Ocean health constraints: - The Philippines’ 2023 Ocean Health Index score is 58 out of 100, below the global average of 73, indicating need for more sustainable use of marine and ocean resources for tourism and recreation. - Policy and infrastructure recommendations: - Protect and conserve the country’s ocean health to maximize tourism potential. - Construct climate-resilient infrastructure to lessen negative economic and social impacts of worsening climate change and tropical cyclones on tourism activity. - Ensure multi-agency collaboration in development, implementation, and monitoring of policies so tourism development protects the marine environment, safeguards coastal communities from economic shocks, and alleviates poverty. ### Emerging marine industries and opportunities - The Philippines can explore and invest in emerging industries to unlock the BE’s economic and development potential, including: - marine technology; - marine renewable energy (e.g., wave and tidal energy derived from the country’s vast marine waters); - bioprospecting of marine biodiversity for biologically active compounds for medical/pharmaceutical purposes relevant to anticipated viral and bacterial endemics and epidemics. - Potential co-benefits: - Ocean energy can enhance sustainable tourism/ecotourism through low-impact private operations. - Fisheries manufacturing supply chains can benefit from additional energy sources. ### Annex VIII — Context and macroeconomic outlook - Recent performance and outlook: - Following a strong post pandemic rebound in 2022, growth moderated in 2023 to 5.5 percent, reflecting global shocks, pent-up demand normalization, higher inflation, and tighter policy settings. - Growth is expected to remain at around 6-6.3 percent over the medium term, driven by robust private consumption and investment, but subject to downside risks from global slowdown, higher-for-longer interest rates in advanced economies, and trade disruptions from geopolitical tensions. - Socioeconomic policy agenda: - Authorities aim to reduce the poverty rate from 15.5 percent of the population in 2023 to 9 percent by 2028. - Priorities include infrastructure, education, health, and addressing climate change given exposure to rising sea levels and increasing severity of cyclones and typhoons. - Financing adaptation and mitigation objectives remains a challenge. ### Integration of Fund capacity development (CD) and surveillance — forward-looking CD agenda - The Philippines has used Fund CD across monetary policy frameworks, financial sector stability and integrity, capital market development, macroeconomic forecasting, tax policy and administration, public financial management, treasury management, and government finance statistics. - Future CD priorities should be fine-tuned to address emerging challenges and include: - enhancing capacity to manage macroeconomic and financial risks and rebuild policy buffers; - accelerating digitalization to improve resilience and inclusion; - addressing climate change adaptation and mitigation. ### Surveillance-aligned CD workstreams and specific support areas - Implementation of monetary policy: - Priority on inflation forecasting and integrated analysis of monetary and other policies. - Adoption of the BSP’s Policy Analysis Model for the Philippines as its core forecasting model (developed with ICD assistance). - MCM support on inflation target and expectations using the Quantitative model for the Integrated Policy Framework in the Philippine context. - Further assistance on central bank communication, including financial stability, digital money and cybersecurity, and climate-related financial risks, building on the Sustainable Finance Taxonomy. - Financial supervision and regulation: - Continue supporting BSP’s bank supervisory framework strengthening and implementation of the 2021 FSAP recommendations. - Areas include conglomerate supervision, supervisory colleges, resolution planning and resolvability assessments, operational resilience supervisory framework, stress-testing, and climate risk assessment capacity. - Bank resolution, crisis management, and corporate restructuring: - Support implementation of recommendations to enhance the bank resolution framework. - MCM stands ready to support BSP’s Technical Working Group on Resolution during implementation. - Follow-up assistance could focus in 2025 on implementing a LOLR operational framework. - Systemic risk analysis: - Advanced training and IMF TA on financial market analysis and stress testing to strengthen BSP capacity on financial stability and macroprudential policies. - Support to develop the SEC’s stress-testing capabilities. - Debt management and capital market development: - Rising public debt and fiscal financing needs increase urgency to strengthen debt management capacity and accelerate capital market development. - Continued CD to improve liquidity management, develop Open Market Operations instruments, and coordinate with the BTr to develop a benchmark yield curve for the local currency government bond market. - Support for innovative financial instruments and pilot wholesale CBDC initiatives. - Tax policy and administration: - Public debt exceeds the authorities’ indicative threshold of 60 percent of GDP; rebuilding policy buffers requires mobilizing more revenues. - FAD delivered a comprehensive diagnostic of the Philippine VAT with recommendations to improve design, legal framework, and administration. - Further support expected on tax expenditures assessment and rationalization options, review of excise and wealth taxation, and engagement on a Medium-Term Revenue Strategy. - Revenue administration reforms will build on the finalized TADAT assessment and possible follow-up on reforms, priorities, and sequencing. - Public financial management (PFM): - Continued improvements can raise efficiency of public expenditures on infrastructure and social services. - FAD supported oversight of GOCCs, PPP management, and digitalization of financial management information systems. - Plans to update the 2018 Public Investment Management Assessment (PIMA) and apply the Climate PIMA module to construct resilient infrastructure and adopt green PFM practices. - Macro-fiscal frameworks: - ICD assisting DOF Office of the Chief Economist to build macroeconomic analysis and macro-fiscal modeling capacity via a macroeconomic projection tool (MPT). - Future support could include training on Dynamic Stochastic General Equilibrium models and further revenue forecasting support incorporating nowcasting methods and leading monthly indicators. - Government finance statistics: - Fiscal data used in the Article IV report aligned with the GFSM 2014 framework since 2023. - IMF Statistics Department will continue TA in GFS and PSDS. - Progress includes submission of general government annual data to the GFS yearbook and quarterly data to International Financial Statistics since July 2024. - PSDS improvements aim to ensure consistency in publication of external debt by the BTr, BSP, and DOF, enable DOF to derive domestic debt, expand quarterly PSDS to include domestic debt, and review GOCC classification for general government inclusion. - Anti-money laundering and combating financing of terrorism: - Authorities have substantially completed an action plan to exit the FATF grey list. - IMF stands ready to assist in the context of the fourth FATF Mutual Evaluation of the Philippines in 2027. *Source: Staff Report for the 2024 Article IV Consultation — informational annex and chapter content from the provided PDF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1phlea2024001-print-pdf.pdf_