## _cr0962

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### Executive Summary
- Growth and inflation projections:
  - GDP growth projected: 2008: 4.4 percent; 2009: 3½ percent.
  - Inflation projected (period average): 2008: 9½ percent; 2009: 6 percent; expected to fall within the target range of 3½ ± 1 percent in the later part of 2009.
- Recent developments:
  - GDP growth moderated to 4.6 percent in the first three quarters of 2008 from 7.2 percent in 2007.
  - Headline inflation peaked in August at 12½ percent (year-on-year) and fell to 9.9 percent in November (other passages cite peak at 12.4 percent and 8.0 percent in December 2008).
  - Equity prices declined by around 45 percent in 2008 (other passages cite around 48 percent).
  - Remittances increased by 17 percent (year-on-year) through September 2008; elsewhere remittance growth slowed to 3.3 percent in October from 16.4 percent in September.
  - Current account surplus declined in the first half of 2008; net foreign equity outflows of US$800 million through November 2008 (one-third since end-August 2008).
  - Peso depreciated by 20 percent against the U.S. dollar and real effective exchange rate by around 6 percent in 2008 (period averages elsewhere reported: 2008 Pesos per U.S. dollar: 44.2 and 44.5; real effective exchange rate (1990=100) 2008: 119.5).
- Risks:
  - Downside risks dominate: intensified financial sector stress, deeper global downturn (including remittance contractions), fiscal reform delays raising financing costs.
  - Upside: globally coordinated fiscal stimulus could mitigate downside risks.
  - Box finding: a 1 percentage point decline in U.S. growth could lower Philippine growth by about 0.4−0.6 percentage point.

### Banking Sector — Position, Risks, and Policy Recommendations
- Asset quality and capitalization:
  - NPLs (excluding interbank loans): 2008 Q2: 5.2 percent of total loans with 84 percent provisioned.
  - CAR (system average) around 15 percent by end-June 2008; some banks closer to statutory limits.
  - Staff sensitivity estimates:
    - 100 basis point widening in EMBI-PHL (currently around 500 bps) → capital losses on US$-denominated government bonds and credit-linked notes of around 3 percent of equity → ½ percentage point decline in CAR.
    - If all foreclosed assets mark-to-market, a 40 percent decline in real estate prices could wipe out 9 percent of banking capital (equivalent to a 1.5 percentage point decline in average CAR).
- Risk channels:
  - Domestic: slowdown reduces earnings and worsens asset quality for households, SMEs, export firms; disposal of foreclosed properties harder.
  - Global: mark-to-market losses on securities and credit-linked notes; off-balance sheet entities (trust accounts) create reputational and contingent risks.
- Supervisory/regulatory changes:
  - Basel II adopted by commercial and universal banks in June 2007 (standardized approach for credit risk; basic indicators or standardized approach for operational risk).
  - Basel II implementation lowered CARs by around 300 basis points due to operational risk charges and higher risk weights on NPLs, ROPA, and FX securities.
  - BSP stepped up risk-based supervision and enhanced CAMELs framework.
- BSP crisis responses:
  - Relaxed mark-to-market accounting window until November 14, 2008 (reclassify to hold-to-maturity; aligned with October 2008 IAS 39 amendments).
  - Exempted until March 31, 2009, unrealized mark-to-market losses from FCDU asset cover requirement.
  - Introduced interbank liquidity support measures and encouraged flexible use of liquidity facilities.
  - Enhanced day-to-day monitoring and stress-testing; recommended stepped-up surveillance of off-balance sheet activities.
- Deposit insurance and resolution:
  - Mission supports plan to raise deposit insurance ceiling to P 500,000 (doubling current limit of P 250,000 (US$5,300)); staff recommends flexibility to raise ceiling further in severe stress.
  - PDIC recapitalization recommended and adoption of risk-based contribution structure.
  - Contextual figures:
    - Current limit P 250,000 (US$5,300), covering about 14 percent of total value of deposits.
    - PDIC capital base: P 50 billion readily available in the deposit insurance fund.
    - Audited net assets of PDIC: 1½ percent of system deposits (P 49 billion; end-2006).
    - Premiums uniformly capped at 0.2 percent of the insured amount irrespective of bank risk profiles.
  - Resolution toolkit enhancements: bridge-bank facility welcomed; consider more flexible P&A application; limit rights of existing shareholders of ailing banks; make restructuring decisions legally irreversible; protect PDIC staff against litigation.
- PCA and legal protections:
  - Short-run: give BSP legal authority to disclose enforcement actions while preserving secrecy where disclosure may aggravate panic.
  - Implement BSP charter amendments to ensure legal protection of BSP staff without delay.
  - Medium-term: consider shift to more rules-based PCA with formalized triggers tied to escalating remedial actions.
- Structural and market development recommendations:
  - Address foreclosed property overhang (about 50 percent larger than NPLs; provisioning below 18 percent) via sales with haircuts or joint ventures; recommend gradual sell-off.
  - Deepen capital markets: fewer than 250 listed companies; government securities account for 95 percent of domestic bond market; promote stronger clearing/settlement, shift public bond mix toward domestic issuance, and transition toward funded pension schemes.

### Monetary Policy, Exchange Rate, and Liquidity Measures
- Monetary stance and actions:
  - Current neutral monetary stance appropriately balances inflation and growth risks; scope to ease if downside growth risks materialize.
  - BSP raised policy rates by a combined 100 bps in June, July and August 2008; policy shifted to neutral in October and November 2008; BSP cut policy rates by 50 bps on December 18, 2008.
  - Recommendation: allow exchange rate to adjust fully; limit FX interventions to smoothing erratic movements; preserve sufficiently high reserves.
- Liquidity operations and facilities:
  - Reserve requirement reduced by 2 percentage points to 19 percent (from 21 percent).
  - Rediscount window amount doubled from PhP 20 billion to PhP 40 billion.
  - Opened dollar-denominated deposit window and dollar repurchase facility to address dollar interbank tightness.
  - Recommendation: flexible application of existing liquidity facilities; temporary forbearance delays pressures but does not solve mark-to-market losses.
- Exchange rate assessment:
  - Staff assesses exchange rate broadly in line with fundamentals; interventions intended to smooth volatility.
  - Remittances recognized as important determinant; staff enriched quantitative exchange rate assessment accordingly.

### Fiscal Policy, Revenues, and Public Finances
- Fiscal stance and projections:
  - 2008 budget likely to record a deficit of 1½ percent of GDP (other passages cite 1 percent of GDP); 2007 deficit: 1.7 percent of GDP.
  - 2009 budget revised to a deficit of 1½ percent of GDP (originally ½ percent); public sector gross financing requirement for 2009 estimated at 18½ percent of GDP, close to 40 percent external.
  - Staff recommends capping the deficit at 2 percent of GDP and financing the bulk domestically given high peso liquidity.
- Revenue and tax reforms:
  - Staff projects revenues of 14.9 percent of GDP for 2009 versus authorities’ target of 15.9 percent of GDP.
  - Recent and planned reforms estimated to result in revenue loss of about 0.6 percent of GDP:
    - Personal income tax: OSD increased from 10 percent to 40 percent of gross income; OSD now available to corporations (estimated loss of P 20 billion).
    - Corporate income tax: rate to be reduced from 35 percent to 30 percent in early 2009 (estimated loss of P 26 billion).
    - PERA: contribution up to P 50,000 per year (P 100,000 for married couples) with 5 percent tax credit; withdrawals after age 55 tax exempt (estimated loss of P 2 billion).
  - Options to offset revenue loss:
    - Rationalize tax incentives (phase out ITH in six years; lower tax rate of 15 percent or 5 percent GIT after expiry).
    - Accelerate tax administration reforms at the Bureau of Internal Revenue and customs reforms.
    - Raise and index excise rates on tobacco and alcohol (House Bill No. 3759 estimated gain of P 31.8−P 33.8 billion).
- Public sector and contingent liabilities:
  - Staff view: public sector debt broadly sustainable but sensitive to exchange rate changes and contingent liability shocks.
  - Example: a 10 percent of GDP increase in public debt from contingent liabilities or bank recapitalization would take the government five years to return debt to pre-shock level.
  - Recommendation: closer monitoring and management of contingent liabilities; adopt formal medium-term fiscal framework.

### Debt Sustainability — Baseline and Stress Insights (APPENDIX I)
- Baseline NFPS debt trajectory (percent of GDP):
  - 2003: 100.8; 2004: 95.2; 2005: 85.9; 2006: 73.9; 2007: 60.9; 2008: 61.7; 2009: 59.2; 2010: 59.3; 2011: 57.9; 2012: 56.2; 2013: 54.2.
- Foreign-currency denominated NFPS debt (percent of GDP):
  - 2003: 68.3; 2004: 62.7; 2005: 52.3; 2006: 45.2; 2007: 34.7; 2008: 36.1; 2009: 33.1; 2010: 30.6; 2011: 29.1; 2012: 27.4; 2013: 25.7.
- Gross financing need (percent of GDP / US$ billions):
  - Percent of GDP: 2008: 15.7; 2009: 18.5; 2010: 19.7; 2011: 18.1; 2012: 17.9; 2013: 17.5.
  - US$ billions: 2008: 26.5; 2009: 30.1; 2010: 34.3; 2011: 33.6; 2012: 35.7; 2013: 37.7.
- Key baseline assumptions (selected):
  - Real GDP growth: 2008: 4.4; 2009: 3.5; 2010: 4.4; 2011: 5.0; 2012: 5.4; 2013: 5.5.
  - Average nominal interest rate on public debt (percent): 2008: 8.4; 2009: 8.5; 2010: 9.1.
  - Inflation rate (GDP deflator, percent): 2008: 8.7; 2009: 5.6; 2010–2013: 3.5 each year.
- Stress test findings:
  - Exchange rate shocks have largest adverse impact: a one-time real depreciation of 30 percent is estimated to entail a 20 percentage point jump in external debt ratio from its 2008 level and keep external debt above 60 percent in the medium term.
  - Interest rate and growth shocks have more muted effects because of lengthening maturities and tilt toward domestic financing.
  - Gross external financing needs rise in projection years, e.g., 2009: $11.7 billion (7.2 percent of GDP); 2013: $17.8 billion (8.3 percent of GDP).

### External Sector, Reserves, and World Bank Relations
- External indicators and reserves:
  - Current account (percent of GDP): 2004: 1.9; 2005: 2.0; 2006: 4.5; 2007: 4.4; 2008: 1.0 (other passages cite 1.7 or 2.0); 2009: 1.7 (other passages vary).
  - Reserves, adjusted (US$ billions): 2004: 15.2; 2005: 18.0; 2006: 23.0; 2007: 33.8; 2008: 35.6 (other passages report US$37.0 or US$37.1).
  - Reserves / Short-term liabilities, adjusted: 2008: 246.8; 2009: 256.9.
  - Total external debt (percent of GDP): 2008: 39.1; 2009: 40.2.
- World Bank engagement (as of September 30, 2008):
  - Committed approximately $12 billion under IBRD loans and $239 million under IDA credits historically.
  - Portfolio as of September 30, 2008: 26 projects amounting to $1.41 billion with undisbursed balance of $923.5 million.
  - FY08 project approvals included Bicol Power Restoration Project ($12.9 million) and National Roads Improvement and Management Project 2 ($232 million).
  - CAS focuses: economic growth and social inclusion; levers: fiscal stability and governance; CAS extended to end-FY09; new CAS to cover July 1, 2009 to June 30, 2012.

### Statistical Issues and Data Quality (Annex IV)
- National accounts weaknesses:
  - Large discrepancies between expenditure and production estimates; reliance on an outdated benchmark year (1988) and fixed input-output ratios; inadequate capture of births/deaths of establishments; constant-price estimation issues.
  - CPI updated in February 2004 using 2000 Family Income and Expenditure Survey weights; food/beverages/tobacco weight fell to 50 percent in 2000 from 55 percent in 1994.
  - ROSC Data Module published August 2004; SDDS subscribed August 1996; authorities compiling new national accounts series based on 1993 SNA guidelines.
- External sector statistics:
  - BSP created Department of Economic Statistics in 2005.
  - Improvements: import measurement (electronics), remittance classification and measurement, trade credit methodology, direct investment survey.
  - Remaining challenges: coverage of nontraditional channels (FCDUs exempt from reporting), remittance underestimation (household surveys suggest about 30 percent of remittances not channeled through banking system; possible underestimation of about US$3 billion (3.8 percent of GDP) in 2002).
- Monetary and government finance statistics:
  - Monetary statistics largely conform to Fund methodology; SRFs and IMD introduced October 2007.
  - Government finance: budget obligations vs cash reporting differences; standard chart of accounts and New Government Accounting System introduced; dedicated DoF unit for GFS compilation.
- Data frequency and quality notes (selected):
  - Exchange rates: latest observation Dec 08; received Dec 5/08; frequency D.
  - International reserve assets: latest observation Nov 08; received Dec 5/08; frequency D/M.
  - CPI latest observation Nov 08; received Dec 5/08; frequency M; methodological soundness O.

### Staff Views, Authorities’ Views, and Executive Board Advice
- Staff recommendations:
  - Banking: heightened BSP surveillance, legal protection for supervisors, PDIC recapitalization, more flexible deposit insurance ceiling, enhance resolution toolkit, consider more rules-based PCA over medium term.
  - Monetary: keep neutral stance but ease if downside risks materialize; allow exchange rate flexibility; preserve reserves.
  - Fiscal: measured fiscal easing to cushion slowdown but cap deficit at 2 percent of GDP; raise tax effort via administrative and legislative measures; formal medium-term fiscal framework; streamline GOCCs and NFA.
  - Structural: complete power sector privatization, improve capital markets, strengthen clearance/settlement infrastructure.
- Authorities’ positions:
  - Broad agreement on channels of risk and contingency measures; viewed existing contingency framework and PCA as largely adequate.
  - Concern that rules-based PCA could reduce flexibility for idiosyncratic cases.
  - Supported PDIC recapitalization and considered temporary flexibility in deposit insurance; skepticism about more flexible P&A tools due to depositor instability risk.
  - Considered it too early to ease monetary policy while inflation high; would ease if downside risks materialize and inflation expectations decline sufficiently.
  - Agreed exchange rate broadly in line with fundamentals.
- Executive Board views:
  - Economy faces headwinds but starts from a position of strength.
  - Urged transparency, close monitoring, flexible use of liquidity facilities, improvements to PCA, and measured fiscal stimulus with credibility protection.

### Key Selected Macroeconomic Indicators (from tables and staff projections)
- Nominal GDP (2007): P6,648 billion ($144.1 billion)
- Population (2007): 88.6 million
- GDP per capita (2007): $1,624
- Poverty headcount ratio at $2 a day at PPP (2003): 43 percent
- IMF quota: SDR 879.9 million
- Main products and exports: Electronics and agricultural products
- Unemployment rate (2007): 7.3 percent
- Real GDP (percent change): 2004: 6.4; 2005: 5.0; 2006: 5.4; 2007: 7.2; 2008: 4.4; 2009 (Est./Proj.): 3.5 (alternative staff supplement projection: 2009 Proj.: 2.9 in supplementary highlights).
- CPI (annual average): 2004: 6.0; 2005: 7.7; 2006: 6.2; 2007: 2.8; 2008: 9.4; 2009: 6.0 (supplementary highlights cite 2009 Proj.: 4.8).
- Gross investment (percent of GDP): 2008: 15.4; 2009: 14.9 (supplementary: 2008 Est.: 15.5; 2009 Proj.: 15.0).
- National saving (percent of GDP): 2008: 16.4; 2009: 16.6 (supplementary: 2008 Est.: 17.5; 2009 Proj.: 16.8).
- Nonfinancial public sector debt (percent of GDP): 2008: 61.7; 2009: 59.2 (supplementary: 2008 Est.: 59.9; 2009 Proj.: 60.4).
- Reserves, adjusted (US$ billions): 2008: 35.6; 2009: 35.6 (supplementary: 2008 Est.: 37.2; 2009 Proj.: 37.2).

*Source: _cr0962 - Executive Summary and selected annexes from the IMF staff report excerpt provided.*

### Executive Summary ......................................................................................................

### EXECUTIVE SUMMARY

### Background
- GDP growth is projected to decline to 4.4 percent in 2008 and further to 3½ percent in 2009, driven by softening external and private domestic demand.
- Inflation is expected to reach 9½ percent in 2008 and decline to 6 percent in 2009, led by a decline in commodity prices and weaker demand.
- A deepening of the global economic downturn presents downside risks to this outlook.

### Recent Economic Developments
- GDP growth moderated to 4.6 percent in the first three quarters of 2008 from 7.2 percent in 2007; the slowdown was driven by weaker external demand and consumption, partly offset by robust remittances.
- Headline inflation peaked in August at 12½ percent (year-on-year) and fell to 9.9 percent in November as annual gains in commodity prices receded; currently no evidence of additional inflation pressures, including from wage adjustments.
- Equity prices declined by around 45 percent in 2008, with almost half of the decline taking place since mid-September 2008.
- Market-based measures indicate increased credit risk: expected default frequencies of banks at elevated levels and Philippine sovereign spreads wider by 300 bps (EMBI+ PHL) since end-August 2008, though spreads remain 175−200 bps lower than the EMBI+ Global average.
- Remittances increased by 17 percent (year-on-year) through September 2008.
- The current account surplus declined in the first half of 2008 as external demand waned and commodity prices rose; net foreign equity outflows reached US$800 million through November 2008, of which a third took place since end-August 2008.
- The peso depreciated by 20 percent against the U.S. dollar and the real effective exchange rate by around 6 percent in 2008.
- Corporate profits were cut by about one-third during the first half of 2008; large corporates have cushions from prior profit growth and pre-financing, while smaller trade-oriented businesses face stress.

### Outlook and Risks
- Staff projects inflation to reach 9½ percent in 2008 and 6 percent in 2009 (period average), with inflation projected to fall within the target range of 3½ ± 1 percent in the later part of 2009 after pass-through from the peso depreciation.
- Growth is expected to slow over the near term; staff projects 3½ percent in 2009 (Executive Summary top-line).
- Risks to the near-term outlook are tilted to the downside:
  - Financial sector stress could intensify if the global financial turmoil worsens or is protracted.
  - A deepening global downturn could weaken the external position, especially if remittances contract as the U.S. recession deepens and Middle East activity slows.
  - Fiscal reform delays, possibly related to the 2010 Presidential elections, could push up financing costs as investors charge higher risk premia.
  - On the upside, globally coordinated fiscal stimulus could mitigate downside risks.
- Box finding on U.S. spillovers: quantitative analysis suggests a 1 percentage point decline in U.S. growth could lower growth in the Philippines by about 0.4−0.6 percentage point (directly and through other trading partners).

### Policy Discussions — Staff Views and Recommendations
- Financial sector oversight and stability
  - The BSP should continue to closely monitor the banking sector, including off-balance sheet activities.
  - The BSP should stand ready to apply existing liquidity facilities flexibly.
  - The current prompt corrective action (PCA) framework is largely adequate to deal with spillovers, but a more rules-based approach could be considered over the medium term.
  - BSP staff should be legally protected against litigation.
  - The proposed doubling in deposit insurance in a bill before Congress is welcome, but a provision allowing greater flexibility to raise the ceiling if needed should also be introduced.
  - The Philippine Deposit Insurance Corporation (PDIC) should be recapitalized and the banking resolution tool kit could be further enhanced.
- Monetary and exchange rate policy
  - The current neutral monetary stance appropriately balances the risks to inflation and growth.
  - There is scope to ease monetary policy if downside risks to growth materialize.
  - The exchange rate is broadly in line with fundamentals, posing no threat to external stability.
- Fiscal policy
  - Fiscal policy could help cushion the current slowdown, but credibility considerations related to fiscal discipline leave only room for a measured loosening.
  - Looking ahead, the introduction of a formalized medium-term fiscal framework and streamlining of government-owned and controlled corporations would support fiscal consolidation efforts.

### Authorities’ Views (as reported)
- Bank surveillance has been strengthened and steps taken to reduce risks from off-balance sheet activities.
- Authorities agreed on the importance of legal protection for supervisors, the need to recapitalize the PDIC, and the merit of flexibility to raise deposit insurance coverage further if needed.
- The current PCA and banking resolution frameworks were considered appropriate; no immediate need for enhancements.
- It was considered too early to ease monetary policy given the high level of inflation; lowering rates could add to downward pressures on the exchange rate and be inflationary.
- There would be room to ease rates if downside risks to growth materialize and inflation expectations decline sufficiently.
- The exchange rate was assessed to be in line with longer-term fundamentals.
- Fiscal policy should be counter-cyclical, but near-term fiscal easing should be limited to preserve credibility; fiscal consolidation remains a key medium-term objective.

*Source: _cr0962 - Executive Summary*

### 9.      The banking sector confronts these problems from a relatively strong position.

### 9.      The banking sector confronts these problems from a relatively strong position.

### Asset quality and capitalization: current position and vulnerabilities
- Nonperforming loans (NPL) declined in the last few years, falling further during the first half of 2008 to 5.2 percent of total loans (excluding interbank loans) and 84 percent have been provisioned for.
- The CAR of the banking system as a whole is high by regional standards, averaging around 15 percent by end-June 2008, although some banks are closer to the statutory limits.
- Staff calculations suggest:
  - A 100 basis point widening in EMBI-PHL credit spreads (currently around 500 bps) results in capital losses on US$-denominated government bonds and credit-linked notes of around 3 percent of equity, leading to a ½ percentage point decline in the capital adequacy ratio (CAR).
  - If all foreclosed assets were mark-to-market, a 40 percent decline in real estate prices could wipe out 9 percent of banking capital (equivalent to a 1.5 percentage point decline in the average CAR).
- Real estate (including foreclosed) holdings are generally not assessed at market value, but loss allowances are shown in balance sheet.

### Risk management, supervision, and regulatory changes
- Basel II adoption:
  - Commercial and universal banks adopted Basel II in June 2007, applying the standardized approach for credit risk and either the basic indicators approach or the standardized approach for operational risk.
  - Implementation of Basel II resulted in lower CARs for the banking system, around 300 basis points, due to capital charge for operational risk and more punitive risk weights on NPLs, Real and Other Property Acquired (ROPA), and foreign currency securities.
- Supervisory improvements:
  - The BSP stepped up risk-based supervision and enhanced the CAMELs framework for monitoring bank risks.

### Channels of risk to the banking system
- Domestic channel:
  - Economic slowdown will reduce earnings and worsen asset quality as households, SMEs, and export-oriented firms find it more difficult to service their debt.
  - Large portfolios of foreclosed properties will be harder to dispose of in this environment.
- Global spillovers:
  - Mark-to-market losses are a key risk; for some banks losses have been significant and have implied problems meeting the asset cover requirement for Foreign Currency Deposit Units (FCDUs), exacerbating peso pressures.
  - Off-balance sheet entities, including trust accounts, create reputational and contingency risks under redemption pressures.
- Outcome:
  - Weaker banks could face heightened stress under the baseline scenario, especially if global economic and financial conditions deteriorate further.

### BSP response to the global financial crisis
- Surveillance and communication:
  - BSP enhanced day-to-day monitoring and stress-testing, and sought to assure depositors. Staff noted scope for stepped-up surveillance, including closer monitoring of off-balance sheet activities.
- Regulatory forbearance:
  - BSP allowed banks a window up until November 14 to reclassify securities from mark-to-market accounts to hold-to-maturity accounts and UDSCLs based on any prevailing fair value between July 1 and November 14, 2008 (in line with October 2008 amendments to IAS 39).
  - BSP exempted until March 31, 2009, unrealized mark-to-market losses from the calculation of banks’ FCDU asset cover requirement.
  - Staff emphasized the importance of preserving transparency and noted these measures delay rather than solve pressures on emerging market bonds.
- Liquidity support:
  - BSP introduced measures to support interbank liquidity; staff encouraged flexible application of existing liquidity facilities as needed.

### Policy recommendations and contingency framework
- Prompt corrective action (PCA):
  - Strengthen PCA framework as a preparatory measure to deal with bank distress.
  - Short-run recommendation: give BSP legal authority to disclose enforcement actions while preserving secrecy where disclosure may aggravate panic.
  - Implement amendments to the BSP charter ensuring legal protection of BSP staff without delay.
- Deposit insurance and PDIC:
  - Mission supports the plan to raise the deposit insurance ceiling to P 500,000 (doubling the current limit of P 250,000 (US$5,300)).
  - Staff sees scope for a more flexible framework to raise the ceiling in severe stress.
  - Recapitalize the Philippine Deposit Insurance Corporation (PDIC) to match higher insurance liabilities and adopt a risk-based contribution structure.
  - Contextual figures:
    - Current limit P 250,000 (US$5,300), covering about 14 percent of total value of deposits.
    - PDIC capital base: P 50 billion readily available in the deposit insurance fund.
    - Audited net assets of the PDIC are 1½ percent of system deposits (P 49 billion; end-2006).
    - Premiums are uniformly capped at 0.2 percent of the insured amount irrespective of banks’ risk profiles.
- Resolution toolkit:
  - Welcome enhancement of banking resolution tools, including proposed bridge-bank facility.
  - Consider more flexible application of the purchase-and-assumption (P&A) tool not contingent on finalization of depositor payout to make takeovers more attractive and reduce deposit insurance activations.
  - To enhance effectiveness: limit rights of existing shareholders of ailing banks, make restructuring decisions legally irreversible, and protect PDIC staff against litigation.
- Medium-term considerations:
  - Shift to a more rules-based PCA framework with formalized triggers tied to escalating remedial actions.
  - Address the large overhang of foreclosed properties (about 50 percent larger than NPLs, provisioning below 18 percent) by selling with haircuts or establishing joint ventures with developers; recommend gradual sell-off given current environment.
  - Further develop capital markets:
    - Less than 250 companies listed on the stock exchange; only a fraction of shares are actively traded.
    - Government securities still account for 95 percent of the domestic bond market.
    - Promote stronger clearance and settlement infrastructure, shift public bond mix toward domestic issuance, and transition towards funded pension schemes to boost local portfolio investment demand.

### Authorities’ views (summary)
- Agreed broadly with staff on channels of risk and contingency measures, but consider existing contingency framework adequate.
- Noted mitigating factors:
  - Loan-to-deposit ratio remains low despite a pickup in lending.
  - Sector loan concentration limited and NPLs continued to fall.
  - Bank capitalization is high and exposures to risky financial instruments are low.
  - Corporates generally have strong balance sheets.
- On PCA rules-based shift:
  - Authorities concerned that a rules-based PCA could reduce flexibility needed for idiosyncratic bank cases.
  - Prioritize legal protection of supervisors and restriction of shareholder rights during restructuring.
- On deposit insurance and P&A:
  - Support recapitalizing PDIC and some flexibility to raise coverage temporarily.
  - Skeptical that more flexible P&A would necessarily improve resolution effectiveness; feared potential depositor instability.
- Steps taken to reduce off-balance sheet risks include enhanced client suitability requirements and disclosure/sales provisions of unit investment trust funds.

*Italic: Source — IMF staff report (excerpt): “9. The banking sector confronts these problems from a relatively strong position.”*

### 22.      The authorities broadly agreed with staff’s recommendations. It was too early to

### _cr0962 - 22.      The authorities broadly agreed with staff’s recommendations. It was too early to

### Monetary policy and inflation
- Authorities agreed it was too early to ease monetary policy while inflation remained high despite recent deceleration.
- Concern that lower interest rates could add downward pressures on the exchange rate and fuel inflation given the large share of imports in the consumption basket.
- Outlook: commodity prices and projected economic slowdown expected to reduce price pressures; monetary easing elsewhere could provide some monetary flexibility.
- Conditional stance: If downside risks to growth materialize and inflation expectations decline sufficiently, the authorities would stand ready to reduce policy rates.
- Staff view: Monetary policy should not carry the burden alone; fiscal policy should also provide counter-cyclical impetus.
- Staff appraisal: Current neutral monetary stance balances inflation and growth risks but may be adjusted if downside risks materialize. A protracted slowdown would provide scope for monetary easing if inflation expectations continue to adjust downwards. The exchange rate should then be allowed to adjust fully, with interventions limited to smoothing erratic movements. A temporary financial shock may call for a hike in interest rates and limited unsterilized intervention. Preserving sufficiently high reserves remains important.

### Exchange rate assessment
- Authorities concurred with staff’s assessment of the exchange rate.
- Recognition of remittances as an important determinant of the exchange rate in the Philippines; staff efforts to enrich quantitative exchange rate assessment accordingly were welcomed.
- Authorities noted the peso is market-determined and interventions are limited to lessen undue volatility; pointed to large appreciation until end-2007 and subsequent significant depreciation as demonstration.
- Authorities reiterated concern that the Fund’s focus on formal and narrow classifications of exchange rate regimes may not align with operational realities and could detract attention from underlying economic issues.
- Staff appraisal: The exchange rate is assessed to be broadly in line with the level implied by longer-term fundamentals and does not pose a threat to external stability. Interventions in recent years largely intended to smooth erratic changes; quantitative estimates suggest the exchange rate does not deviate significantly from its long-term equilibrium level.

### Fiscal policy stance and projections
- 2008 budget likely to record a deficit of 1½ percent of GDP, a slight improvement over 1.7 percent of GDP in the prior year.
- Tax effort expected to remain broadly unchanged at around 14 percent of GDP due to windfall gains from high oil prices being offset by changes to the income tax law and weaknesses in domestic VAT collection.
- Higher current spending expected to be offset by lower-than-budgeted capital expenditure, reflecting weak absorptive capacity.
- Nonfinancial public sector debt in percent of GDP projected to rise modestly in 2008, due largely to a weaker exchange rate, reversing the recent trend.
- 2009 budget: originally envisaged deficit target of ½ percent of GDP (in line with plans to balance the budget in 2010) revised up to 1½ percent of GDP to accommodate higher capital outlays and a modest increase in pro-poor spending; awaits Senate approval.
- Public sector gross financing requirement for 2009 estimated at 18½ percent of GDP, of which close to 40 percent is external.
- Risks: gross financing needs could increase significantly in percent of GDP if the peso depreciates further or contingent liabilities are realized (including outstanding guarantees and government-linked corporations and financial institutions).

### Revenue, tax reforms, and tax effort
- Staff projects revenues of 14.9 percent of GDP for 2009 versus the authorities’ target of 15.9 percent of GDP.
- Staff recommendation: cap the deficit at 2 percent of GDP, with the bulk financed domestically given high level of peso liquidity in the banking system.
- To achieve a 2 percent deficit without unduly squeezing expenditure, staff favors raising the tax effort through administrative and legislative measures (e.g., reforming sin taxes and streamlining fiscal incentives as in current proposals before Congress). Otherwise, infrastructure, wages, and maintenance/operations expenditures would need to be kept broadly unchanged from projected 2008 levels (in percent of GDP), while protecting higher spending on well-targeted pro-poor programs.

Box 3 — Recent Tax Policy Reforms and Options for Tax Base Broadening (findings)
- Recent and planned reforms estimated to result in a revenue loss of about 0.6 percent of GDP.
  - Personal income tax: exemption levels raised; optional standard deduction (OSD) increased from 10 percent to 40 percent of gross income in lieu of listed allowable deductions; OSD now available to corporations (estimated loss of P 20 billion).
  - Corporate income tax: rate to be reduced from 35 percent to 30 percent in early 2009 (estimated loss of P 26 billion).
  - Personal Equity and Retirement Act (PERA): contribution possible up to P 50,000 per year (P 100,000 for married couples) with a 5 percent tax credit; withdrawals after age 55 are tax exempt (estimated loss of P 2 billion).
- Options to offset revenue loss agreed by authorities and staff:
  - Rationalizing tax incentives: compromise Bill would phase out the income tax holiday (ITH) in six years; after expiry companies would face a lower income tax rate of 15 percent or a 5 percent tax on gross income earned.
  - Accelerating tax administration reform: priorities at the Bureau of Internal Revenue include taxpayer registration, arrears collection, returns filing, and improving audits; customs administration reform progress has been particularly poor, with priorities to strengthen management controls, integrity of the import and export clearance system, and enforcement/intelligence functions.
  - Raising and indexing excises: unifying, raising, and indexing excise rates on tobacco and alcohol products, as proposed in House Bill No. 3759 (estimated gain of P 31.8−P 33.8 billion).

### Public sector and contingent liabilities
- Staff view: public sector debt is broadly sustainable but sensitive to exchange rate changes and contingent liability shocks.
- Example sensitivity: in the event of a 10 percent of GDP increase in public debt from realization of contingent liabilities or bank recapitalization, it would take the government five years to return debt to the pre-shock level.
- Recommendation: closer monitoring and management of contingent liabilities, combined with a more formalized medium-term fiscal framework, to enhance public sector balance sheet risk management.

### National Food Authority (NFA) and GOCCs
- Large deficits emerged at the NFA: projected NFA deficit at 1 percent of GDP in the current year, up from a broadly balanced position in 2007, driven by higher import volumes and food prices.
- Staff recommendation: streamline NFA operations and other GOCCs. Fundamental reform of NFA aimed at full cost recovery and limiting its role to providing food security; savings to be used for well-targeted conditional cash transfer schemes.
- Authorities agreed that rationalization of NFA and monitorable performance targets for other GOCCs are integral to consolidation.

### Power sector privatization and electricity tariffs
- Government has privatized around 70 percent of its generating assets (Luzon-Visayas grid), including two generation plants this year; plans to finalize privatization of generating assets by 2009.
- FDIs will be key for successful completion and sustainable power-sector development.
- Investor concerns: slow adjustment of electricity tariffs to global input prices and lack of transparency in the pricing mechanism.
- Staff recommendation: carry through planned privatization to promote cost-efficient supply; adopt more transparent and market-based tariff adjustments to attract investors. Timing of planned auctions should be flexible given prevailing market conditions.

### Financial sector stability and supervision
- Financial sector reforms strengthened bank soundness, but the sector remains exposed to domestic and external risks.
- Supervisory improvements: upgrading of BSP supervisory capacity, introduction of risk-based CAMELs approach, adoption of Basel II and international accounting standards.
- Risks to banks: economic slowdown impacts on earnings and asset quality; continued strained global financial markets could lead to losses on large security holdings; tight external financing conditions and off-balance sheet reputational risks.
- Staff recommendations:
  - BSP should continue heightened surveillance, closely monitor off-balance sheet activities, and retain supervisory vigilance.
  - Relaxation of mark-to-market accounting rules provides some relief but should not impair transparency about financial soundness.
  - BSP proactive steps on liquidity strains welcomed; flexible application of existing facilities encouraged to stem stress.
  - PCA framework improvements: give BSP legal authority to disclose enforcement actions (while preserving nondisclosure where needed), consider more rules-based triggers tied to remedial action, and amend BSP charter to strengthen legal protection of BSP staff.
  - Strengthen bank resolution framework: proposed increase in deposit coverage to P 500,000 is welcome; allow flexibility to increase deposit insurance temporarily in high stress cases; introduce a bridge-bank facility and consider more flexible purchase-and-assumption tool; ensure bank restructuring decisions are irreversible and PDIC staff protected against litigation.

### Staff appraisal — macro outlook and key numeric projections
- Growth: expected to slow to 4.4 percent in 2008 and 3½ percent in 2009, led by deceleration in external demand and private consumption as remittances level off.
- Inflation: projected to decline from 9½ percent in 2008 to 6 percent in 2009 as commodity prices recede and demand eases.
- Downside risk: a prolonged global downturn presents downside risk to the growth outlook.
- Fiscal policy recommendation reiterated: fiscal easing should be measured to avoid compromising credibility, capping the fiscal deficit at 2 percent of GDP. To meet this, authorities should raise the tax effort through administrative measures and tax reform; otherwise contain expenditures except for well-targeted pro-poor cash benefits.
- Institutional recommendations: consider a formalized medium-term fiscal framework (submit medium-term expenditure framework alongside the budget), consider a Fiscal Responsibility Law requiring new spending or tax proposals to be fully financed, and possibly introduce an explicit numerical rule to anchor fiscal policy.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 45.      Staff recommends the next Article IV consultation be on the standard 12-month cycle.

### _cr0962 - 45.      Staff recommends the next Article IV consultation be on the standard 12-month cycle.

### Staff recommendation
- Staff recommends the next Article IV consultation be on the standard 12-month cycle.

### Key macroeconomic indicators (selected)
- Nominal GDP (2007): P6,648 billion ($144.1 billion)
- Population (2007): 88.6 million
- GDP per capita (2007): $1,624
- Poverty headcount ratio at $2 a day at PPP (2003): 43 percent
- IMF quota: SDR 879.9 million
- Main products and exports: Electronics and agricultural products
- Unemployment rate (2007): 7.3 percent

### GDP, inflation, investment, and saving (2004–2009, percent change / percent of GDP)
- Real GDP: 2004: 6.4; 2005: 5.0; 2006: 5.4; 2007: 7.2; 2008: 4.4; 2009 (Est./Proj.): 3.5
- CPI (annual average): 2004: 6.0; 2005: 7.7; 2006: 6.2; 2007: 2.8; 2008: 9.4; 2009: 6.0
- CPI (end year): 2004: 8.6; 2005: 6.7; 2006: 4.3; 2007: 3.9; 2008: 9.7; 2009: 3.5
- Gross investment (percent of GDP): 2004: 16.7; 2005: 14.6; 2006: 14.5; 2007: 15.3; 2008: 15.4; 2009: 14.9
- National saving (percent of GDP) 1/: 2004: 18.6; 2005: 16.6; 2006: 19.0; 2007: 19.7; 2008: 16.4; 2009: 16.6

### Public finances and debt (percent of GDP; selected)
- National government balance (authorities definition): 2004: -3.8; 2005: -2.7; 2006: -1.1; 2007: -0.2; 2008: -0.9; 2009: -1.7
- National government balance (authorities definition) excl. privatization receipts: 2004: -4.2; 2005: -3.0; 2006: -1.2; 2007: -1.5; 2008: -1.4; 2009: -1.8
- National government balance (Fund definition) 2/: 2004: -4.2; 2005: -3.0; 2006: -1.4; 2007: -1.7; 2008: -1.5; 2009: -2.0
- Nonfinancial public sector balance 3/: 2004: -5.0; 2005: -2.1; 2006: 0.1; 2007: 0.4; 2008: -0.9; 2009: -1.7
- Revenue and grants 4/: 20.5; 22.1; 23.0; 24.1; 22.7; 21.5
- Expenditure 5/: 25.5; 24.1; 22.9; 23.7; 23.6; 23.1
- Nonfinancial public sector debt 6/: 2004: 95.2; 2005: 85.9; 2006: 73.9; 2007: 60.9; 2008: 61.7; 2009: 59.2

### Monetary and credit indicators
- Broad money (M3): 2004: 10.3; 2005: 10.3; 2006: 22.7; 2007: 10.6; 2008: 13.1; 2009: ...
- Interest rate (91-day treasury bill, end of period, in percent) 7/: 2004: 8.4; 2005: 6.4; 2006: 5.1; 2007: 4.2; 2008: 6.5; 2009: ...
- Credit to the private sector (percent change): 2004: 4.9; 2005: -0.3; 2006: 6.7; 2007: 8.5; 2008: 17.0; 2009: ...

### External sector (selected)
- Export value (percent change): 2004: 9.8; 2005: 3.8; 2006: 15.6; 2007: 6.4; 2008: 3.7; 2009: 5.3
- Import value (percent change): 2004: 8.0; 2005: 8.0; 2006: 10.9; 2007: 8.4; 2008: 14.8; 2009: 3.0
- Current account (percent of GDP): 2004: 1.9; 2005: 2.0; 2006: 4.5; 2007: 4.4; 2008: 1.0; 2009: 1.7
- Capital and Financial account (US$ billions, excluding errors and omissions): 2004: -1.6; 2005: 2.2; 2006: 0.0; 2007: 2.9; 2008: 1.1; 2009: -1.8
- Foreign direct investment (net, US$ billions): 2004: 0.1; 2005: 1.7; 2006: 2.8; 2007: -0.5; 2008: 1.2; 2009: 1.1
- Errors and omissions (US$ billions): 2004: -0.3; 2005: -1.8; 2006: -1.6; 2007: -0.6; 2008: -1.7; 2009: -1.7
- Overall balance (US$ billions): 2004: -0.3; 2005: 2.4; 2006: 3.8; 2007: 8.6; 2008: 1.1; 2009: -0.8
- Total external debt (percent of GDP) 10/: 2004: 70.7; 2005: 62.6; 2006: 51.8; 2007: 45.7; 2008: 39.1; 2009: 40.2
- Reserves, adjusted (US$ billions) 11/: 2004: 15.2; 2005: 18.0; 2006: 23.0; 2007: 33.8; 2008: 35.6; 2009: 35.6
- Reserves / Short-term liabilities, adjusted 12/: 2004: 125.8; 2005: 120.1; 2006: 172.7; 2007: 215.2; 2008: 246.8; 2009: 256.9
- Exchange rate (period averages) Pesos per U.S. dollar: 2004: 56.0; 2005: 55.1; 2006: 51.3; 2007: 46.1; 2008: 44.2; 2009: 9/...
- Nominal effective exchange rate (1990 =100): 2004: 75.7; 2005: 76.9; 2006: 82.0; 2007: 89.3; 2008: 90.6; 2009: 8/...
- Real effective exchange rate (1990 =100): 2004: 86.2; 2005: 92.3; 2006: 102.5; 2007: 112.3; 2008: 119.5; 2009: 8/...

### National government cash and budget aggregates (selected, percent of GDP)
- Revenue and grants (Budget / Proj. rows): 15.0; 16.2; 15.8; 16.6; 15.4; 15.9; 14.9
- Tax revenue: 13.0; 14.3; 14.0; 15.2; 13.9; 14.7; 13.3
- Expenditure and net lending: 18.0; 17.5; 17.4; 17.1; 16.9; 16.7; 16.9
- Balance (national government): -3.0; -1.4; -1.7; -0.6; -1.5; -0.7; -2.0
- Financing: 3.0; 1.4; 1.7; 0.6; 1.5; 0.5; 2.0
- National government debt 6/ (selected): 62.8; 55.4; 47.7; ...; 47.0; ...; 44.8
- Nonfinancial public sector debt 7/: 85.9; 73.9; 60.9; ...; 61.7; ...; 59.2
- GDP (in billions of pesos) 9/: 5,444; 6,033; 6,648; 7,285; 7,543; 8,692; 8,244

### Balance of payments and external financing (selected, percent / US$ billions)
- Current account balance (percent of GDP): 2004: 1.6; 2005: 2.0; 2006: 5.3; 2007: 6.3; 2008: 1.7; 2009: 2.8
- Trade balance (percent of GDP): 2004: -5.7; 2005: -7.8; 2006: -6.7; 2007: -8.2; 2008: -15.0; 2009: -14.2
- Exports, f.o.b. (percent of GDP): 2004: 38.8; 2005: 40.3; 2006: 46.5; 2007: 49.5; 2008: 51.1; 2009: 53.8
- Imports, f.o.b. (percent of GDP): 2004: 44.5; 2005: 48.0; 2006: 53.3; 2007: 57.7; 2008: 66.1; 2009: 68.0
- Services (net) (percent of GDP): -1.8; -1.3; 0.1; 1.1; 1.3; 1.0
- Transfers (net) (percent of GDP): 9.2; 11.4; 13.2; 14.0; 15.7; 16.4
- Overall balance (US$ billions): -0.3; 2.4; 3.8; 8.6; 1.1; -0.8
- Short-term debt (original maturity): 7.6; 9.4; 7.7; 9.9; 8.9; 9.1
- Adjusted gross reserves (US$ billions) 1/: 15.2; 18.0; 23.0; 33.8; 35.6; 35.6
- Adjusted reserves (percent of short-term debt by residual maturity) 2/: 125.8; 120.1; 172.7; 215.2; 246.8; 256.9

### Medium-term outlook (Staff projections, 2006–13; selected)
- Real GDP (2006–2013): 2006: 5.4; 2007: 7.2; 2008: 4.4; 2009: 3.5; 2010: 4.4; 2011: 5.0; 2012: 5.4; 2013: 5.5
- GDP per capita (US$): 2006: 1,352; 2007: 1,624; 2008: 1,871; 2009: 1,772; 2010: 1,848; 2011: 1,940; 2012: 2,044; 2013: 2,156
- CPI (average): 2006: 6.2; 2007: 2.8; 2008: 9.4; 2009: 6.0; 2010: 3.5; 2011: 3.5; 2012: 3.5; 2013: 3.5
- Employment (average, million): 2006: 32.6; 2007: 33.6; 2008: 34.5; 2009: 35.1; 2010: 35.8; 2011: 36.7; 2012: 37.7; 2013: 38.8
- Gross investment (percent of GDP): 2006: 14.5; 2007: 15.3; 2008: 15.4; 2009: 14.9; 2010: 15.4; 2011: 15.7; 2012: 16.0; 2013: 16.2
- National saving 1/: 2006: 19.0; 2007: 19.7; 2008: 16.4; 2009: 16.6; 2010: 17.1; 2011: 16.3; 2012: 16.0; 2013: 15.8
- Nonfinancial public sector balance 2/: 2006: 0.1; 2007: 0.4; 2008: -0.9; 2009: -1.7; 2010: -2.2; 2011: -2.0; 2012: -2.0; 2013: -2.0
- Revenue and grants 3/: 2006: 23.0; 2007: 24.1; 2008: 22.7; 2009: 21.5; 2010: 21.6; 2011: 21.8; 2012: 22.0; 2013: 22.1
- Nonfinancial public sector debt 6/: 2006: 73.9; 2007: 60.9; 2008: 61.7; 2009: 59.2; 2010: 57.3; 2011: 57.9; 2012: 56.2; 2013: 54.2
- Reserves, adjusted (US$ billions) 7/: 2006: 23.0; 2007: 33.8; 2008: 35.6; 2009: 35.6; 2010: 37.4; 2011: 37.3; 2012: 37.1; 2013: 37.3
- Reserves / Short-term liabilities, adjusted 8/: 2006: 172.7; 2007: 215.2; 2008: 246.8; 2009: 256.9; 2010: 227.0; 2011: 222.9; 2012: 218.6; 2013: 206.1
- Gross external financing requirements (US$ billions) 9/: 2006: 10.1; 2007: 6.9; 2008: 14.0; 2009: 11.7; 2010: 10.8; 2011: 15.3; 2012: 16.7; 2013: 17.8
- Total external debt (percent of GDP) 10/: 2006: 51.8; 2007: 45.7; 2008: 39.1; 2009: 40.2; 2010: 38.2; 2011: 36.0; 2012: 34.2; 2013: 32.9
- Debt-service ratio (percent of exports of G&S): 2006: 18.6; 2007: 17.9; 2008: 17.8; 2009: 16.7; 2010: 14.3; 2011: 17.4; 2012: 15.8; 2013: 14.1

### Banking sector indicators (2003–2008, end of year)
- Total capital accounts to total assets: 2003: 13.1; 2004: 12.6; 2005: 12.0; 2006: 11.7; 2007: 11.7; 2008 Q2: 10.7
- Capital adequacy ratio (consolidated basis): 2003: 17.4; 2004: 18.4; 2005: 17.6; 2006: 18.1; 2007: 15.7; 2008 Q2: 15.5
- NPL ratio 1/ (excluding IBL): 2003: 16.1; 2004: 14.4; 2005: 10.3; 2006: 7.5; 2007: 5.8; 2008 Q2: 5.2
- NPA ratio 2/: 2003: 13.2; 2004: 11.8; 2005: 8.8; 2006: 6.9; 2007: 5.8; 2008 Q2: 5.6
- Distressed asset ratio 3/: 2003: 27.0; 2004: 25.3; 2005: 20.0; 2006: 15.7; 2007: 13.0; 2008 Q2: 11.6
- NPL coverage ratio 4/: 2003: 51.5; 2004: 58.0; 2005: 73.8; 2006: 75.0; 2007: 81.5; 2008 Q2: 84.1
- Return on assets: 2003: 1.1; 2004: 0.9; 2005: 1.1; 2006: 1.3; 2007: 1.3; 2008 Q2: 1.1
- Return on equity: 2003: 8.5; 2004: 7.1; 2005: 8.8; 2006: 10.6; 2007: 10.8; 2008 Q2: 9.6
- Liquid assets to deposits: 2003: 47.9; 2004: 53.2; 2005: 53.1; 2006: 52.1; 2007: 51.9; 2008 Q2: 51.7
- Loans (gross) to deposits: 2003: 80.3; 2004: 73.4; 2005: 72.4; 2006: 69.3; 2007: 70.9; 2008 Q2: 72.9

### Indicators of external vulnerability (2003–2009, selected)
- Gross international reserves, adjusted (US$ billions) 1/: 2003: 14.9; 2004: 15.2; 2005: 18.0; 2006: 23.0; 2007: 33.8; 2008: 35.6; 2009 (Proj.): 35.6
- Maturing short-term debt (US$ billions): 2003: 8.2; 2004: 7.6; 2005: 9.4; 2006: 7.7; 2007: 9.9; 2008: 8.9; 2009: 9.1
- Amortization of medium and long-term debt (US$ billions): 2003: 5.9; 2004: 5.4; 2005: 6.0; 2006: 5.6; 2007: 5.8; 2008: 5.5; 2009: 6.7
- Net FDI inflows (US$ billions): 2003: 0.2; 2004: 0.1; 2005: 1.7; 2006: 2.8; 2007: -0.5; 2008: 1.2; 2009: 1.1
- FX deposits (US$ billions) 2/: 13.7; 15.8; 16.7; 19.0; 19.6; 19.6; ...
- Total gross external debt (percent of GDP): 2003: 79.2; 2004: 70.7; 2005: 62.6; 2006: 51.8; 2007: 45.7; 2008: 39.1; 2009: 40.2
- Overall non-financial public sector balance 3/: 2003: -5.6; 2004: -5.0; 2005: -2.1; 2006: 0.1; 2007: 0.4; 2008: -0.9; 2009: -1.7
- Nonfinancial public sector debt (NFPSD): 2003: 100.8; 2004: 95.2; 2005: 85.9; 2006: 73.9; 2007: 60.9; 2008: 61.7; 2009: 59.2
- NFPSD denominated in FX or linked to the exchange rate (percent of NFPSD): 2003: 67.8; 2004: 65.9; 2005: 60.9; 2006: 61.2; 2007: 56.9; 2008: 58.5; 2009: 55.9
- Short-term general government debt (original maturity, percent of NFPSD): 2003: 14.5; 2004: 15.4; 2005: 16.6; 2006: 17.7; 2007: 17.3; 2008: 19.8; 2009: 18.9
- Average effective interest rate of government debt (percent): 2003: 6.3; 2004: 6.9; 2005: 7.4; 2006: 7.8; 2007: 7.5; 2008: 7.3; 2009: 8.1
- Amortization of total debt (percent): 2003: 23.2; 2004: 23.1; 2005: 22.2; 2006: 24.2; 2007: 18.3; 2008: 14.8; 2009: 16.8

*Sources: Philippine authorities; and IMF staff estimates and projections.*

### APPENDIX I: DEBT SUSTAINABILITY ANALYSIS

### APPENDIX I: DEBT SUSTAINABILITY ANALYSIS

### Overall assessment
- The Philippines’ public sector debt is broadly sustainable.
- Under the baseline scenario (no new measures apart from the planned reduction in the corporate income tax (CIT) rate in 2009 and the full-year impact of the 2008 increase in personal income tax thresholds), nonfinancial public sector (NFPS) debt:
  - Will initially increase, mostly due to exchange rate depreciation, and then decline to 54 percent of GDP in 2013.
- Debt dynamics remain vulnerable to shocks, especially to the exchange rate and, to a lesser extent, growth.

### Baseline public sector debt projections (nonfinancial public sector, gross and consolidated)
- Public sector debt (percent of GDP) by year:
  - 2003: 100.8
  - 2004: 95.2
  - 2005: 85.9
  - 2006: 73.9
  - 2007: 60.9
  - 2008: 61.7
  - 2009: 59.2
  - 2010: 59.3
  - 2011: 57.9
  - 2012: 56.2
  - 2013: 54.2
- Of which: foreign-currency denominated (percent of GDP) by year:
  - 2003: 68.3
  - 2004: 62.7
  - 2005: 52.3
  - 2006: 45.2
  - 2007: 34.7
  - 2008: 36.1
  - 2009: 33.1
  - 2010: 30.6
  - 2011: 29.1
  - 2012: 27.4
  - 2013: 25.7
- Change in public sector debt (percentage points of GDP):
  - 2003: 7.1
  - 2004: -5.6
  - 2005: -9.3
  - 2006: -12.0
  - 2007: -13.0
  - 2008: 0.8
  - 2009: -2.5
  - 2010: 0.1
  - 2011: -1.4
  - 2012: -1.7
  - 2013: -1.9
- Identified debt-creating flows (percent of GDP):
  - 2003: 1.2
  - 2004: -6.1
  - 2005: -10.9
  - 2006: -12.1
  - 2007: -13.7
  - 2008: -6.3
  - 2009: -3.4
  - 2010: -2.0
  - 2011: -2.6
  - 2012: -2.6
  - 2013: -2.5
- Primary deficit (percent of GDP):
  - 2003: -0.7
  - 2004: -1.6
  - 2005: -4.3
  - 2006: -5.8
  - 2007: -5.0
  - 2008: -3.6
  - 2009: -3.1
  - 2010: -2.7
  - 2011: -2.7
  - 2012: -2.5
  - 2013: -2.4
- Revenue and grants (percent of GDP):
  - 2003: 20.8
  - 2004: 20.5
  - 2005: 22.1
  - 2006: 23.0
  - 2007: 24.1
  - 2008: 22.7
  - 2009: 21.5
  - 2010: 21.6
  - 2011: 21.8
  - 2012: 22.0
  - 2013: 22.1
- Primary (noninterest) expenditure (percent of GDP):
  - 2003: 20.1
  - 2004: 19.0
  - 2005: 17.8
  - 2006: 17.2
  - 2007: 19.1
  - 2008: 19.1
  - 2009: 18.3
  - 2010: 18.9
  - 2011: 19.1
  - 2012: 19.5
  - 2013: 19.7
- Automatic debt dynamics (percent of GDP):
  - 2003: 1.4
  - 2004: -4.2
  - 2005: -6.9
  - 2006: -6.3
  - 2007: -9.0
  - 2008: -2.7
  - 2009: -0.4
  - 2010: 0.6
  - 2011: -0.1
  - 2012: -0.3
  - 2013: -0.4
- Contribution from interest rate/growth differential (percent of GDP):
  - 2003: -1.3
  - 2004: -5.0
  - 2005: -3.6
  - 2006: -2.6
  - 2007: -2.3
  - 2008: -2.7
  - 2009: -0.4
  - 2010: 0.6
  - 2011: -0.1
  - 2012: -0.3
  - 2013: -0.4
- Contribution from real interest rate (percent of GDP):
  - 2003: 2.9
  - 2004: 0.7
  - 2005: 0.6
  - 2006: 1.6
  - 2007: 2.5
  - 2008: -0.4
  - 2009: 1.5
  - 2010: 3.0
  - 2011: 2.6
  - 2012: 2.6
  - 2013: 2.5
- Contribution from real GDP growth (percent of GDP):
  - 2003: -4.2
  - 2004: -5.7
  - 2005: -4.2
  - 2006: -4.2
  - 2007: -4.8
  - 2008: -2.4
  - 2009: -2.0
  - 2010: -2.4
  - 2011: -2.7
  - 2012: -2.9
  - 2013: -2.8
- Residual, including asset changes (percent of GDP):
  - 2003: 5.8
  - 2004: 0.6
  - 2005: 1.6
  - 2006: 0.1
  - 2007: 0.7
  - 2008: 7.1
  - 2009: 0.9
  - 2010: 2.1
  - 2011: 1.2
  - 2012: 0.9
  - 2013: 0.6
- Public sector debt-to-revenue ratio (percent) by year:
  - 2003: 484.5
  - 2004: 463.6
  - 2005: 389.5
  - 2006: 321.5
  - 2007: 253.1
  - 2008: 272.1
  - 2009: 276.1
  - 2010: 274.4
  - 2011: 265.2
  - 2012: 255.1
  - 2013: 245.6
- Gross financing need (percent of GDP):
  - 2003: 28.8
  - 2004: 28.0
  - 2005: 24.3
  - 2006: 24.2
  - 2007: 17.9
  - 2008: 15.7
  - 2009: 18.5
  - 2010: 19.7
  - 2011: 18.1
  - 2012: 17.9
  - 2013: 17.5
- Gross financing need (in billions of U.S. dollars):
  - 2003: 22.9
  - 2004: 24.4
  - 2005: 24.0
  - 2006: 28.4
  - 2007: 25.8
  - 2008: 26.5
  - 2009: 30.1
  - 2010: 34.3
  - 2011: 33.6
  - 2012: 35.7
  - 2013: 37.7

### External debt projections and indicators
- External debt (percent of GDP) by year:
  - 2003: 79.2
  - 2004: 70.7
  - 2005: 62.6
  - 2006: 51.8
  - 2007: 45.7
  - 2008: 39.1
  - 2009: 40.2
  - 2010: 38.2
  - 2011: 36.0
  - 2012: 34.2
  - 2013: 32.9
- Change in external debt (percent of GDP):
  - 2003: 1.5
  - 2004: -8.5
  - 2005: -8.1
  - 2006: -10.8
  - 2007: -6.1
  - 2008: -6.6
  - 2009: 1.2
  - 2010: -2.1
  - 2011: -2.2
  - 2012: -1.8
  - 2013: -1.3
- Identified external debt-creating flows (percent of GDP):
  - 2003: -3.9
  - 2004: -9.2
  - 2005: -13.7
  - 2006: -19.1
  - 2007: -15.8
  - 2008: -2.8
  - 2009: -3.0
  - 2010: -4.0
  - 2011: -3.0
  - 2012: -2.6
  - 2013: -2.3
- Current account deficit, excluding interest payments (percent of GDP):
  - 2003: -3.6
  - 2004: -4.8
  - 2005: -5.3
  - 2006: -7.8
  - 2007: -7.7
  - 2008: -4.0
  - 2009: -4.9
  - 2010: -4.9
  - 2011: -4.1
  - 2012: -3.2
  - 2013: -2.5
- Exports (percent of GDP):
  - 2003: 48.6
  - 2004: 49.3
  - 2005: 45.3
  - 2006: 45.1
  - 2007: 40.1
  - 2008: 36.1
  - 2009: 39.6
  - 2010: 41.0
  - 2011: 42.0
  - 2012: 42.7
  - 2013: 43.5
- Imports (percent of GDP):
  - 2003: 58.4
  - 2004: 57.9
  - 2005: 54.5
  - 2006: 50.7
  - 2007: 45.1
  - 2008: 44.2
  - 2009: 47.6
  - 2010: 49.2
  - 2011: 51.0
  - 2012: 52.2
  - 2013: 53.0
- Net nondebt creating capital inflows (negative; percent of GDP):
  - 2003: -0.8
  - 2004: -0.7
  - 2005: -3.2
  - 2006: -4.5
  - 2007: -1.9
  - 2008: 0.0
  - 2009: 0.1
  - 2010: -0.6
  - 2011: -0.6
  - 2012: -0.8
  - 2013: -1.0
- Automatic debt dynamics (percent of GDP):
  - 2003: 0.5
  - 2004: -3.7
  - 2005: -5.2
  - 2006: -6.7
  - 2007: -6.3
  - 2008: 1.3
  - 2009: 1.8
  - 2010: 1.5
  - 2011: 1.7
  - 2012: 1.4
  - 2013: 1.2
- Contribution from nominal interest rate (percent of GDP):
  - 2003: 3.2
  - 2004: 2.9
  - 2005: 3.3
  - 2006: 3.3
  - 2007: 3.3
  - 2008: 3.0
  - 2009: 3.2
  - 2010: 3.1
  - 2011: 3.5
  - 2012: 3.2
  - 2013: 2.9
- Contribution from real GDP growth (percent of GDP):
  - 2003: -3.7
  - 2004: -4.6
  - 2005: -3.1
  - 2006: -2.8
  - 2007: -3.0
  - 2008: -1.7
  - 2009: -1.4
  - 2010: -1.7
  - 2011: -1.8
  - 2012: -1.8
  - 2013: -1.8
- Residual, including change in gross foreign assets (percent of GDP):
  - 2003: 5.4
  - 2004: 0.7
  - 2005: 5.6
  - 2006: 8.2
  - 2007: 9.8
  - 2008: -3.9
  - 2009: 4.2
  - 2010: 2.0
  - 2011: 0.8
  - 2012: 0.8
  - 2013: 1.0
- External debt-to-exports ratio (percent):
  - 2003: 162.9
  - 2004: 143.5
  - 2005: 138.2
  - 2006: 114.9
  - 2007: 114.0
  - 2008: 108.3
  - 2009: 101.7
  - 2010: 93.2
  - 2011: 85.8
  - 2012: 80.2
  - 2013: 75.8
- Gross external financing need (in billions of U.S. dollars):
  - 2003: 13.1
  - 2004: 12.5
  - 2005: 11.1
  - 2006: 10.1
  - 2007: 6.9
  - 2008: 14.0
  - 2009: 11.7
  - 2010: 10.8
  - 2011: 15.3
  - 2012: 16.7
  - 2013: 17.8
- Gross external financing need (percent of GDP):
  - 2003: 16.5
  - 2004: 14.4
  - 2005: 11.2
  - 2006: 8.6
  - 2007: 4.8
  - 2008: 8.3
  - 2009: 7.2
  - 2010: 6.2
  - 2011: 8.2
  - 2012: 8.4
  - 2013: 8.3

### Vulnerabilities and shock sensitivities
- Continued vulnerability to the exchange rate:
  - A one-time real depreciation of 30 percent is estimated to entail a 20 percentage point jump in the external debt ratio from its 2008 level, which would remain above 60 percent in the medium term.
- Rising resilience to interest rate and growth shocks:
  - Given the lengthening of maturities and tilt toward domestic financing, external debt is less affected by world interest rates and domestic growth shocks.
  - External debt is only moderately affected by noninterest shocks to the current account.
- Bound tests and stress scenarios presented (figures and narrative):
  - Individual shocks are permanent one-half standard deviation shocks.
  - Combined shocks include permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.
  - Specific scenario: one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2007 (real depreciation defined as nominal depreciation minus domestic inflation).
  - For external debt figures, a one-time real depreciation of 30 percent is modeled to occur in 2008 in figure notes.

### Key macroeconomic and fiscal assumptions underlying baseline (selected)
- Real GDP growth (percent):
  - 2003: 4.9
  - 2004: 6.4
  - 2005: 5.0
  - 2006: 5.4
  - 2007: 7.2
  - 2008: 4.4
  - 2009: 3.5
  - 2010: 4.4
  - 2011: 5.0
  - 2012: 5.4
  - 2013: 5.5
- Average nominal interest rate on public debt (percent):
  - 2003: 7.3
  - 2004: 7.3
  - 2005: 7.5
  - 2006: 7.5
  - 2007: 6.8
  - 2008: 8.4
  - 2009: 8.5
  - 2010: 9.1
  - 2011: 8.5
  - 2012: 8.6
  - 2013: 8.5
- Average real interest rate (percent):
  - 2003: 3.6
  - 2004: 1.2
  - 2005: 1.0
  - 2006: 2.3
  - 2007: 4.0
  - 2008: -0.3
  - 2009: 2.9
  - 2010: 5.6
  - 2011: 5.0
  - 2012: 5.1
  - 2013: 5.0
- Inflation rate (GDP deflator, percent):
  - 2003: 3.8
  - 2004: 6.1
  - 2005: 6.5
  - 2006: 5.1
  - 2007: 2.8
  - 2008: 8.7
  - 2009: 5.6
  - 2010: 3.5
  - 2011: 3.5
  - 2012: 3.5
  - 2013: 3.5
- Growth of real primary spending (deflated by GDP deflator, percent):
  - 2003: 1.3
  - 2004: 0.6
  - 2005: -1.7
  - 2006: 1.8
  - 2007: 19.5
  - 2008: 4.3
  - 2009: -0.8
  - 2010: 7.7
  - 2011: 6.3
  - 2012: 7.4
  - 2013: 6.5
- Nominal external interest rate (percent):
  - 2003: 4.3
  - 2004: 4.0
  - 2005: 5.3
  - 2006: 6.2
  - 2007: 7.7
  - 2008: 7.6
  - 2009: 8.0
  - 2010: 8.3
  - 2011: 9.7
  - 2012: 9.6
  - 2013: 9.2

### Key insights from stress tests and scenarios
- Baseline trajectories show declining public and external debt ratios through 2013 under the stated assumptions.
- Exchange rate shocks have the largest adverse impact on debt ratios among tested shocks; a 30 percent real depreciation can raise external debt sharply (20 percentage points from 2008 level for external debt; external debt ratio would remain above 60 percent in the medium term under that shock).
- Interest rate and growth shocks have more muted effects on external debt given the lengthening of maturities and tilt toward domestic financing.
- Gross external financing needs rise in projection years, reaching:
  - 2009: $11.7 billion (7.2 percent of GDP)
  - 2010: $10.8 billion (6.2 percent of GDP)
  - 2011: $15.3 billion (8.2 percent of GDP)
  - 2012: $16.7 billion (8.4 percent of GDP)
  - 2013: $17.8 billion (8.3 percent of GDP)

_International Monetary Fund. APPENDIX I: DEBT SUSTAINABILITY ANALYSIS (Staff Report for the 2008 Article IV Consultation—Informational Annex)._

### ANNEX II: PHILIPPINES: RELATIONS WITH THE WORLD BANK GROUP

### ANNEX II: PHILIPPINES: RELATIONS WITH THE WORLD BANK GROUP

### World Bank lending and portfolio (historical and as of September 30, 2008)
- Since the World Bank started operations in the Philippines:
  - Committed approximately $12 billion under IBRD loans.
  - Committed $239 million under IDA credits (fewer cancellations).
- As of September 30, 2008:
  - Philippine portfolio consisted of 26 projects, amounting to $1.41 billion with undisbursed balance of $923.5 million.
- Projects approved in FY08:
  - Bicol Power Restoration Project ($12.9 million).
  - National Roads Improvement and Management Project 2 ($232 million).
- Portfolio by sector (based on net commitments):
  - Human development: $371 million, 26 percent.
  - Transport and energy: $323 million, 23 percent.
  - Rural development and environment: $304.8 million, 22 percent.
  - Urban development: 244.0 million, 17 percent.
  - Social development: $136.8 million, 10 percent.
  - Governance and economic management: $32.9 million, 2 percent.
- Table summaries provided in source (selected figures):
  - Table 2. IBRD/IDA Lending Operations as of September 30, 2008:
    - Total disbursed 1/: 9,650.5 (IBRD), 244.0 (IDA) — Total 9,894.5.
    - Total commitments 1/: 11,839.2 (IBRD), 239.5 (IDA) — Total 12,078.7.
    - Total undisbursed: 997.5 (IBRD), 0 (IDA) — Total 997.5.
    - Total repaid: 7,161.4 (IBRD), 70.2 (IDA) — Total 7231.6.
    - 1/ Net of cancellations.
  - Table 3. IFC investments as of September 30, 2008:
    - Total commitments held by IFC and participants: 978.53.
    - Total commitments held by IFC alone: 973.64.
    - Approvals pending commitments: IFC 250; Participants 0.

### Country Assistance Strategy (CAS) and strategic focus
- Current CAS builds on the government's 2004–10 Medium-Term Philippines Development Plan with two main goals:
  - Economic growth.
  - Social inclusion.
- Two levers identified for pursuing these goals:
  - Achieving fiscal stability.
  - Improving governance.
- CAS theme: supporting Islands of Good Governance (successful experiences of public service delivery and effective public institutions) in national government agencies, local governments, and dynamic sectors.
- CAS Progress Report (June 2007) recommendations and actions:
  - Re-affirmed relevance of supporting Islands of Good Governance.
  - Recommended extension of the CAS for one year (to end-FY09).
  - Recommended scaling up of the Bank’s lending based on increased fiscal space and government demand.
- Coverage and future CAS:
  - Extended coverage of current CAS up to June 2009.
  - World Bank formulating new CAS to cover July 1, 2009 to June 30, 2012.
  - Emerging shifts in strategy include:
    - Increasing focus on direct poverty alleviation.
    - Operationalizing the focus on governance.
    - Expanding and re-focusing the knowledge agenda.
    - Strengthening linkages to global issues––climate change and disaster risk management.
  - New CAS expected to be discussed by the Bank’s Board in April 2009.

### Analytical, advisory, and knowledge activities (AAA and ESW)
- World Bank provides analytical and advisory activities leveraged through partnerships, trust funds, and policy dialogue.
- Programmatic approach to AAA in the Philippines, with Inclusive Growth as the AAA flagship theme addressing how to get more growth and make it more inclusive.
- Inclusive Growth AAA is in addition to AAA on:
  - Macro/fiscal, governance, health, education, local government issues, rural poverty reduction, environment and social safeguards.
- ESW delivery:
  - Two major pieces of ESW delivered in FY08:
    - Country Procurement Assessment Report.
    - Development Update for the Philippines Development Forum (PDF).
  - Three key ESW products expected in FY09:
    - Philippines Development Report.
    - Inclusive Growth.
    - Country Environment Assessment.
- Knowledge outreach:
  - 11 Knowledge for Development Centers (KDCs) around the country providing Bank publications and development literature via on-line access or hard copies.
  - Partnership with the Asian Institute of Management to create a Global Distance Learning Network offering distance learning sessions to a broad national, regional, and international audience.
  - External country website maintained by the Bank (www.worldbank.org.ph).

### Partnerships and policy dialogue (PDF and working groups)
- Strategic partnerships supported by bilateral and multi-donor trust funds administered by the World Bank are growing, aligning with the Paris Declaration.
- Philippines Development Forum (PDF):
  - Formerly called the Consultative Group (CG).
  - Primary government mechanism for facilitating substantive policy dialogue among development partners and stakeholders.
  - Main event held in country every 12 months; next PDF scheduled to convene in March 2009.
  - Chaired by the Philippine Government (Department of Finance); World Bank serves as co-chair.
  - PDF has eight working groups covering:
    - MDGs and social progress.
    - Growth and investment climate.
    - Economic and fiscal reforms.
    - Governance and anti-corruption.
    - Mindanao, sustainable rural development.
    - Infrastructure.
    - Decentralization and local government.
  - World Bank is actively engaged as co-lead convener or participant in all PDF working groups.

*ANNEX II: PHILIPPINES: RELATIONS WITH THE WORLD BANK GROUP*

### ANNEX IV: PHILIPPINES: STATISTICAL ISSUES

### ANNEX IV: PHILIPPINES: STATISTICAL ISSUES

### A. National Accounts — Findings and Issues
- Overall assessment: Data provision has some shortcomings, but is broadly adequate for surveillance.
- Main weaknesses in national accounts:
  - Large discrepancies in GDP estimates between the expenditure and production sides (the official GDP estimates), producing differences in estimates of GDP growth.
  - Deaths and births of establishments are not adequately captured; problem amplified by rapid structural change and a large number of new establishments, particularly in electronics and information technology industries.
  - Compilation relies on an outdated benchmark year and fixed input-output ratios: estimates extrapolate the 1988 benchmark year using fixed input-output ratios. Example: GDP statistics for the electronic sector suggest value added remained at 10 percent of exports over past years despite industry evidence domestic component of exports rising sharply. (Industry representatives indicate domestic component has increased significantly to around 30 percent in recent years.)
  - Inadequate statistical techniques for estimating GDP at constant prices:
    - For most activities, not all components of the production accounts are compiled; only value added is estimated.
    - Value added at current prices is calculated by extrapolating the benchmark year value with an indicator for the value of output; constant price data are estimated using a price deflator for output.
    - National accounts constant price estimates for merchandise exports and imports are constructed by multiplying 1985 values by quantity data (weights) from the foreign trade statistics for current years; this method produces inappropriate implicit deflators (e.g., for electric machinery products appearing high compared with world market prices).
- Consumer Price Index update:
  - CPI compiled since February 2004 using weights based on the 2000 Family Income and Expenditures survey.
  - Weight for the group comprising food, beverages, and tobacco decreased to 50 percent in 2000 from 55 percent in 1994.

- ROSC context:
  - A Report on the Observance of Standards and Codes (ROSC)—Data Module was published on the IMF website in August 2004.
  - The ROSC identified the national accounts and balance of payments statistics as needing particular attention.
  - The country subscribed to the Special Data Dissemination Standards in August 1996.
  - Note: Currently, the authorities are compiling new national accounts series based on the 1993 SNA guidelines.

### B. External Sector Statistics — Findings, Improvements, and Challenges
- Institutional improvement:
  - In 2005, Bangko Sentral ng Pilipinas (BSP) created a new Department of Economic Statistics with a unit dedicated to compiling, analyzing, and publishing balance of payments and the international investment position.
- Improvements since 2004:
  - Significant improvement in measurement of imports to correct underestimation of imports of electronic goods on a consignment basis.
  - Improvements in classification and recording of remittances.
  - Introduction of a new methodology for measuring trade credits.
  - Progress in the direct investment survey.
- External debt and reserves: Data are generally of good quality, though the data ROSC mission identified scope for improvement.
- Import revisions and trade discrepancies:
  - Revisions to imports narrowed the gap between national trade data and partner countries on a net basis.
  - An interagency task force on import statistics established in July 2002 to improve measurement of activity in the electronics sector (which accounts for about 43 percent of trade flows).
  - Surveys covering electronics sector raw material imports confirmed routine underestimation in reports to the National Statistics Office; import figures revised substantially back to 2000. (Data from 1996–99 have not been revised and remain underestimated.)
  - Substantial differences remain with partner country data on gross flows: partner country gross export and import flows are about 15 percent higher than corresponding national data.
  - BSP continuing research on discrepancies related to trade in processed goods, such as electronics and textiles.
- Challenges in coverage of nontraditional channels:
  - Since deregulation in the early 1990s, international transactions increasingly flow through nontraditional channels not adequately covered by statistical reporting.
  - Foreign Currency Deposit Units (FCDUs), accounting for about 70–75 percent of foreign exchange settlements, are exempt from reporting because of strict banking secrecy rules.
  - Steps taken to measure cross-border transactions that skirt the domestic banking system (e.g., flows through inter-company accounts); enterprise surveys have been introduced but are voluntary and will take time.
  - Unless secrecy rules associated with FCDU accounts are modified to facilitate collection of statistical data, compilers of the balance of payments will continue to face challenges in securing adequate source data.
  - Remittances underestimation: According to recent household surveys, typically about 30 percent of remittances of Overseas Filipino Workers were not channeled through the banking system, suggesting remittances may have been underestimated by about US$3 billion (3.8 percent of GDP) in 2002.

### C. Monetary and Financial Statistics — Progress
- Compilation largely conforms to Fund methodology.
- October 2007 MFS mission introduced:
  - Standardized report forms (SRFs) for reporting monetary statistics to the IMF.
  - An integrated monetary database (IMD) to meet the data needs of the BSP, APD, and STA.
- IMD will become operational when the BSP submits data in the SRFs.

### D. Government Finance Statistics — Findings, Reforms, and Data Limitations
- Fiscal transparency: Philippines meets requirements in many important respects, but fiscal and data ROSCs found areas needing strengthening.
- Key data and compilation issues:
  - Budget is presented on an obligations basis, while the deficit is reported on a cash basis.
  - Budget classification differs from accounting classification, complicating comparisons of budget and outcomes.
  - Consolidated fiscal outturns for items other than the fiscal balance are generally unavailable for levels of the public sector beyond the budgetary central (national) government.
  - Discrepancy between stocks and flows due to differences in time of recording and inconsistency in coverage and classification of some transactions related to debt guarantees and assumed debt.
  - Authorities agreed to compare coverage of data in the two debt recording systems, standardize classifications of these transactions, and improve recording of debt transactions according to international best practice.
- Institutional and systems improvements:
  - Introduction of a standardized chart of accounts and the electronic New Government Accounting System has facilitated compilation of annual financial statements for all levels of the public sector.
  - The accounting system allows compilation of accrual-based accounts and provides for compilation of a statement of cash flows; these statements become available six months after the end of a reference period.
  - Mission assisted authorities to revise classifications in the chart of accounts to allow consolidation of data for the nonfinancial public sector as a whole.
  - Recommendation to separate market and nonmarket activities of government-owned-and-controlled-corporations to enable compilation of consolidated data for the general government sector.
  - Annual data covering only the budgetary central government are reported for publication in the GFSY, and monthly budgetary central government data are published in the IFS.
  - A dedicated unit in the Department of Finance was created to compile government finance statistics in accordance with GFSM 2001 framework.

### Table of Common Indicators Required for Surveillance (as of December 5, 2008) — Selected Data Quality and Frequency Notes
- Exchange Rates
  - Date of Latest Observation: Dec 08
  - Date Received: Dec 5/08
  - Frequency of Data, Reporting, Publication: D, D, D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of Latest Observation: Nov 08
  - Date Received: Dec 5/08
  - Frequency: D, D, M
- Reserve/Base Money
  - Date of Latest Observation: Sep 08
  - Date Received: Nov 12/08
  - Frequency: D, W, W
  - Data Quality – Methodological Soundness: O, LO, LO, LNO
  - Data Quality – Accuracy and Reliability: LO, O, O, O, LO
- Broad Money
  - Date of Latest Observation: Sep 08
  - Date Received: Nov 12/08
  - Frequency: M, M, M
- Central Bank Balance Sheet
  - Date of Latest Observation: Aug 08
  - Date Received: Oct 20/08
  - Frequency: M, M, M
- Consolidated Balance Sheet of the Banking System
  - Date of Latest Observation: Jun 08
  - Date Received: Nov 4/08
  - Frequency: M, M, M
- Interest Rates
  - Date of Latest Observation: Dec 08
  - Date Received: Dec 5/08
  - Frequency: D, D, D
- Consumer Price Index
  - Date of Latest Observation: Nov 08
  - Date Received: Dec 5/08
  - Frequency: M, M, M
  - Data Quality – Methodological Soundness: O, O, O, O
  - Data Quality – Accuracy and Reliability: O, LO, O, LO, LO
- Revenue, Expenditure, Balance and Composition of Financing – General Government
  - Latest Observation: Q2/08
  - Date Received: Jul/08
  - Frequency: Q, Q, Q
  - Data Quality – Methodological Soundness: LO, LO, O, O
  - Data Quality – Accuracy and Reliability: LO, LO, LO, LO, LO
- Revenue, Expenditure, Balance and Composition of Financing – Central Government
  - Latest Observation: Oct 08
  - Date Received: Nov 18/08
  - Frequency: M, M, M
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Latest Observation: Q2/08
  - Date Received: Sep 17/08
  - Frequency: Q, Q, Q
- External Current Account Balance
  - Latest Observation: Q2/08
  - Date Received: Sep 18/08
  - Frequency: Q, Q, Q
  - Data Quality – Methodological Soundness: O, LO, LO, LO
  - Data Quality – Accuracy and Reliability: LNO, LO, O, LO, LO
- GDP/GNP
  - Latest Observation: Q3/08
  - Date Received: Nov 27/08
  - Frequency: Q, Q, Q
  - Data Quality – Methodological Soundness: LO, LO, O, LO
  - Data Quality – Accuracy and Reliability: LNO, LNO, O, LO, O
- Gross External Debt
  - Latest Observation: Q2/08
  - Date Received: Sep 30/08
  - Frequency: Q, Q, Q
- International Investment Position
  - Latest Observation: 2007
  - Date Received: Sep 30/08

(Notes from table footnotes preserved in methodology: frequency codes D/W/M/Q/A/I/NA; assessments O = fully observed, LO = largely observed, LNO = largely not observed, NO = not observed.)

### Supplementary Economic and Policy Highlights (selected from associated staff supplement)
- Growth and inflation outlook (staff projections and recent developments):
  - Staff expects the economy to grow 2.9 percent in 2009 (revised down from earlier projection of 3.5 percent).
  - Headline inflation fell from 9.9 percent in November to 8.0 percent in December.
  - Inflation expected to fall to 4.8 percent in 2009 compared to previous forecast of 6 percent.
- Financial sector and markets:
  - Banks’ mark-to-market losses for third quarter of 2008 ranged from 4 to 11 percent of capital for some of the largest banks.
  - In December 2008 and January 2009, BSP placed 18 small rural banks under receivership of the PDIC for insufficient assets and unsafe and unsound banking practices.
  - BSP is in the process of introducing differentiated capital requirements consistent with pillar 2 of the Basel II framework.
- External sector dynamics:
  - Exports fell by an average of 13½ percent in October and November.
  - Remittance inflows growth slowed to 3.3 percent in October from 16.4 percent in September.
  - International reserves rose by US$0.3 billion in December to $37.1 billion.
- Fiscal policy:
  - Recent fiscal developments suggest a lower-than-anticipated deficit in 2008; 2009 deficit expected to be in line with original projections.
  - Staff considers the cap on the 2009 deficit at 2 percent of GDP still appropriate.
  - National government successfully sold $1.5 billion worth of 10-year bonds in the international debt market in early 2009; the offering was four times oversubscribed.
- Selected macro indicators (from Table 1, Philippines: Selected Economic Indicators, 2004-09):
  - Nominal GDP (2007): P6,648 billion ($144.1 billion)
  - Population (2007): 88.6 million
  - GDP per capita (2007): $1,624
  - Poverty headcount ratio at $2 a day at PPP (2003): 43 percent
  - IMF quota: SDR 879.9 million
  - Main products and exports: Electronics and agricultural products
  - Unemployment rate (2007): 7.3 percent
  - Real GDP growth: 2004: 6.4; 2005: 5.0; 2006: 5.4; 2007: 7.2; 2008 Est.: 4.4; 2009 Proj.: 2.9
  - CPI (annual average): 2004: 6.0; 2005: 7.7; 2006: 6.2; 2007: 2.8; 2008 Est.: 9.3; 2009 Proj.: 4.8
  - CPI (end year): 2004: 8.6; 2005: 6.7; 2006: 4.3; 2007: 3.9; 2008 Est.: 8.0; 2009 Proj.: 4.1
  - Gross investment (percent of GDP): 2004: 16.7; 2005: 14.6; 2006: 14.5; 2007: 15.3; 2008 Est.: 15.5; 2009 Proj.: 15.0
  - National saving (percent of GDP): 2004: 18.6; 2005: 16.6; 2006: 19.0; 2007: 19.7; 2008 Est.: 17.5; 2009 Proj.: 16.8
  - National government balance (authorities definition, percent of GDP): 2004: -3.8; 2005: -2.7; 2006: -1.1; 2007: -0.2; 2008 Est.: -0.5; 2009 Proj.: -1.7
  - Nonfinancial public sector debt (percent of GDP): 2004: 95.2; 2005: 85.9; 2006: 73.9; 2007: 60.9; 2008 Est.: 59.9; 2009 Proj.: 60.4
  - Broad money (M3) end-period percent change: 2004: 10.3; 2005: 10.3; 2006: 22.7; 2007: 10.6; 2008 Est.: 13.1; (Note: 2008 data point annotated as October 2008)
  - Interest rate (91-day treasury bill, end of period, percent): 2004: 8.4; 2005: 6.4; 2006: 5.1; 2007: 4.2; 2008 Est.: 5.8 (Note: 2008 data point annotated as December 2008)
  - Export value (percent change): 2004: 9.8; 2005: 3.8; 2006: 15.6; 2007: 6.4; 2008 Est.: 0.9; 2009 Proj.: -0.4
  - Current account (percent of GDP): 2004: 1.9; 2005: 2.0; 2006: 4.5; 2007: 4.4; 2008 Est.: 2.0; 2009 Proj.: 1.8
  - Total external debt (percent of GDP): 2004: 70.7; 2005: 62.6; 2006: 51.8; 2007: 45.7; 2008 Est.: 39.2; 2009 Proj.: 40.9
  - Reserves, adjusted (US$ billions): 2004: 15.2; 2005: 18.0; 2006: 23.0; 2007: 33.8; 2008 Est.: 37.2; 2009 Proj.: 37.2
  - Exchange rate (period averages) Pesos per U.S. dollar: 2004: 56.0; 2005: 55.1; 2006: 51.3; 2007: 46.1; 2008 Avg (to Nov 2008): 44.5

*Source: IMF Staff Report supplement and Annex IV: Philippines — Statistical Issues (as provided).*

### 4.6 percent during the first three quarters of 2008, led by weaker external demand and

### _cr0962 - 4.6 percent during the first three quarters of 2008, led by weaker external demand and

### Economic performance and external position
- GDP growth moderated to 4.6 percent over the first three quarters of 2008 from 7.2 percent in 2007.
- Headline inflation:
  - peaked in August at 12.4 percent,
  - fell to 8.0 percent in December 2008.
- External position and reserves:
  - International reserves reported at US$37 billion, 240 percent of short-term debt (section opening).
  - Net international reserves increased to US$35.5 billion as of end 2008 (authorities’ statement).
  - Current account recorded a surplus of US$1.2 billion during January–September 2008 (authorities’ statement).
  - Current account projected at about US$2.0 billion in 2009 (authorities’ statement).
- Contributors to weaker growth: weaker external demand, reduced consumption from the oil and food price shock; offsetting factors included robust remittances and expanding services.

### Financial market spillovers, banking sector exposures and risks
- Global turmoil impact:
  - Equity prices declined by around 48 percent in 2008, with almost half of the decline since mid-September 2008.
  - Less than 2 percent of the population invested in capital markets (limiting wealth effect).
- Credit and sovereign risk:
  - Philippine sovereign spreads wider by 300 bps (EMBI+ PHL) since end-August; spreads remain 150−200 basis points lower than the EMBI+ Global average.
  - Market-based expected default frequencies of banks at elevated levels (textual description).
- Direct exposures to failed/distressed global institutions (as of end-September 2008):
  - Direct exposures to Lehman Brothers: US$350 million (3 percent of equity), largely provisioned for.
  - Combined exposure to Lehman Brothers and ten other distressed major global financial institutions: US$1.5 billion or 13 percent of equity.
- Market risk channels: large holdings of debt securities and credit linked notes led to mark-to-market losses as domestic interest rates and sovereign spreads changed.
- Banking system status: on average well-capitalized.

### Policy responses — Monetary and liquidity measures
- Monetary policy easing as inflation outlook improved with receding commodity prices and expected slowdown.
- BSP actions to address financial market fallout:
  - Reserve requirement reduced by 2 percentage points to 19 percent (from 21 percent).
  - Amount allocated for the rediscount window doubled from PhP 20 billion to PhP 40 billion.
  - Opened a dollar-denominated deposit window and a dollar repurchase facility to address dollar interbank tightness.
  - Enhanced day-to-day monitoring and stress-testing exercises; mark-to-market rules relaxed to provide temporary relief.
- Interest-rate actions and liquidity:
  - BSP raised policy rates by a combined 100 bps in June, July and August 2008 in response to inflation; policy shifted to neutral in October and November 2008.
  - Directors saw scope for further monetary easing if inflation expectations continue to fall.
  - Recommendation: keep exchange rate flexible, limit central bank FX market participation to smoothing erratic movements; consider a strategy of raising interest rates and limited unsterilized intervention while preserving high FX reserves in response to a temporary financial shock (with caution against inducing procyclical interest-rate movements).

### Fiscal stance, reforms, and consolidation
- 2008 fiscal balances and composition:
  - 2008 budget expected to record a deficit of 1 percent of GDP (improvement over 2007 deficit of 1.7 percent of GDP) — (earlier paragraph).
  - National Government deficit (excluding privatization receipts) projected at 1.4 percent of GDP in 2008, down from 1.5 percent in 2007 (authorities’ statement).
  - Tax effort expected to remain broadly unchanged at around 14 percent of GDP (section opening).
  - Tax revenue loss from 2008 tax reforms: about 0.6 percent of GDP in 2008 (authorities’ statement).
  - Current expenditures maintained at 14.2 percent of GDP; capital spending constrained by absorptive capacity at 2.5 percent of GDP.
  - Nonfinancial public sector debt in percent of GDP projected to decline modestly in 2008 (text chart reference).
- 2009 fiscal policy and projections (authorities’ proposal):
  - Proposed fiscal deficit of 1.5 percent of GDP in 2009 to accommodate higher capital expenditures and increased pro-poor spending.
  - Targeted tax revenues of 15.9 percent of GDP and expenditures of 16.7 percent of GDP for 2009.
  - Contingency: deficit capped at 2 percent of GDP in the event of a shortfall in tax revenues; expenditures to be scaled back if needed.
- Fiscal reform priorities:
  - Broaden tax base, rationalize tax incentives, accelerate tax administration reforms, raise and index excise taxes.
  - Rationalization of the National Food Authority (NFA) and performance targets for GOCCs.
  - Priority on power sector privatization and turnover of transmission facilities to the National Grid Corporation of the Philippines.
  - Support for a formal medium-term fiscal framework and introduction of a fiscal rule and fiscal responsibility law, subject to Congressional support.

### Executive Board views and recommendations
- Assessment:
  - Economy faces strong headwinds but starts from a position of strength.
  - Growth expected to moderate near term as external demand falls and private consumption wanes with more modest remittance inflows.
  - Weaker domestic demand plus receding commodity prices should anchor expectations of lower inflation.
- Financial sector advice:
  - Welcome strengthening of financial sector soundness and supervision; maintain close monitoring and supervisory vigilance.
  - Concern that continued global strains could cause further losses on banks’ securities, reduce external financing availability, and increase off-balance sheet risks.
  - Urge transparency despite temporary regulatory forbearance (including relaxed mark-to-market rules).
  - Encourage flexible use of existing liquidity facilities; consider improvements to the prompt corrective action (PCA) framework, stepped-up surveillance of off-balance sheet activities, legal authority for BSP to disclose enforcement actions in appropriate cases, and strengthened legal protection for bank supervisors.
  - Support for proposed increase in PDIC deposit coverage, recapitalization of PDIC, enhanced bank resolution toolkit (including bridge-bank facility), and reconsideration of more flexible application of purchase-and-assumption tool; make restructuring decisions irreversible and strengthen legal protection of PDIC staff.
- Macroeconomic recommendations:
  - Monetary policy: further easing possible if inflation expectations fall; maintain exchange-rate flexibility; limit FX intervention to smoothing; preserve prudently high FX reserves.
  - Fiscal policy: measured fiscal stimulus to cushion slowdown while preserving fiscal sustainability and credibility; raise tax collection effort, broaden tax base, rationalize tax incentives; limit fiscal deficit to no more than 2 percent of GDP, with contingency plans for fiscal pressures.
  - Structural: streamline NFA and GOCCs, complete power sector privatization.

*Source: IMF staff report and authorities’ statements contained in the provided content unit.*

### 9. Staff’s assessment that the Philippines’ exchange rate is in line with fundamentals is

### _cr0962 - 9. Staff’s assessment that the Philippines’ exchange rate is in line with fundamentals is

### Exchange rate assessment and monetary policy
- Staff’s assessment that the Philippines’ exchange rate is in line with fundamentals is appreciated; authorities value incorporation of remittances in the quantitative assessment of exchange rate equilibrium.
- The peso remains market determined with BSP’s participation in the foreign exchange market aimed only at smoothing volatility and promoting more orderly market movements.
- The peso has faced depreciation pressures from capital flow reversals and the uncertain global environment, similar to other emerging economies.
- Accumulation in international reserves over the past years has provided the BSP ample policy space to dampen disruptive effects of exchange rate volatility.
- Monetary policy actions:
  - BSP cut policy rates by 50 bps in its December 18, 2008 meeting.
  - The central bank believes that inflation will be falling within the target by 2010.
  - Outlook supported by a downward shift in the balance of risks following easing of commodity prices, moderation of inflation expectations, and expected slowdown in economic activity.
  - Policy objective: continue to focus on achieving price stability while allowing room for economic growth.

### Banking sector resilience and measures adopted
- Banking sector fundamentals and prudential position:
  - Capital adequacy ratio averaging at around 15 percent.
  - Loan-to-deposit ratio is near maximum at around 72 percent given reserve requirement at 21 percent (reduced to 19 percent on November 19, 2008).
  - Nonperforming loans (NPLs) have declined in the last few years to around 5 percent of total loans.
  - Exposures to risky financial instruments are low.
  - Commercial and universal banks have adopted Basel II since June 2007.
- Measures adopted to strengthen resilience:
  - BSP introduced measures to support interbank liquidity to address risks of tight liquidity in the banking system.
  - Surveillance remains strong through day-to-day monitoring and stress-testing exercises.
  - Proposal to double deposit insurance coverage to PhP 500,000 while public communication has been intensified to assure depositors of the soundness of the banking system.
  - Regulatory forbearance in mark-to-market accounting has been introduced in line with international best practice.

### Contingency framework, bank resolution, and supervisory powers
- Authorities consider the existing contingency framework adequate but note staff suggestions for further improvements in some areas.
- Prompt corrective action (PCA) framework is considered appropriate for remedial actions in dealing with banks under stress.
- Authorities’ views on staff proposals:
  - Concern that a staff-suggested rule-based approach may restrict BSP flexibility needed to address special circumstances across individual bank situations.
  - Generally receptive to the proposal for a bridge bank facility, but reiterated that greater flexibility in applying the purchase-and-assumption (P&A) model should not come at the expense of curtailing underlying rights of depositors.
  - BSP broadly agrees with the principle of increasing the maximum deposit insurance coverage in the context of reforms to strengthen the Philippine Deposit Insurance Corporation (PDIC); recapitalization of the PDIC is subject to legislative action.
  - Agreed on the imperative for legal protection of all supervisors and the restriction of shareholder rights during bank restructuring.

### Concluding remarks
- The Philippine economy has been holding up relatively well under the current global financial crisis and economic downturn.
- While economic growth has moderated as external demand weakened, overall macroeconomic and financial stability has remained.
- Authorities recognize risks from a prolonged and perhaps deep global economic downturn and remain committed to:
  - Sound macroeconomic management.
  - Structural reforms to fortify the economy in the near term and allow growth to revert to trend in the medium term.
- Authorities value the Fund’s views and intend to continue working closely with it through regular Article IV consultations and technical assistance programs.

*Source: _cr0962 - 9. Staff’s assessment that the Philippines’ exchange rate is in line with fundamentals is — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0962.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0962.pdf_