## _cr1159

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### Developments and outlook
- Growth and composition
  - GDP growth at 7½ percent (year/year) during the first three quarters of 2010.
  - Growth recovered strongly in the first three quarters of 2010; private consumption, investment, and exports contributed broadly.
  - Support from policy stimulus, temporary pre-election spending, post-typhoon reconstruction, and re-stocking of global and regional inventories.
  - Private consumption supported by robust remittances; investment buoyed by reconstruction and growing interest in the business process outsourcing (BPO) sector.
- Labor market and social indicators
  - Unemployment rate: nearly 7 percent (as of the third quarter).
  - Underemployment rate: 18 percent (as of the third quarter).
- External sector and capital flows
  - Balance of payments in sizable surplus driven by strong exports, remittances, sovereign bond issuance, and other capital inflows.
  - Capital inflows rose substantially since September 2010, especially portfolio inflows from the United States, United Kingdom, Hong Kong SAR, and Singapore.
  - International reserves rose by about $17 billion during January–November, to $61 billion (10 months of imports).
  - BSP forward book rose by about $10 billion during January–October.
  - The peso appreciated by around 4 percent in both nominal and real effective terms during January-November.
  - EMBI spread narrowed to 150 basis points as of late December, from around 250 points in June.
- Financial conditions
  - Credit growth picked up since mid-2010; benchmark government bond yields fell to historical lows amid ample liquidity and rising foreign demand.
  - Excess reserves in the banking system remain elevated.
- Inflation and monetary stance
  - BSP inflation target: 3½–5½ percent.
  - Headline inflation averaged 3.8 percent (year/year) during January-November 2010.
  - Food inflation subdued; core inflation contained in the 3–4 percent range.
  - Inflation expectations over the coming year remain within the target range (BSP December inflation report).
- Fiscal developments
  - Fiscal revenue fell short of budget targets in January–September 2010.
  - National government deficit came in slightly below targeted level (3.3 percent of GDP) owing to a sharp slowdown in spending in the third quarter.
  - Philippines issued a local currency–denominated global bond in September 2010.
- Staff projections
  - Growth projected to average 7 percent in 2010 and to moderate to 5 percent in 2011.
  - Balance of payments projected to remain in surplus as remittances and export diversification support the current account and capital inflows persist.

### Risks, scenarios, and potential growth
- Risk assessment
  - Overall risk balance: Risks to the outlook are broadly balanced.
  - Upside risk: High confidence could further boost investment and growth.
  - Downside risks: Negative shocks to global growth would affect Philippine exports and remittances; large capital inflows could generate macroeconomic volatility if not managed carefully.
- Near-term risks
  - Positive domestic sentiment may boost private investment more than expected.
  - Renewed shocks to global growth and financial markets would affect exports and remittances.
  - Surges in capital inflows could lead to asset price booms and busts and raise potential for destabilizing outflows.
- Growth projections and authorities’ views
  - Staff projection: growth to continue at 5 percent annually over the medium term.
  - Authorities’ view: expect growth could reach the 7–8 percent range in 2011 and the medium term.
  - Staff view: authorities’ 7–8 percent target would require additional measures (rebalance toward investment, improve climate for private investment, strengthen public infrastructure, address impediments to job creation and productivity).
- Box 1 — Potential growth and reform scenario (illustrative)
  - Historical potential growth: risen from 3-4 percent in the 1990s to 4½–5 percent in recent years.
  - Cross-country signals: increase in average secondary schooling years and transition from agriculture to industry/services (1996–2005) could be associated with an improvement in TFP growth by 1 percentage point; improvement in institutional quality could add 0.1 percentage point to TFP growth.
  - Investment target: raise the investment rate from historical average of 15 percent of GDP to 19½ percent by 2015 to raise capital contribution from 1 percent to 2 percent by 2015.
  - Growth contribution table (illustrative):
    - Potential growth (percent): 4.6 7.0
    - Contribution of TFP (percent): 2.0 3.0
    - Contribution of capital (percent): 1.0 2.0
    - Contribution of labor (percent): 1.6 2.0

### Monetary policy and managing external inflows
- Normalizing the monetary stance
  - Background: 200-basis-point cut in policy rates during December 2008–July 2009; liquidity support measures; BSP began unwinding liquidity support since early 2010.
  - Staff’s view: BSP’s holding stance appropriate to date but proactive response to price pressures remains important; monetary policy tightening likely needs to start in the near term to head off inflation risks.
  - Financial conditions: real policy rates close to zero and below a Taylor-rule implied “neutral” rate; treasury bill yields fell below policy rates in mid-November.
  - Authorities’ view: current monetary stance consistent with low inflation and expansion; BSP expects inflation to remain well within the target range in 2011–12 absent adverse shocks.
- Managing external inflows
  - Authorities’ actions: liberalized controls on capital outflows in October; employed macro-prudential measures; prepayment of some external debt; limited FX intervention.
  - Staff’s view: real exchange rate broadly in line with medium-term fundamentals; scope to shift emphasis away from reserve accumulation toward greater exchange rate flexibility and limit intervention to smoothing operations.
  - Box 2 — Remittances and equilibrium exchange rate:
    - Example: a 3 percent annual retirement rate would contribute to a decline in remittances to 5 percent of GDP by 2050 from 13 percent of GDP in 2010.
    - Intertemporal consumption smoothing targets:
      - Constant real per capita annuity: 1.8 (percent of GDP).
      - Constant annuity/output ratio: 8.5 (percent of GDP).
      - Constant real annuity: -1.3 (percent of GDP).
    - Staff estimate: stripping temporary factors yields a medium-term current account balance of 1.9 percent of GDP, in line with desired 1.8 percent of GDP.
  - Box 3 — Capital flows risks:
    - Determinants: growth differential relative to advanced countries; interest rate differentials; degree of global risk aversion (VIX); exchange rate changes.
    - Outlook: sizable growth- and interest-rate differentials likely to persist in 2011 and the medium term, suggesting continued impetus for capital inflows; shocks to global risk aversion could cause sudden stops or reversals.
    - Channels: inflows increase liquidity, boost domestic demand, raise asset prices; main channel is expanding credit and reducing cost of finance.

### Fiscal consolidation, revenue, and expenditure priorities
- Fiscal targets and stance
  - Authorities’ plan: reduce the fiscal deficit from nearly 4 percent of GDP in 2010 to 2 percent by 2013.
  - 2011 budget: targets reduction in national government deficit to 3.2 percent of GDP (authorities’ definition, includes privatization receipts) implying a withdrawal of fiscal stimulus of about ½ percent of GDP.
  - Staff baseline: assuming no additional revenue measures, the deficit could remain slightly above 3½ percent of GDP in 2011.
- Revenue-side recommendations
  - Raise the tax effort; initial focus on improving tax administration.
  - Early actions to complement administration improvements: broaden the tax base and simplify the tax system.
  - Specific areas: strengthen excise taxes; rationalize fiscal incentives; address inefficiencies in the VAT.
- Expenditure reorientation and public investment
  - Reorient spending to support inclusive long-term growth; limit rice and transport subsidies; move to targeted conditional cash transfer programs.
  - Roll-out PPPs to improve infrastructure; evaluate PPPs with sound cost-benefit analyses and reflect fiscal risks in fiscal accounts.
  - Caution against rapid growth in civil service wage bill; implement plan to rationalize public services.
- Fiscal framework strengthening
  - Support for enacting a fiscal responsibility law, publishing a fiscal risk statement, and adopting a medium-term budget framework.
- Fiscal indicators and public debt
  - Nominal GDP (2009): P7,679 billion ($161.2 billion)
  - Public debt stands at nearly 60 percent of GDP and 3 times fiscal revenue.
  - Debt service absorbs a quarter of primary expenditure.
  - Public debt projections: public debt would be nearly 50 percent of GDP by 2015 (under authorities’ medium-term objective).
  - Staff view: greater consolidation could be considered to reduce public debt further and create more fiscal space.

### Financial sector resilience and market development
- Recent performance and indicators
  - Universal and commercial banks’ non-performing loan ratios: 3.2 percent on average as of October 2010; NPL ratios noted also as 5.8 (2007), 4.1 (2008), 4.1 (2009), 4.5 (2010 Q1) in selected tables.
  - Banks’ capital adequacy ratios: about 16 percent as of June (latest data available); consolidated CAR: 15.7 (2007), 15.5 (2008), 15.8 (2009), 16.0 (2010 Q1).
  - Banks’ profitability: net income growing by 22 percent (year/year) in first half of 2010.
  - Asset prices: stock prices have risen rapidly since early 2010; price-earnings ratios regained pre-crisis levels; property prices remain moderate.
- Risks flagged
  - Concentration risk from conglomerates magnifying “connected” lending.
  - Interest rate risk given large share of securities in banks’ assets.
  - External inflows could further fuel liquidity and swamp small local financial markets.
- Policy and development recommendations
  - Monitor concentration risk and maturity mismatches for infrastructure PPP lending (BSP allowed single borrower limit up to 25 percent of net worth for PPP projects).
  - Financial market development to channel inflows: harmonize taxes, lower regulatory burden, develop corporate bond and derivative markets, develop benchmark yield curve, enhance third-party credit, develop hedging tools, reduce time and expense of new debt offerings.
  - Strengthen supervision and regulation: approve proposed amendments to the BSP Charter; move to a more risk-based approach to capital requirements; introduce ICAAP under Basel II in 2011; continue AML/CFT legislation improvements.
  - Banks appear well placed to handle Basel III given high Tier 1 capital and low loan-to-deposit ratios.

### Debt sustainability and stress tests (APPENDIX I)
- Public debt outlook and projections
  - Non-financial sector public debt declined from over 100 percent of GDP in 2003 to below 60 percent of GDP in 2010.
  - Under government’s medium-term objective (national government deficit to 2 percent of GDP), public debt projected to decline to 47.1 percent of GDP by 2015.
  - Gross financing need projected to decline from 16 percent of GDP in 2010 to 11 percent of GDP by 2015.
  - Shock scenario: if deficit remained 1 percent of GDP higher or medium-term growth lower by 1 percent, debt levels would remain stable but above 55 percent of GDP through 2014.
  - Main vulnerability: high share of foreign currency debt exposes public debt to exchange rate risk; a one-time real depreciation of 30 percent would entail an 18 percent jump in external debt ratio from end-2009 level.
- Key projection series (selected)
  - Public sector debt (baseline, percent of GDP): 2005: 85.9; 2006: 73.9; 2007: 61.0; 2008: 60.7; 2009: 60.7; 2010: 58.0; 2011: 57.3; 2012: 55.8; 2013: 53.7; 2014: 51.5; 2015: 47.1.
  - Of which foreign-currency denominated (percent of GDP): 2005: 52.3; 2006: 45.3; 2007: 34.9; 2008: 35.5; 2009: 35.7; 2010: 33.6; 2011: 32.4; 2012: 31.6; 2013: 30.9; 2014: 30.0; 2015: 28.1.
  - Gross financing need (percent of GDP): 2005: 24.3; 2006: 24.2; 2007: 18.1; 2008: 14.9; 2009: 19.2; 2010: 15.9; 2011: 15.8; 2012: 13.4; 2013: 11.1; 2014: 11.1; 2015: 10.9.
  - External debt (baseline, percent of GDP): 2005: 62.9; 2006: 52.1; 2007: 46.0; 2008: 39.0; 2009: 40.1; 2010: 38.6; 2011: 39.2; 2012: 39.4; 2013: 39.5; 2014: 39.4; 2015: 39.1.
- Stress tests
  - Individual permanent one-half standard deviation shocks to real interest rate, growth, and the current account produce modest deteriorations in debt ratios.
  - Combined scenarios and contingent liabilities (10 percent of GDP) can raise public debt substantially; a one-time 30 percent real depreciation materially increases external debt.

### Structural reforms, IMF–World Bank collaboration, and institutional support
- Macro-critical reform areas (joint identification)
  - (i) recovery and potential growth; (ii) public finance; and (iii) the financial sector.
- Bank–Fund collaboration priorities (October 2010–September 2011)
  - Joint work on Philippines Development Report, public expenditure reviews, TA in tax administration, public financial management, and financial sector reforms.
- Specific structural priorities to raise potential growth
  - Investment: higher public investment and catalyzing private investment through improved business climate, reduced corruption, regulatory reform, and capital market development.
  - Employment: job creation via higher investment, labor market measures, job training and search assistance.
  - Productivity: invest in human capital, improve institutional quality, shift up the value chain from agriculture to industry/services.
  - PPPs emphasized to address infrastructure constraints; Medium-Term Philippine Development Plan (2010–16) to outline growth strategies.

### Statistical issues, data adequacy, and recent indicators
- Data adequacy
  - Data provision has shortcomings but is broadly adequate for surveillance.
  - National accounts weaknesses: large statistical discrepancies between expenditure and production sides; reliance on outdated benchmark year (1988) and fixed input-output ratios.
  - External sector: nontraditional channels and FCDU reporting exemptions present challenges.
  - Government finance statistics: budget on obligation basis while deficit reported on cash basis; consolidation gaps beyond national government.
- Key recent indicators (selected)
  - Real GDP growth: 2010: 7.0 (staff projection) / 7.3 percent actual noted elsewhere.
  - CPI (annual average): 2010: 3.8; 2011 (Proj.): 3.9.
  - International reserves: rose to $62.4 billion in December and $63.6 billion in January (equivalent to 10½ months of imports).
  - Broad money growth: 10.6 percent in December (from 7.5 percent in November).
  - CPI inflation: 3.5 percent (year/year) and 0.8 percent (month/month) in January; core inflation sequential rise to 0.4 percent (month/month) in January.
  - Reserves, adjusted (US$ billions): 2007: 33.8; 2008: 35.9; 2009: 44.2; 2010: 62.9; 2011 (Proj.): 78.4.

### Staff appraisal — policy priorities and recommendations
- Overarching appraisal
  - The strong recovery and improved investor sentiment provide a window of opportunity for decisive reforms to raise inclusive growth.
  - Policy strategy should focus on preserving macroeconomic stability while enhancing medium-term growth prospects.
- Priority policy actions
  - Monetary policy: gradual normalization of monetary policy as inflation pressures emerge; tightening likely needed in the near term to head off liquidity and inflation risks, with timing recalibrated if tail risks materialize.
  - Managing capital inflows: careful management with greater exchange rate flexibility; limit FX intervention to smoothing operations; rely more on market development to absorb inflows.
  - Fiscal consolidation: anchor consolidation in higher revenue (raise the tax effort), consider greater consolidation to lower public debt and expand fiscal space, reorient spending toward social sectors and infrastructure.
  - Financial sector: continue strengthening supervision, monitor concentration and interest rate risks, develop financial markets to channel inflows toward long-term investment.
  - Structural reforms: rebalance the economy toward private investment, address impediments to job creation and productivity to reach higher growth targets (authorities’ 7–8 percent objective would require additional measures).
- Surveillance recommendation
  - Next Article IV consultation recommended on the standard 12-month cycle.

*Source: Executive Summary and selected sections, _cr1159.*

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

### _cr1159 - Executive Summary

### Developments and outlook
- Growth recovered strongly in the first three quarters of 2010, with GDP growth at 7½ percent (year/year) during the first three quarters of 2010.
- Growth composition and drivers:
  - Broad-based recovery across private consumption, investment, and exports.
  - Support from policy stimulus, temporary pre-election spending, post-typhoon reconstruction, and the re-stocking of global and regional inventories.
  - Private consumption supported by robust remittances; investment buoyed by reconstruction and growing interest in the business process outsourcing (BPO) sector.
- Labor market and social indicators:
  - Unemployment rate: nearly 7 percent (as of the third quarter).
  - Underemployment rate: 18 percent (as of the third quarter).
- External sector and capital flows:
  - Balance of payments in sizable surplus driven by strong exports, remittances, sovereign bond issuance, and other capital inflows.
  - Capital inflows rose substantially since September 2010, especially portfolio inflows from the United States, United Kingdom, Hong Kong SAR, and Singapore.
  - International reserves rose by about $17 billion during January–November, to $61 billion (10 months of imports).
  - BSP forward book rose by about $10 billion during January–October.
  - The peso appreciated by around 4 percent in both nominal and real effective terms during January-November.
  - EMBI spread narrowed to 150 basis points as of late December, from around 250 points in June.
- Financial conditions:
  - Credit growth picked up since mid-2010; benchmark government bond yields fell to historical lows amid ample liquidity and rising foreign demand.
  - Excess reserves in the banking system remain elevated.
- Inflation and monetary stance:
  - BSP inflation target: 3½–5½ percent.
  - Headline inflation averaged 3.8 percent (year/year) during January-November 2010.
  - Food inflation subdued; core inflation contained in the 3–4 percent range.
  - Inflation expectations over the coming year remain within the target range (BSP December inflation report).
- Fiscal developments:
  - Fiscal revenue fell short of budget targets in January–September 2010.
  - National government deficit came in slightly below targeted level (3.3 percent of GDP) owing to a sharp slowdown in spending in the third quarter.
  - Philippines issued a local currency–denominated global bond in September 2010.
- Staff projections:
  - Growth projected to average 7 percent in 2010 and to moderate to 5 percent in 2011.
  - Balance of payments projected to remain in surplus as remittances and export diversification support the current account and capital inflows persist.

### Risks and challenges
- Overall risk balance: Risks to the outlook are broadly balanced.
- Upside risks:
  - High confidence could further boost investment and growth.
- Downside risks:
  - Negative shocks to global growth would affect Philippine exports and remittances.
  - Large capital inflows could generate macroeconomic volatility if not managed carefully.
- Key policy challenge:
  - Manage the exit from stimulus policies in a complicated external environment while advancing reforms to enhance the pace and quality of growth.
- Structural constraints to growth:
  - Low saving rate and low investment rate relative to regional peers.
  - Low tax effort constraining fiscal space and public investment.
  - Need to address impediments to job creation and productivity to reach higher growth targets.

### Policy priorities and recommendations
- Monetary policy:
  - The accommodative stance has supported the recovery and was appropriate so far given low inflation.
  - Staff view: some tightening in financial conditions is likely needed in the near term to head off inflation risks and keep inflation within the target range over the next two years.
- Managing external inflows:
  - Rising external inflows in 2010 increased international reserves and contributed to some exchange rate appreciation.
  - Authorities have liberalized capital outflows and eschewed capital controls.
  - With reserves at comfortable levels ($61 billion) and the peso broadly in equilibrium, staff sees scope to rely more on greater exchange rate flexibility going forward.
- Fiscal policy:
  - Authorities’ plan: reduce the fiscal deficit from nearly 4 percent of GDP in 2010 to 2 percent by 2013.
  - Staff view: greater consolidation could be considered to reduce public debt further and create more fiscal space for future shocks.
  - To achieve consolidation while allowing provision of key public goods and services, it will be essential to raise the tax effort, which is low by regional standards.
- Financial sector:
  - The financial sector remains sound and asset bubbles have not been a concern to date.
  - Asset price movements and rising capital inflows warrant careful attention.
  - Further financial market development could help channel external inflows toward infrastructure investment.
- Structural reforms to enhance growth:
  - To reach the government’s 7–8 percent growth objective, continue efforts to rebalance the economy toward investment—particularly private investment—and to address impediments to job creation and productivity.

### Staff appraisal (summary)
- The Philippine economy’s strong recovery and improved investor sentiment provide a window of opportunity for decisive reforms to raise inclusive growth.
- Policy strategy should focus on preserving macroeconomic stability while enhancing medium-term growth prospects through:
  - Gradual normalization of monetary policy as inflation pressures emerge;
  - Careful management of capital inflows with greater exchange rate flexibility and market development;
  - Fiscal consolidation anchored in higher revenue to lower debt and expand fiscal space;
  - Continued strengthening of financial sector resilience and targeted reforms to boost private investment and productivity.

*Source: Executive Summary, _cr1159.*

### 9.      Risks to the outlook are broadly

### 9.      Risks to the outlook are broadly

### Risks to the near-term outlook
- Positive domestic economic sentiment may boost private investment more than expected.
- Renewed shocks to global growth and financial markets would affect Philippine exports and remittances.
- Surges in capital inflows could lead to asset price booms and busts, and raise the potential for future destabilizing outflows.
- Historically the Philippines has not been a large recipient of capital inflows, but the historical experience does not include a comparable period of abundant global liquidity.

### Growth projections and authorities’ views
- Staff projection: growth to continue at 5 percent annually over the medium term.
- Staff assessment: projection is in line with regional peers and somewhat higher than staff’s projections for the October 2010 World Economic Outlook.
- Staff view: the projection is lower than the authorities’ 7–8 percent target, which would require additional measures to attain.
- Required measures (staff): rebalance the economy toward investment, improve climate for private investment, strengthen public infrastructure, and address impediments to greater job creation and productivity.
- Authorities’ view: expect growth could reach the 7–8 percent range in 2011 and the medium term, citing growing confidence, new initiatives such as PPPs, diversification of exports, and robust remittances.
- Authorities’ inflation outlook: more benign near-term inflation outlook than staff; project inflation to stay well within the target range.
- Authorities’ risk emphasis: concerns about capital inflows, particularly as easing of monetary policy in advanced countries could exacerbate future inflows to emerging Asia, including the Philippines.

### Box 1 — Potential growth and reform scenario
- Historical potential growth: risen from 3-4 percent in the 1990s to 4½–5 percent in recent years (estimation methods: simple filtering, production function, multivariate time-series).
- Sources of growth shift: rise in contribution of TFP and a fall in contribution of capital.
- Cross-country panel regression signals:
  - An increase in average secondary schooling years and transition from agriculture to industry and services during 1996–2005 could be associated with an improvement in TFP growth by 1 percentage point.
  - An improvement in institutional quality during the same period could be associated with an improvement in TFP growth by 0.1 percentage point.
- Illustrative reform scenario elements to reach authorities’ 7-8 percent target:
  - Productivity: continued investment in human capital, transition from agriculture to industry and services, and improvements in institutional quality—to raise TFP contribution from historical averages.
  - Investment: fiscal reforms and business climate improvements that raise the investment rate from its historical average of 15 percent of GDP to 19½ percent by 2015 could raise the growth contribution of capital from 1 percent historically to 2 percent by 2015.
  - Employment: job creation, labor market flexibility, and active labor market measures (job training and search assistance) to increase labor’s growth contribution.
- Growth contribution table (as presented):
  - Potential growth (percent)4.67.0
  - Contribution of TFP (percent)2.03.0
  - Contribution of capital (percent)1.02.0
  - Contribution of labor (percent) 1.62.0

### A. Normalizing the monetary stance
Background
- Monetary policy response: a 200-basis-point cut in policy rates during December 2008–July 2009, plus crisis-related liquidity support measures.
- BSP actions: started to unwind liquidity support measures since early 2010; in July, extended through 2014 the 3-5 percent inflation target for 2011.

Staff’s views
- BSP’s holding stance appropriate to date but proactive response to price pressures remains important.
- Inflation pressures could build during 2011.
- Financial conditions: real policy rates close to zero and below a Taylor-rule implied “neutral” rate; treasury bill yields fell below policy rates in mid-November.
- Rising external inflows could further fuel asset prices, depress local long-term yields, and stimulate domestic demand.
- Conclusion: monetary policy tightening likely needs to start in the near term to head off inflation risks; timing could be recalibrated if a tail risk (e.g., renewed global turmoil) materializes.

Authorities’ views
- Authorities view current monetary stance as consistent with both low inflation and economic expansion.
- BSP expects inflation to remain well within the target range in 2011–12 absent adverse shocks.
- Authorities note inflation risks are finely balanced and stand ready to respond proactively should such pressure emerge.

### B. Managing external inflows
Background and policy toolkit
- Authorities have liberalized controls on capital outflows in October, have not modified regulations on capital inflows, employed macro-prudential measures, and sought to prepay some external debt.
- Exchange rate: appreciated in nominal and real effective terms, although somewhat less than neighboring economies.
- Reserves: have risen to high levels; reserve coverage comparable to regional peers and high compared to the past; BSP has sterilized much of the reserve buildup, raising sterilization costs as domestic-foreign yield differentials widen.

Staff’s views
- Real exchange rate: broadly in line with medium-term fundamentals; panel estimation indicates a wide range with, on average, the peso not far from its medium-term fundamental level (around 6 percent below).
- Alternative estimation (accounting for long-term trends in remittances and current account): supports conclusion that exchange rate is close to equilibrium level.
- Policy recommendation: scope to shift emphasis away from reserve accumulation toward other measures; support for limiting foreign exchange market intervention to smoothing operations.
- Consider greater exchange rate flexibility.
- Exchange rate appreciation could provide a buffer to tighten monetary conditions and lessen speculative inflow pressures; appreciation would be necessary adjustment if inflows are sustained.

Box 2 — Remittances and equilibrium exchange rate
- Long-term remittance outlook: remittances likely an exhaustible resource due to slowing population growth and declining migration; retirement by existing migrants contributes to decline.
- Example: a 3 percent annual retirement rate would contribute to a decline in remittances to 5 percent of GDP by 2050 from 13 percent of GDP in 2010.
- Intertemporal consumption smoothing approach:
  - Achieving a constant real per capita annuity requires a medium-term current account surplus of 1.8 percent of GDP.
  - Achieving a constant annuity/output ratio requires a current account surplus of 8.5 percent of GDP.
  - Achieving a constant real annuity allows a current account deficit of -1.3 percent of GDP as remittances may continue to grow in near term.
- Staff estimate: stripping temporary factors yields a medium-term current account balance of 1.9 percent of GDP, in line with the desired 1.8 percent of GDP; hence real exchange rate broadly aligned with long-term fundamentals.
- Equilibrium Current Account Balance (percent of GDP):
  - Constant real per capita annuity1.8
  - Constant annuity/output ratio8.5
  - Constant real annuity-1.3

Box 3 — Capital flows: determinants and risks
- Determinants of net capital inflows (EGARCH model for non-FDI inflows, 1990-2010): growth differential relative to advanced countries; interest rate differentials; degree of global risk aversion (VIX); exchange rate changes.
- Outlook: sizable growth- and interest-rate differentials likely to persist in 2011 and the medium term, suggesting continued impetus for capital inflows; shocks to global risk aversion could cause sudden stops or reversals.
- Risks and channels:
  - Inflows can increase liquidity, boost domestic demand, and raise asset prices.
  - Empirical relationship between non-FDI capital inflows and domestic demand in the Philippines is strong.
  - Main channel: expanding credit and reducing cost of finance.
  - Portfolio inflows have not led to overheating so far, but liquidity is unusually high and government bond yield curve has fallen to historical lows.
  - Recent asset price increases confined to equities, with valuations broadly in line with historical averages.

Authorities’ views on inflows
- Authorities emphasize balancing measures in the traditional toolkit; believe balance between exchange rate appreciation and reserve accumulation has been appropriate.
- Reserves provide an important buffer; authorities studying reserve adequacy and aware of accumulation costs.
- Authorities are reluctant to prematurely conclude reserves are adequate, especially in a volatile external environment.
- If inflows are transitory, smoothing exchange rate impact is appropriate.
- Authorities are seeking ways to increase absorptive capacity to harness capital flows for investment and potential growth.

### C. Fiscal consolidation through higher revenue
- Authorities’ fiscal target: reduce the national government deficit from 3.9 percent of GDP in 2010 to 2 percent from 2013.
- Rationale: fiscal consolidation would create fiscal space to respond to future shocks, improve medium-term growth prospects by lowering sovereign risk and enhancing investment, and reduce the share of debt service in government expenditure.
- Main elements of fiscal plans:
  - Stronger tax administration (including technical assistance from the U.S. Millennium Challenge Corporation compact and the Fund).
  - Reorientation of expenditure toward social sectors and infrastructure.
  - Public debt management strategy to reduce share of external debt and lengthen maturity structure.
  - Authorities pledged not to raise taxes at least until 2012.
  - Expenditure priorities: greater emphasis on basic education; expansion of the conditional cash transfer program and health insurance coverage; reduction in subsidies for rice imports and rail transportation.
  - Efforts to expand PPP projects for infrastructure with partial government investment mobilized from government financial institutions and social security institutions.
- Fiscal challenges and indicators:
  - Civil service wage bill continues to increase rapidly and accounts for over 40 percent of primary expenditure.
  - Public debt stands at nearly 60 percent of GDP and 3 times fiscal revenue.
  - Debt service absorbs a quarter of primary expenditure.
- Staff view: revenue-based consolidation envisaged, relying primarily on tax administration efforts.

*Source: _cr1159 - 9.      Risks to the outlook are broadly*

### 22.      Consistent with their medium-term

### _cr1159 - 22.      Consistent with their medium-term

### Fiscal consolidation and 2011 budget
- The 2011 budget targets a reduction in the national government deficit to 3.2 percent of GDP (authorities’ definition, includes privatization receipts).
- The deficit reduction would imply a withdrawal of fiscal stimulus of about ½ percent of GDP, roughly in line with the pattern in regional peers.
- Given expenditure plans, the 2011 deficit target would require a substantial increase in fiscal revenue, which fell short of targets in 2010.
- Under the staff’s baseline forecast, which assumes no additional revenue measures to those that are already planned, the deficit could remain slightly above 3½ percent of GDP.

### Staff views on fiscal strategy and public debt
- The authorities’ medium-term consolidation plan is welcomed as a marker of policy direction to improve investor confidence and increase government ability to respond to shocks.
- Public debt projections and fiscal metrics cited:
  - Public debt would be nearly 50 percent of GDP by 2015.
  - Public debt would be 200 percent of revenue by 2015.
  - (See Appendix I referenced in source for detail.)
- Government gross financing requirements are substantial and interest expenditure remains a large share of the budget, suggesting further debt reduction could be considered.
- In 2011, with growth envisaged to remain robust, a greater withdrawal of fiscal stimulus could be considered to make credible progress toward medium-term consolidation.

### Revenue-side recommendations
- Raising the tax effort is essential to achieve consolidation and to scale up social expenditure and public investment.
- Initial focus on improving tax administration is appropriate; expected to enhance revenue collection over time.
- To make substantive gains in revenue, early actions should complement administration improvements by broadening the tax base and simplifying the tax system.
- Specific reform areas noted (in line with Fund technical assistance to the Philippines):
  - Strengthen excise taxes.
  - Rationalize fiscal incentives.
  - Address inefficiencies in the VAT.

### Expenditure reorientation and public investment
- Reorientation of spending should support inclusive long-term growth.
- Given low levels of social spending, staff supports limiting rice and transport subsidies by public enterprises and moving to more targeted conditional cash transfer programs.
- Roll-out of Public Private Partnerships (PPPs) should help improve infrastructure; PPP projects should be evaluated using sound cost-benefit analyses and fiscal risks reflected in fiscal accounts.
- Staff cautioned against rapid growth in the civil service wage bill and suggested faster implementation of the government’s plan to rationalize public services.

### Fiscal framework strengthening
- The staff supports recent government initiatives to strengthen the fiscal framework:
  - A fiscal responsibility law is being proposed to require new budget proposals to be deficit neutral.
  - Ongoing efforts to strengthen public financial management, publish a fiscal risk statement, and focus debt management on reducing currency and maturity risk should help strengthen public finances.
  - A medium-term budget framework would be very helpful for anchoring consolidation, improving fiscal planning, and raising investor confidence.

### Authorities’ views on fiscal policy
- Authorities reiterated firm commitment to medium-term fiscal consolidation.
- Recent debt management operations reduced currency and rollover risks; authorities view a medium-term target of 2 percent of GDP as balancing consolidation and development spending.
- Acknowledging the 2011 deficit target would require substantial revenue effort, authorities noted they would consider spending measures if revenues underperform.
- Authorities stated any positive revenue surprises should be allocated to meet spending needs rather than deficit reduction.
- Authorities agreed consolidation should be based primarily on revenue measures; they do not envisage increases in tax rates in the near term but have agreed on principles to limit tax exemptions and incentives.
- Proposals to reform excise taxes are under consideration in Congress.
- Authorities reiterated commitment to reorient expenditure toward social objectives; a spending review under “zero-based budgeting” should identify scope for savings.
- Authorities agreed civil service size needs management to restrain the public wage bill over the medium term.

### Financial sector resilience — background and recent performance
- The Philippine financial sector withstood the crisis well; developments support the January 2010 Financial System Stability Assessment (FSSA) that it remains sound.
- Sector characteristics and recent metrics:
  - Universal and commercial banks’ non-performing loan ratios have remained low at 3.2 percent on average as of October 2010.
  - Banks’ capital adequacy ratios were high at about 16 percent as of June (latest data available).
  - Banks’ profitability improved, with net income growing by 22 percent (year/year) in the first half of 2010.
- Asset prices and inflows:
  - Stock prices have risen rapidly since early 2010; price-earnings ratios have regained pre-crisis levels and are in line with long-run historical averages.
  - Property prices remain moderate, particularly commercial real estate; some firming in low-to-middle income housing.
  - Prudential measures like the loan-to-value ratio and cap on real estate loans have helped keep prices in check.
  - External inflows could further fuel liquidity and swamp small local financial markets, particularly the bond and swap markets.

### Staff views on financial risks and policy actions
- Two key risks flagged in the 2010 FSSA update:
  - Concentration risk, due to dominant role of conglomerates in corporate and bank ownership, magnifying “connected” lending.
  - Interest rate risk, given the large share of securities in banks’ assets.
- BSP action noted:
  - In November, the BSP approved a separate single borrower limit for infrastructure and development PPP projects, allowing banks to extend loans and guarantees for such projects up to 25 percent of their net worth.
  - Such lending should be monitored for concentration risk and maturity mismatches.
- Financial market development recommendations to channel external inflows into productive investment:
  - Harmonize various taxes and lower regulatory burden on some products and services.
  - Develop corporate bond and derivative markets via:
    - Measures to further develop a benchmark yield curve.
    - Enhance third-party credit (such as bond insurance).
    - Develop hedging tools for investors and traders.
    - Reduce time and expense of new debt offerings.
- Supervisory and regulatory strengthening (priorities):
  - Supervision: Prompt approval of proposed amendments to the BSP Charter to provide stronger legal powers and protection for supervisors, lift remaining bank secrecy constraints on examiners, and allow the BSP to issue its own debt securities to strengthen monetary management.
  - Prudential regulation: Move to a more risk-based approach to capital requirements to better reflect banks’ risk profiles; ongoing efforts to introduce ICAAP under Basel II in 2011 are welcomed.
  - Banks’ high capital levels, particularly Tier 1, and relatively low loan-to-deposit ratios should position them well to handle new global financial regulations, including Basel III.
  - AML/CFT: Bills submitted to Congress to address FATF-noted gaps in criminalizing money laundering and terrorist financing and in identifying and freezing related assets.

### Authorities’ views on financial sector issues
- Authorities broadly agreed with staff’s assessment of soundness and the need to monitor concentration and interest rate risks.
- Authorities emphasized supervisors pay close attention to systemically important conglomerates’ interface with banks and noted conglomerates’ revenue diversification helps mitigate concentration risk.
- Authorities saw no indication of asset price bubbles; recent stock price increases are broadly in line with recovery.
- Authorities consider existing prudential measures adequate and do not plan to resort to capital controls; they seek ways to harness capital inflows for productive investment and welcomed staff suggestions on financial market development.
- Authorities confirmed ICAAP introduction under Basel II in 2011 is on track and banks’ internal risk management has improved; they did not see immediate challenges with Basel III given adequate capital buffers.

### Growth, investment, and structural policy
- Background: Low investment is a long-standing constraint; investment levels are lower than regional peers because public and private investment have been anemic. Unemployment and underemployment remain high, particularly among younger people.
- Staff’s views on raising potential growth (three pillars):
  - Investment:
    - Higher public investment needed to strengthen infrastructure and provision of public goods.
    - Main source of higher investment must be the private sector; tackling corruption and reducing red tape is emphasized.
    - Developing capital markets would expand firm access to finance for investment.
  - Employment:
    - Higher investment would create jobs; measures may be needed to lower redundancy costs and step up job training and search assistance.
  - Productivity:
    - Improvements in total factor productivity are the most sustainable source of faster growth.
    - Improving human capital and institutional quality, and shifting up the value chain from agriculture to industry and services would help raise total factor productivity.
- Authorities’ view: Higher investment is critical; planned PPP projects viewed as essential for improving infrastructure (airports, roads). The 2010–16 Medium-Term Philippine Development Plan (MTPDP), due in early 2011, will outline strategies for raising medium-term growth and lowering unemployment and poverty.

### Staff appraisal and macroeconomic outlook
- The strong recovery and positive sentiment provide a window of opportunity to move decisively with reforms to raise inclusive growth.
- The smooth transition to the new administration and government focus on addressing impediments to investment and growth have strengthened confidence.
- Staff projects growth to moderate to 5 percent in 2011.
- Over the medium term, a similar rate of growth should prevail, in line with regional peers and higher than previous Fund projections.
- Inflation has been low in recent months, but pressures could start to build during 2011 if financial conditions are not tightened.
- Potential surges in capital inflows could lead to asset price and macroeconomic volatility.
- Policy challenges and recommendations:
  - Preserve macroeconomic stability while enhancing medium-term growth.
  - Carefully manage exit from stimulus policies amid a challenging external environment while pursuing reforms to rebalance the economy toward higher investment, job creation, and productivity.
  - Monetary policy: BSP should remain ready to respond proactively to price pressures; monetary stance likely needs to tighten in the near term to head off liquidity and inflation risks. If a tail risk materializes, timing of policy normalization could be recalibrated.
  - External inflow pressures complicate normalization: staff supports BSP’s policy of allowing the exchange rate to adjust and limiting intervention to smoothing operations.
  - Staff estimates the real effective exchange rate of the peso is broadly in line with medium-term fundamentals.
  - With reserves at comfortable levels on standard prudential metrics, greater exchange rate flexibility should be considered in response to additional inflows.
  - Exchange rate appreciation would help tighten monetary conditions and lessen speculative inflow pressures.
  - Staff welcomes authorities’ moves to further liberalize regulations for foreign exchange outflows and to avoid capital controls.

*Source: _cr1159 - 22.      Consistent with their medium-term (IMF staff report content provided).*

### 46.      The government’s focus on medium-

### _cr1159 - 46.      The government’s focus on medium-

### Fiscal consolidation: objectives and near-term stance
- Government intends to reduce the national government deficit to 2 percent of GDP by 2013.
- Authorities plan to reduce the national government deficit to 3.2 percent of GDP in 2011, implying a small withdrawal of fiscal stimulus.
- Staff view: focus on medium-term fiscal consolidation is appropriate to expand fiscal space and strengthen budget responsiveness to future shocks.
- Staff note: public debt would nonetheless remain relatively high and further debt reduction would be useful.

### Fiscal implementation risks and revenue outlook
- 2011 budget targets entail a significant increase in tax revenue that "may require more measures to achieve than are currently envisaged."
- Staff recommends raising the tax effort further to achieve consolidation and scale up social spending and public investment.
- Specific tax administration and policy actions recommended:
  - Strengthen tax administration (supported by scaled-up Fund technical assistance).
  - Early actions to reform excise taxes.
  - Rationalize fiscal incentives.
  - Address distortions in the value added tax.
- These actions are important to support planned increases in spending on health, basic education, conditional cash transfers, and infrastructure.

### Fiscal framework and institutions
- Staff welcomes initiatives to strengthen the fiscal framework.
- Recommended institutional measures:
  - Enact a Fiscal Responsibility Law.
  - Publish a Fiscal Risk Statement.
  - Adopt a medium-term budget framework to anchor the fiscal consolidation plan.

### Fiscal and budgetary indicators (selected)
- Nominal GDP (2009): P7,679 billion ($161.2 billion)
- National government balance (authorities' definition): -0.2 (2007), -0.9 (2008), -3.9 (2009), -3.8 (2010), -3.2 (2011)
- National government balance (IMF definition): -1.7 (2007), -1.5 (2008), -4.0 (2009), -3.8 (2010), -3.3 (2011)
- Total revenue and grants: 15.8 (2007), 15.8 (2008), 14.6 (2009), 14.5 (2010), 15.5 (2011)
- Total expenditure: 17.4 (2007), 17.3 (2008), 18.6 (2009), 18.4 (2010), 18.9 (2011)
- National government debt (percent of NG revenues): 303.4 (2007), 307.4 (2008), 336.7 (2009)
- Non-financial public sector debt 61.0 (2007), 60.7 (2008), 60.7 (2009), 58.0 (2010)
- Primary national government balance: 2.5 (2007), 2.3 (2008), -0.3 (2009), 0.0 (2010), 0.1 (2011)

### Financial sector resilience and supervision
- Financial sector "withstood the crisis well" and remains sound per the January 2010 Financial System Stability Assessment.
- Banking sector indicators and vulnerabilities:
  - Banks’ non-performing loan ratios have stayed low; NPL ratio: 5.8 (2007), 4.1 (2008), 4.1 (2009), 4.5 (2010 Q1).
  - Capital adequacy: Capital adequacy ratio (consolidated basis) 15.7 (2007), 15.5 (2008), 15.8 (2009), 16.0 (2010 Q1).
  - NPL coverage ratio: 81.5 (2007), 86.0 (2008), 93.1 (2009), 94.0 (2010 Q1).
- Staff welcomes authorities’ monitoring of two key sources of vulnerability highlighted in the 2010 FSSA: interest rate risk and concentration risk.
- Asset bubbles not yet a concern, but asset price movements warrant careful attention in an environment of rising external inflows.
- Further financial market development would help channel inflows to long-term investments such as infrastructure.
- To strengthen supervision, approval of proposed amendments to the BSP Charter remains critical.
- Banks appear well placed to handle new global financial regulations, including Basel III, given high levels of capital, particularly Tier 1 capital.

### Growth, investment, and structural priorities
- For higher and more inclusive growth, critical actions include:
  - Continue rebalancing the economy toward investment.
  - Address impediments to job creation and productivity.
  - Raise government revenue to provide needed fiscal space.
- Sustainable expansion in investment must come from private investment; facilitation measures include:
  - Improvements in the business climate.
  - Improvements in infrastructure and power supply.
  - Deeper capital markets.

### Macroeconomic and social context (selected indicators)
- Population (2009): 92.2 million
- GDP per capita (2009): $1,748
- Poverty headcount ratio at $2 a day at PPP (2003): 43 percent
- Unemployment rate (2009): 7.5 percent
- Real GDP growth: 7.1 (2007), 3.7 (2008), 1.1 (2009), 7.0 (2010), 5.0 (2011)
- CPI (annual average): 2.8 (2007), 9.3 (2008), 3.2 (2009), 3.8 (2010), 3.9 (2011)
- Current account (percent of GDP): 4.9 (2007), 2.2 (2008), 5.5 (2009), 5.4 (2010), 4.3 (2011)
- Reserves, adjusted (US$ billions): 33.8 (2007), 35.9 (2008), 44.2 (2009), 62.9 (2010), 78.4 (2011)
- Total external debt (percent of GDP): 46.3 (2007), 39.2 (2008), 40.2 (2009), 38.6 (2010), 39.2 (2011)

### Surveillance recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff report content provided.*

### APPENDIX I. DEBT SUSTAINABILITY ANALYSIS

### APPENDIX I. DEBT SUSTAINABILITY ANALYSIS

### Public debt outlook and main findings
- Non-financial sector public debt declined from over 100 percent of GDP in 2003 to below 60 percent of GDP in 2010.
- Under the government’s medium-term objective of a national government deficit to 2 percent of GDP, public debt is projected to decline to 47.1 percent of GDP by 2015.
- Gross financing need is projected to decline from 16 percent of GDP in 2010 to 11 percent of GDP by 2015.
- A shock scenario: if the deficit were to remain 1 percent of GDP higher than currently projected or if medium-term growth were lower by 1 percent, debt levels would remain stable but at an elevated level above 55 percent of GDP through 2014.
- Main vulnerability: high share of foreign currency debt exposes public debt to exchange rate risk.

### External debt outlook and resilience
- External debt fell from nearly 80 percent of GDP in 2002 to just over 40 percent of GDP at end-2009.
- Under staff baseline, the external debt ratio is projected to remain stable (debt-creating capital inflows).
- Resilience: one-half standard deviation shocks to interest rates, growth, and the current account produce only modest deterioration in debt ratios over the medium term.
- Vulnerability: a one-time real depreciation of 30 percent would entail an 18 percent jump in the external debt ratio from its end 2009 level.

### Key projection series (public sector debt, selected rows; in percent of GDP unless noted)
- Public sector debt (baseline): 2005: 85.9; 2006: 73.9; 2007: 61.0; 2008: 60.7; 2009: 60.7; 2010: 58.0; 2011: 57.3; 2012: 55.8; 2013: 53.7; 2014: 51.5; 2015: 47.1.
- Of which foreign-currency denominated: 2005: 52.3; 2006: 45.3; 2007: 34.9; 2008: 35.5; 2009: 35.7; 2010: 33.6; 2011: 32.4; 2012: 31.6; 2013: 30.9; 2014: 30.0; 2015: 28.1.
- Change in public sector debt: 2005: -9.3; 2006: -11.9; 2007: -12.9; 2008: -0.4; 2009: 0.0; 2010: -2.7; 2011: -0.7; 2012: -1.5; 2013: -2.1; 2014: -2.3; 2015: -4.4.
- Identified debt-creating flows (4+7+12): 2005: -10.9; 2007: -12.1; 2008: -13.6; 2009: -0.9; 2010: -0.5; 2011: -3.2; 2012: -2.8; 2013: -2.9; 2014: -3.2; 2015: -2.9.
- Primary deficit: 2005: -4.3; 2006: -5.8; 2007: -4.8; 2008: -3.8; 2009: -0.8; 2010: -1.5; 2011: -1.5; 2012: -2.0; 2013: -2.5; 2014: -2.2; 2015: -2.1.
- Automatic debt dynamics: 2005: -6.9; 2006: -6.2; 2007: -9.1; 2008: 2.7; 2009: 1.1; 2010: -1.6; 2011: -0.8; 2012: -1.2; 2013: -1.0; 2014: -0.9; 2015: -0.8.
- Other identified debt-creating flows: 2005: 0.4; 2006: 0.0; 2007: 0.2; 2008: 0.2; 2009: -0.9; 2010: 0.0; 2011: -0.5; 2012: 0.3; 2013: 0.2; 2014: 0.2; 2015: 0.2.
- Residual, including asset changes (2-3): 2005: 1.6; 2006: 0.1; 2007: 0.7; 2008: 0.6; 2009: 0.6; 2010: 0.4; 2011: 2.1; 2012: 1.4; 2013: 1.1; 2014: 0.6; 2015: -1.7.
- Public sector debt-to-revenue ratio: 2005: 389.5; 2006: 321.5; 2007: 253.5; 2008: 265.2; 2009: 293.3; 2010: 280.0; 2011: 275.3; 2012: 255.0; 2013: 234.3; 2014: 225.0; 2015: 205.6.
- Gross financing need (percent of GDP): 2005: 24.3; 2006: 24.2; 2007: 18.1; 2008: 14.9; 2009: 19.2; 2010: 15.9; 2011: 15.8; 2012: 13.4; 2013: 11.1; 2014: 11.1; 2015: 10.9.
- Gross financing need (in billions of U.S. dollars): 2005: 24.0; 2006: 28.4; 2007: 26.1; 2008: 24.9; 2009: 31.0; 2010: 29.8; 2011: 31.5; 2012: 28.8; 2013: 25.4; 2014: 27.3; 2015: 28.9.

### Key macroeconomic and fiscal assumptions underlying the public baseline
- Real GDP growth (in percent): 2005: 5.0; 2006: 5.4; 2007: 7.1; 2008: 3.7; 2009: 1.1; 2010: 7.0; 2011–2015: 5.0 each year.
- Average nominal interest rate on public debt (in percent): 2005: 7.5; 2006: 7.5; 2007: 6.8; 2008: 7.5; 2009: 7.0; 2010: 7.6; 2011: 7.7; 2012: 7.7; 2013: 7.3; 2014: 7.3; 2015: 7.4.
- Average real interest rate (in percent): 2005: 1.0; 2006: 2.3; 2007: 3.9; 2008: 0.1; 2009: 4.5; 2010: 4.3; 2011: 3.7; 2012: 3.0; 2013: 3.3; 2014: 3.3; 2015: 3.4.
- Inflation rate (GDP deflator, in percent): 2005: 6.5; 2006: 5.1; 2007: 2.9; 2008: 7.5; 2009: 2.6; 2010: 3.3; 2011: 3.9; 2012: 4.7; 2013: 4.0; 2014: 4.0; 2015: 4.0.
- Growth of real primary spending (deflated by GDP deflator, in percent): 2005: -1.7; 2006: 1.8; 2007: 20.6; 2008: 2.1; 2009: 5.7; 2010: 3.0; 2011: 5.8; 2012: 8.3; 2013: 8.0; 2014: 5.7; 2015: 6.0.

### External debt projections (selected rows; in percent of GDP unless noted)
- External debt (baseline): 2005: 62.9; 2006: 52.1; 2007: 46.0; 2008: 39.0; 2009: 40.1; 2010: 38.6; 2011: 39.2; 2012: 39.4; 2013: 39.5; 2014: 39.4; 2015: 39.1.
- Change in external debt: 2005: -7.8; 2006: -10.7; 2007: -6.1; 2008: -7.0; 2009: 1.1; 2010: -1.5; 2011: 0.6; 2012: 0.1; 2013: 0.1; 2014: -0.1; 2015: -0.3.
- Identified external debt-creating flows (4+8+9): 2005: -13.7; 2006: -19.1; 2007: -16.3; 2008: -8.4; 2009: -4.4; 2010: -9.1; 2011: -7.6; 2012: -6.8; 2013: -6.1; 2014: -5.4; 2015: -4.7.
- Current account deficit, excluding interest payments: 2005: -5.2; 2006: -7.3; 2007: -7.4; 2008: -4.1; 2009: -7.0; 2010: -6.9; 2011: -6.2; 2012: -5.4; 2013: -4.6; 2014: -3.9; 2015: -3.1.
- Net non-debt creating capital inflows (negative): 2005: -3.2; 2006: -4.5; 2007: -1.7; 2008: 0.0; 2009: -0.3; 2010: -1.2; 2011: -1.2; 2012: -1.1; 2013: -1.1; 2014: -1.1; 2015: -1.0.
- Automatic debt dynamics: 2005: -5.3; 2006: -7.2; 2007: -7.1; 2008: -4.3; 2009: 2.9; 2010: -0.9; 2011: -0.1; 2012: -0.2; 2013: -0.3; 2014: -0.4; 2015: -0.6.
- External debt-to-exports ratio (in percent): 2005: 138.8; 2006: 115.7; 2007: 111.9; 2008: 112.1; 2009: 134.9; 2010: 117.4; 2011: 118.8; 2012: 119.8; 2013: 120.6; 2014: 121.0; 2015: 120.9.
- Gross external financing need (in billions of U.S. dollars): 2005: 10.9; 2006: 9.3; 2007: 4.7; 2008: 10.4; 2009: 5.5; 2010: 2.0; 2011: 3.6; 2012: 4.9; 2013: 7.4; 2014: 9.4; 2015: 11.6.
- Gross external financing need (in percent of GDP): 2005: 11.0; 2006: 7.9; 2007: 3.3; 2008: 6.2; 2009: 3.4; 2010: 1.1; 2011: 1.8; 2012: 2.3; 2013: 3.2; 2014: 3.8; 2015: 4.4.

### External baseline macro assumptions (selected)
- Real GDP growth (in percent): 2005: 5.0; 2006: 5.3; 2007: 7.1; 2008: 3.7; 2009: 1.1; 2010: 7.0; 2011–2015: 5.0 each year.
- GDP deflator in U.S. dollars (change in percent): 2005: 8.3; 2006: 12.9; 2007: 14.5; 2008: 11.5; 2009: -4.3; 2010: 8.4; 2011: 1.8; 2012: 2.5; 2013: 2.0; 2014: 2.1; 2015: 2.1.
- Nominal external interest rate (in percent): 2005: 5.1; 2006: 5.3; 2007: 5.8; 2008: 4.9; 2009: 4.0; 2010: 4.3; 2011: 4.6; 2012: 4.3; 2013: 4.1; 2014: 3.9; 2015: 3.4.
- Growth of exports (U.S. dollar terms, in percent): 2005: 4.6; 2006: 18.3; 2007: 11.9; 2008: -2.2; 2009: -17.4; 2010: 28.4; 2011: 7.4; 2012: 7.1; 2013: 6.6; 2014: 6.6; 2015: 6.5.
- Growth of imports (U.S. dollar terms, in percent): 2005: 7.2; 2006: 10.5; 2007: 9.8; 2008: 6.5; 2009: -20.8; 2010: 22.9; 2011: 8.7; 2012: 8.5; 2013: 8.1; 2014: 7.9; 2015: 7.9.
- Current account balance, excluding interest payments (in percent of GDP): 2005: 5.2; 2006: 7.3; 2007: 7.4; 2008: 4.1; 2009: 7.0; 2010: 6.9; 2011: 6.2; 2012: 5.4; 2013: 4.6; 2014: 3.9; 2015: 3.1.
- Net non-debt creating capital inflows (in percent of GDP): 2005: 3.2; 2006: 4.5; 2007: 1.7; 2008: 0.0; 2009: 0.3; 2010: 1.2; 2011: 1.2; 2012: 1.1; 2013: 1.1; 2014: 1.1; 2015: 1.0.

### Stress tests and scenario results (selected)
- Individual permanent one-half standard deviation shocks to real interest rate, growth, and the current account produce modest deteriorations in debt ratios.
- Combined shock scenarios shown include growth shock, primary balance shock, interest rate shock, non-interest current account shock, combined shock (permanent 1/4 standard deviation on multiple variables), contingent liabilities shock (10 percent of GDP), and a one-time real depreciation of 30 percent.
- Example impacts:
  - One-time real depreciation of 30 percent (applied in 2010) increases external debt substantially (illustrated as a rise to 58 percent in a combined shock chart versus baseline 39 percent for external debt).
  - A contingent liabilities shock of 10 percent of GDP raises public debt in scenario charts (illustrated increase to 57 percent versus baseline 47 percent for public debt).

### Policy implications (implied by analysis)
- Maintaining the government’s medium-term deficit target (national government deficit to 2 percent of GDP) supports continued decline in public debt-to-GDP.
- Managing the fiscal deficit and sustaining medium-term growth are key to avoiding elevated debt levels (an additional 1 percent of GDP deficit or 1 percentage point lower growth keeps debt above 55 percent through 2014).
- Exchange rate risk management and reserve/foreign-exchange policy are important given the high share of foreign-currency denominated debt and the large impact of a one-time real depreciation.
- Continued monitoring of external financing needs is warranted given projected increases in gross external financing need in later years (rising to 11.6 billion U.S. dollars by 2015).

*Source: APPENDIX I. DEBT SUSTAINABILITY ANALYSIS (staff report tables and text).*

### 2010. FAD’s peripatetic advisor on cash management reforms visited Manila in February and

### _cr1159 - 2010. FAD’s peripatetic advisor on cash management reforms visited Manila in February and

### Visits, technical assistance, and institutional notes
- FAD’s peripatetic advisor on cash management reforms visited Manila in February and June 2009 and February 2011.
- An LEG legal expert visited Manila to discuss anti-money laundering initiatives in March 2002 and for the regional United Nations Security Council Resolutions/Financing of Terrorism Convention Project workshop in July 2010.
- A Resident Representative has been stationed in Manila since January 1984. Mr. Dennis Botman assumed the post of Resident Representative in January 2009.
- The authorities have formally communicated to the Fund their acceptance of the Fourth Amendment, which was ratified by the Upper House of Parliament (Senate) in August 2001.

*Annex II. PHILIPPINES: BANK-FUND COLLABORATION*

### Joint meeting and objectives
- The Bank and the Fund country teams led by Mr. Hofman (country director) and Mr. Arora (mission chief), respectively, met on October 5, 2010, to:
  - Exchange views on key macroeconomic prospects.
  - Identify macro-critical structural reforms.
  - Coordinate the two teams’ work for the period October 2010–September 2011.
- Other participating country team members included, on the Bank side, Ulrich Lachler, Lada Strelkova, Eric Le Borgne, and Yasuhiko Matsuda; on the Fund side, Dennis Botman, Joji Ide, Padamja Khandelwal, Jay Peiris, and Anita Tuladhar.

### Agreed main macroeconomic challenges
- Managing the exit from policy stimulus.
- Reducing external and fiscal vulnerabilities.
- Outlining a reform agenda to raise potential growth toward the new government’s 7–8 percent objective and to bring about more inclusive growth to reduce poverty.

### Specific issues and areas of work (as identified by the teams)
- Managing the exit from stimulus
  - Near-term growth and inflation outlook
  - Managing the exit from stimulus to avoid inflation risks, on the one hand, and foster the recovery on the other hand without hurting public investment.
  - Tools to manage the exit, particularly the monetary-fiscal policy mix.
- Monetary policy
  - Appropriate setting of monetary policy in view of inflation target and outlook
  - Tools for normalizing policy
  - The role of the exchange rate in monetary policy implementation
  - Policy responses to capital inflows and asset prices
- Fiscal policy
  - Fiscal stance in 2010 and 2011
  - Tax policy and administration
    - Tax policy reforms including excises and investment incentives
    - Strengthening large taxpayers service
    - Improving tax performance management
  - Expenditure management and efficiency
    - Better budget preparation (Medium-Term Expenditure Framework, FE, program evaluation) and execution
    - More budget transparency
  - Fiscal risks
    - Strengthening Department of Finance’s capacity to handle contingent liabilities, Public Private Partnerships (PPPs), and Government-owned and Controlled Corporations (GOCCs) (e.g., National Food Authority)
  - Reforms for long-term fiscal sustainability
- Financial policy
  - Bank soundness
  - Real-financial linkages
  - Regulatory and supervisory lessons from the crisis
- External sector
  - External vulnerabilities
  - Exchange rate assessment
- Raising potential growth and investment
  - Investment climate
    - PPPs, energy, transport, telecoms, water and sanitation policies and regulations
    - Constraints and costs of doing business
    - Competition policy
  - Governance
    - Strengthening public expenditure management
    - Decentralization
  - Factor markets
    - Financial market development
    - Enhancing labor market mobility
    - Understanding the role of the services sector

### Macro-critical structural reform areas (joint identification)
- (i) recovery and potential growth;
- (ii) public finance; and
- (iii) the financial sector.

### Requests for collaboration and information sharing
- Fund team requests:
  - To be kept informed of progress in World Bank’s discussions with the government on financing of infrastructure, PPPs, and a possible development policy loan.
  - Review and sharing of analytical work, in particular the annually prepared Philippines Development Report (PDR).
  - Follow up from the 2010 FSAP and work related to reform of social safety nets, public expenditure reviews, and public financial management.
- Bank team requests:
  - To be kept informed of the Fund’s assessments of macroeconomic policies and prospects.
  - Close coordination of TA work, especially in tax policy and administration and public expenditure analysis and management.
  - Opportunity to participate in the 2010 Article IV mission meetings with the authorities.
  - That the Fund designate one team member to serve as a peer reviewer of the forthcoming PDR.

### Agreement on collaboration
- No disagreement between the two teams on key issues, challenges, or division of tasks.
- Further details on collaboration to be agreed at the technical level as work progresses.

### Appendix 1 — Planned activities (Bank, Fund, and Joint work programs) (October 2010–September 2011)
- Bank Work Program — Products and Expected Delivery Date
  - Philippines Development Reports — January 2011
  - Quarterly Economic Updates — Quarterly
  - Public Expenditure Review — 2010 and 2011
  - Supervision of NPSTAR project — Quarterly
  - Development Policy Loan — April 2011 (tbd)
  - Govt. Integrated Fin. Mgmt Info. System (GIFMIS) — Tbd
  - TA for Statistical Development Plan — 2011–2012
  - Analytical and Advisory Activities (AAA) on Power — June 2011
  - AAA on Transport — June 2011
  - AAA on Agriculture and Agribusiness — June 2011
  - Innovations in Financing — June 2011
  - Doing Business 2011 — August 2010
  - Programmatic AAA on Education — 2010–12
  - Programmatic AAA on Health — 2010–12
  - Programmatic AAA for Social Protection and Poverty Reduction — 2010–12
  - Public Financial Management AAA — 2010–12
  - Programmatic AAA on Decentralization — 2010–12
  - Financial Crisis Preparedness Simulation Exercise — 2012 (tentative)
- Fund Work Program — Products and Expected Delivery Date
  - Article IV Consultation Notes — January 2011
  - Article IV Staff Report — January 2011
  - July Staff Visit Concluding Statement — July 2011
  - Possible Working Papers on issues addressed during the Article IV mission — Q1: 2011
    - Potential Growth
    - Growth-Friendly Fiscal Consolidation: Prospects for the Philippines
    - Inflation Forecasting and Monetary Policy Analysis Framework for the Philippines
    - [Implications of workers’ remittances for external stability assessments]
  - Technical assistance (banking supervision, tax administration, public financial management (cash management and budget execution), tax policy) — Ongoing
- Joint Work Program
  - Collaboration and Review of the Philippines Development Report — End-2010

### IMF-WB Collaboration Matrix: macro-critical structural issues (high-level mapping)
- Recovery and potential growth
  - Investment incentives; Energy sector taxation; Oil deregulation law; Corporate sector performance and vulnerabilities; Investment environment; Regulatory framework; Corruption/rule of law; Investment incentives; Power supply and expected shortage; Energy sector taxation; Rice market; NFA operation and efficiency; Pricing and subsidy of rice; Labor market; Regulatory framework; Wages/union structure; Corporate governance; Concentration/oligopoly/monopoly.
- Public finance
  - BIR reform; Cash management; Expenditure efficiency (capital spending); Revenue administration; BIR reform (IMF/WB); BOC (IMF in relation to customs/WB in relation to trade facilitation); Revenue forecasting (WB/IMF); Public financial management; Cash management (IMF); IFMIS/fiscal reporting (IMF); Budget preparation (IMF/WB); Budget execution (IMF/WB); Tax policy (IMF/WB); Expenditure efficiency/policy; Social safety net; Level of spending; Medium-term Expenditure Framework; GOCC reform; Fiscal Responsibility Law; PPPs (WB/IMF); Debt Management (World Bank/IMF).
- Financial sector
  - Bank supervision (IMF); Banking sector soundness (IMF/WB); PDIC; Contingency Framework (IMF); Capital market development (IMF/WB); Int’l coordination to limit regulatory arbitrage (IMF).
- Other official financing
  - External corporate bond issuance (IMF).

*Annex III. PHILIPPINES: RELATIONS WITH THE ASIAN DEVELOPMENT BANK*

### AsDB approvals and portfolio (January 2005–December 2010 and cumulative)
- From January 2005 to December 2010, the Asian Development Bank (AsDB) approved 17 public sector loans totaling $3.73 billion, including $3.125 billion for 11 policy-based loans and $48.73 million for 52 TA and grant-financed projects.
- As of 30 June 2010, cumulative direct value-added cofinancing for the Philippines since 1970 amounted to $3.2 billion for 38 investment projects and $22.1 million for 34 TA projects.
- Since joining the AsDB in 1966, the Philippines has received 194 sovereign loans for a total of $11.9 billion, and 365 TA grants amounting to $169.17 million.
- From 2006 to 2009, on average, more than 2/3 of the portfolio was in program loans.

### Table: Philippines cumulative AsDB lending (As of December 2010)
- Energy — No. of Loans: 26; Amount of Loans ($ million): 2,688.2; Percent (by amount): 22.6
- Public Sector Management — No. of Loans: 9; Amount of Loans ($ million): 2,328.0; Percent (by amount): 19.6
- Agriculture and Natural Resources — No. of Loans: 59; Amount of Loans ($ million): 1,909.0; Percent (by amount): 16.1
- Transport and ICT — No. of Loans: 26; Amount of Loans ($ million): 1,292.9; Percent (by amount): 10.9
- Finance — No. of Loans: 19; Amount of Loans ($ million): 1,128.0; Percent (by amount): 9.5
- Water and Other Municipal Infrastructure and Services — No. of Loans: 27; Amount of Loans ($ million): 1,042.9; Percent (by amount): 8.8
- Health and Social Protection — No. of Loans: 8; Amount of Loans ($ million): 767.4; Percent (by amount): 6.5
- Multisector — No. of Loans: 7; Amount of Loans ($ million): 301.2; Percent (by amount): 2.5
- Education — No. of Loans: 8; Amount of Loans ($ million): 252.1; Percent (by amount): 2.1
- Industry and Trade — No. of Loans: 5; Amount of Loans ($ million): 174.0; Percent (by amount): 1.5
- Total — No. of Loans: 194; Amount of Loans ($ million): 11,883.7; Percent (by amount): 100.0

### AsDB private sector operations and projects
- AsDB’s private sector operations in the Philippines began in 1986. As of 30 June 2010, cumulative approvals in 26 projects amounted to $768.1 million.
- Notable projects:
  - 2008: $200 million loan approved and disbursed for acquisition, rehabilitation, and operation of the existing 600-megawatt Masinloc coal-fired thermal power plant in Zambales province by Masinloc Power Partners.
  - 2009: Loan for up to $120 million approved for KEPCO SPC Power Corporation for the construction, operation, and maintenance of a new coal-fired power plant in the Visayas region using circulating fluidized bed technology.
- Ongoing discussions with sponsors on infrastructure projects to:
  - Address power shortages;
  - Develop renewable energy;
  - Provide clean water and/or wastewater/sanitation services;
  - Facilitate movement of goods and services through toll road construction, mass transportation, and inter-island transport.
- Financial sector AsDB work includes projects to channel funds to small and medium enterprises and microfinance, infrastructure, and trade finance.

### AsDB Country Partnership Strategy
- AsDB is preparing its Country Partnership Strategy (CPS) for 2011–16. On request of Government, the cycle of the CPS was aligned with the government’s planning cycle, namely the Medium-Term Philippine Development Plan 2011–16.

*Italic: Source — _cr1159 - 2010. FAD’s peripatetic advisor on cash management reforms visited Manila in February and*

### ANNEX IV.  PHILIPPINES––STATISTICAL ISSUES

### ANNEX IV.  PHILIPPINES––STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General
  - Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.
- National Accounts — identified weaknesses
  - Large statistical discrepancies in the GDP estimates between the expenditure and production sides with consequent differences in estimates of GDP growth.
  - Causes noted in the data ROSC (2004):
    - Deaths and births of establishments are not adequately captured; gap growing given rapid structural change and a large number of new establishments.
    - Compilation relies on an outdated benchmark year and fixed input-output ratios: estimates extrapolated from the 1988 benchmark year using fixed input-output ratios.
    - Statistical techniques for estimating GDP at constant prices are inadequate: for most activities, not all components of the production accounts are compiled, instead 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.
- Price Statistics
  - Consumer price index compiled since February 2004 using weights based on the 2000 Family Income and Expenditures survey.
- External Sector Statistics
  - Steps taken to improve balance of payments statistics: in 2005 BSP created a Department of Economic Statistics with a unit focused on balance of payments and the international investment position.
  - Remaining challenges: international transactions increasingly flow through nontraditional channels not adequately covered by the statistical reporting system.
  - Foreign Currency Deposit Units (FCDUs) account for about 70–75 percent of foreign exchange settlements and are exempt from reporting because of strict banking secrecy rules.
- Monetary and Financial Statistics
  - Compilation of monetary and financial statistics (MFS) largely conforms to the Fund’s methodology.
- Government Finance Statistics
  - Fiscal and data ROSCs found areas requiring strengthening.
  - Important problems:
    - Budget presented on an obligation basis, while the deficit is reported on a cash basis.
    - Budget classification differs from accounting classification, complicating comparisons of budget and outcomes.
    - For public sector levels beyond the budgetary central (national) government, consolidated fiscal outturns for items other than the fiscal balance are generally unavailable.
  - Positives:
    - 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.

### II. Data Standards and Quality
- The Philippines subscribed to the Special Data Dissemination Standards (SDDS) in August 1996.
- A data ROSC was published in August 2004.

### Table of Common Indicators — data coverage and quality assessments (selected notes)
- Exchange Rates: Latest observation 12/20/2010; received 12/20/2010; Frequency: D; Memo: methodological soundness and accuracy/reliability flags noted in table.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation Nov 2010; received Dec 2010; Frequency: D; Publication frequency: M.
- Reserve/Base Money: Latest observation Dec 2010; received Dec 2010; Frequency: D; Reporting frequency: W; Publication frequency: W.
- Broad Money: Latest observation Oct 2010; received Dec 2010; Frequency: M; Reporting frequency: M; Publication frequency: M.
- Consumer Price Index: Latest observation Nov 2010; received Dec 2010; Frequency: M; Reporting frequency: M; Publication frequency: M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest observation 2009; received Dec 2010; Frequency: Q; Reporting frequency: Q; Publication frequency: Q.
- GDP/GNP: Latest observation Q3 2010; received Nov 2010; Frequency: Q; Reporting frequency: Q; Publication frequency: Q.
- Gross External Debt: Latest observation Q2 2010; received Sep 2010; Frequency: Q; Reporting frequency: Q; Publication frequency: Q.
- International Investment Position: Latest observation 2009; received Sept 2010; Frequency: A; Reporting frequency: A; Publication frequency: A.
- Footnotes clarify definitions and methodological assessment codes: O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed).

### Statement by the IMF Staff Representative (February 18, 2011) — key developments and indicators
- Economic activity
  - GDP growth in 2010 was 7.3 percent (year/year), compared with a staff forecast of 7 percent.
  - Growth rose to 7.1 percent in the 4th quarter, from 6.3 percent in the 3rd quarter, mainly driven by private domestic demand.
  - Private consumption fueled by strong remittances and fixed investment; public consumption moderated to keep fiscal deficit within budget targets.
- Balance of payments and reserves
  - Export growth rose significantly to over 25 percent (year/year) in December.
  - International reserves rose to $62.4 billion in December and $63.6 billion in January (equivalent to 10½ months of imports and 11 times and 5½ times short-term external debt based on original and residual maturity, respectively).
  - Exchange rate remained roughly unchanged against the U.S. dollar since December.
  - Broad money growth picked up to 10.6 percent in December from 7.5 percent in November.
- Inflation and monetary policy
  - CPI inflation rose to 3.5 percent (year/year) and 0.8 percent (month/month) in January from 3 percent and 0.5 percent, respectively, in December.
  - Increase driven mainly by food and energy prices; core inflation slowed slightly year/year but rose sequentially to 0.4 percent (month/month) in January from 0.3 percent in December.
  - Monetary Board left policy rates unchanged at its February 10 meeting; noted risks to the inflation outlook tilted to the upside and signaled readiness to act.
  - Risks identified: food and oil prices, electricity rates, demand-side price pressures as output expands faster than historical trend.
- Fiscal stance
  - Fiscal consolidation recommended to create fiscal space for future shocks; authorities intend to reduce the national government deficit to 2 percent of GDP from 2013.
  - Main elements of authorities’ fiscal strategy: greater tax effort, reorientation of expenditure towards social sectors and infrastructure, and a debt management strategy to reduce reliance on external debt and lengthen maturity.
- Other notes
  - Financial sector remained sound and stable; withstood the crisis well.

### Public Information Notice (PIN) No. 11/28 — Executive Board conclusions (March 1, 2011)
- Background and outlook
  - Growth recovered strongly in 2010; recovery helped by supportive macroeconomic policies and strong private demand.
  - Growth in 2010 was 7.3 percent and projected to moderate in 2011 to 5 percent.
  - Inflation moderate; expectations well anchored but pressures may start to build as demand closes in on supply potential.
  - Balance of payments projected to remain in surplus; remittances and export diversification support current account; capital inflows may be largely structural.
- Risks and policy responses
  - Risks broadly balanced: domestic positive sentiment could boost private investment more than expected; global shocks could affect exports and remittances.
  - Monetary policy: welcomed for keeping inflation low while fostering recovery; gradual unwinding of liquidity support appropriate; readiness to tighten policy if needed.
  - Management of capital inflows: appropriate mix of policy tools encouraged; support for allowing exchange rate to adjust and limiting intervention to smoothing operations; greater exchange rate flexibility could be considered with further inflows.
  - Fiscal policy: welcomed planned gradual withdrawal of fiscal stimulus and focus on medium-term consolidation; encouraged accelerating debt reduction and substantial revenue efforts to meet deficit targets while increasing social/infrastructure spending.
  - Structural reforms: recommended early actions to reform excise taxes, rationalize fiscal incentives, address gaps in the value added tax, strengthen budgetary framework and control of the civil service wage bill.
  - Financial sector: emphasized monitoring vulnerabilities (concentration and interest rate risks); awaited approval of amendments to the central bank law and further AML/CFT progress.
  - Promoting private investment and removing impediments to job creation and productivity are crucial; public-private partnership program and Medium-Term Philippine Development Plan noted as important initiatives.

### Selected Economic Indicators, 2007–11 (selected rows)
- Growth and prices (percent change)
  - Real GDP: 2007: 7.1; 2008: 3.7; 2009: 1.1; 2010: 7.0; 2011 (Proj.): 5.0
  - CPI (annual average): 2007: 2.8; 2008: 9.3; 2009: 3.2; 2010: 3.8; 2011 (Proj.): 3.9
- Public finances (percent of GDP)
  - National government balance (authorities' definition): 2007: -0.2; 2008: -0.9; 2009: -3.9; 2010: -3.8; 2011 (Proj.): -3.2
  - National government balance (IMF definition) 2/: 2007: -1.7; 2008: -1.5; 2009: -4.0; 2010: -3.8; 2011 (Proj.): -3.3
  - Total revenue and grants: 2007: 15.8; 2008: 15.8; 2009: 14.6; 2010: 14.5; 2011 (Proj.): 15.5
  - Total expenditure: 2007: 17.4; 2008: 17.3; 2009: 18.6; 2010: 18.4; 2011 (Proj.): 18.9
  - Non-financial public sector balance 3/: 2007: 0.2; 2008: -0.3; 2009: -3.4; 2010: -2.6
  - Non-financial public sector debt: 2007: 61.0; 2008: 60.7; 2009: 60.7; 2010: 58.0
- Monetary sector (percent change, end of period)
  - Broad money (M3): 2007: 10.6; 2008: 15.6; 2009: 8.3; 2010: 7.7 4/; 2011: ...
  - Interest rate (91-day treasury bill, end of period, in percent) 5/: 2007: 4.2; 2008: 5.8; 2009: 4.3; 2010: 1.8 6/; 2011: ...
  - Credit to the private sector: 2007: 8.5; 2008: 16.8; 2009: 8.1; 2010: 10.1 4/; 2011: ...
- External sector
  - Current account (percent of GDP): 2007: 4.9; 2008: 2.2; 2009: 5.5; 2010: 5.4; 2011 (Proj.): 4.3
  - Reserves, adjusted (US$ billions) 7/: 2007: 33.8; 2008: 35.9; 2009: 44.2; 2010: 62.9; 2011 (Proj.): 78.4
  - Reserves/short-term liabilities, adjusted: 2007: 240.5; 2008: 284.4; 2009: 389.1; 2010: 498.6; 2011 (Proj.): 595.4
  - Pesos per U.S. dollar: 2007: 46.1; 2008: 44.5; 2009: 47.6; 2010: 45.2 9/; 2011 (Proj.): ...
- Notes from table:
  - 1/ Public finance projections reflect the 2011 budget.
  - 2/ Excludes privatization receipts and includes deficit from restructuring of the central bank (Central Bank Board of Liquidators).
  - 3/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.
  - 4/ October 2010 (year-on-year).
  - 5/ Secondary market rate.
  - 6/ November 2010.
  - 7/ Adjusted for gold and securities pledged as collateral against short-term liabilities.
  - 8/ Short-term liabilities include medium- and long-term debt due in the following year.
  - 9/ Average for January to November 2010.

*Source: ANNEX IV.  PHILIPPINES––STATISTICAL ISSUES, As of December 20, 2010.*

### Introduction

### Introduction

### Recent Economic Developments and Outlook
- The Philippines avoided recession during the global crisis.
- Real GDP growth: from 1.1 percent in 2009 to 7.3 percent in 2010 (highest in 34 years).
- Official growth target: 5.0-6.0 percent.
- Growth drivers and supportive conditions:
  - Appropriately accommodative monetary and fiscal policies.
  - Low inflation and interest environment, and stable exchange rate.
  - Stability in the banking system allowing continued flow of credit to productive sectors.
  - Rebound in external demand and availability of external financing.
- Balance of payments: surplus of US$14.4 billion in 2010 versus US$6.4 billion in 2009.
- External performance supported by:
  - Rebound of trading activity in goods and services.
  - Steady remittance flows.
  - Sustained investor appetite for local financial instruments.
- Reserve and exchange rate outcomes:
  - Strong foreign exchange inflows enabled building precautionary reserve buffers and maintained peso stability and relative competitiveness.
- Credit rating actions:
  - Standard and Poor’s upgraded the country’s credit ratings in November last year.
  - Moody's Investors Service raised the outlook of the Philippines' sovereign bond ratings to positive from stable in January 2011.
- 2011 outlook:
  - Economy expected to sustain growth momentum at 7-8 percent driven by domestic consumption and investment, as well as external demand.
  - Industry (particularly manufacturing) and services sectors expected to remain main drivers.
  - Demand increasingly driven by private sector activity supported by remittances and improving consumer and business confidence.
  - Investments related to the public-private partnership program expected to provide strong support.
  - Government consumption expected to be subdued due to some re-alignments in the budget.
- Inflation and external position forecasts:
  - Inflation rate expected to range within the target level of 3-5 percent.
  - External payments position expected to remain in surplus in the near term with strong impetus from remittances, exports and continued capital inflows.

### Policy Thrusts
- Authorities recognize remaining risks and challenges, including:
  - Uneven pace of global growth.
  - Volatilities in global food prices.
  - Persistent increases in world oil prices.
  - Remaining domestic structural weaknesses.
- Overall policy agenda: consolidate gains and pursue additional policy measures and reforms to address vulnerabilities hindering sustainable medium-term growth.

#### Monetary and External Policy
- Monetary policy focus: keep inflation low and prices stable to promote appropriate interest rates supportive of domestic demand.
- Credit policy: consistent with inflation targeting and supportive of economic expansion.
- BSP action and stance:
  - In its recent monetary policy meeting last 10 February 2011, the BSP’s Monetary Board decided to keep the policy rate steady, noting limited evidence of spillovers or second-round effects of supply shocks.
  - The Monetary Board noted prevailing price and output conditions suggest the stance of monetary policy continues to be appropriate for the time being, but the balance of risks to the inflation outlook has tilted further to the upside.
  - BSP is closely watching emerging risks to the inflation outlook and is prepared to undertake monetary action, if necessary, to arrest a potential build-up in inflation expectations and contain second-round effects of supply shocks.
- Inflation targeting framework changes:
  - In 2010, the BSP announced the shift to a fixed medium-term inflation target from a variable annual inflation target to promote a long-term view on inflation and better anchor expectations.
- BSP institutional measures being pursued:
  - Amendment of the BSP Charter to allow it to issue its own debt instruments.
  - Achievement of full BSP capitalization to enable more effective monetary policy.
- Exit strategy stages announced by BSP:
  1. Discontinuation of liquidity measures.
  2. Withdrawal of interest rate stimulus.
- Liquidity rollback actions implemented in first quarter of 2010:
  - Alignment of the peso rediscount rate to the BSP’s policy rate.
  - Reduction of the peso rediscounting budget from Php60 billion to Php20 billion.
  - Restoration of the loan value of all eligible rediscounting papers.
  - Restoration of the non-performing loan ratio requirement for banks wishing to avail of the rediscounting facility.
- Withdrawal of interest rate stimulus contingent on inflation outlook and strength/speed of domestic real sector recovery and global conditions; potential near-term policy rate hikes intended mainly to curb inflation pressures and arrest build-up in inflation expectations.
- Capital flow management toolkit:
  - Greater exchange rate flexibility.
  - Reserve accumulation and associated liquidity management operations.
  - Macroprudential tools.
  - Liberalization of outward foreign exchange transactions.
  - Calibrations in monetary policy when necessary.
- Objective: orderly management of large capital flows to contain destabilizing effects and ensure sustainable growth.

#### Fiscal Policy
- Fiscal sustainability is a top priority and integral to effective governance.
- Main tasks: address narrow fiscal space and get on a sustainable revenue-and-spending path.
- Strategies:
  - Increase revenue, improve allocative and operational efficiency of fiscal expenditures, and strengthen liability management.
- Revenue target:
  - Achieve a tax effort of 18% by 2016 through measures including stringent tax enforcement, simplification of tax compliance rules, streamlining of clearance procedures, modernization of customs administration, reduction of discretionary administration, intensification of efforts against tax evaders, establishment of a tax registry, and strengthening of the Lateral Attrition Law with more effective rewards and penalties.
  - The Fund’s technical assistance on tax reforms could help increase revenue collection.
- Expenditure reforms:
  - Set funding priorities while protecting social programs for the most vulnerable.
  - Enhance inter-agency coordination and internal control systems to reduce wastage and corruption.
  - Enhance transparency and accountability mechanisms.
- Liability management strategy:
  - Lengthen the maturity profile of government debts through debt swaps and debt exchanges to avoid bunching.
  - Diversify government funding structure by currency, maturity and markets.
- Expected outcome: keep the deficit and government debt within manageable levels.

#### Financial Sector Policy
- Objective: establish a strong and vibrant financial system to facilitate the economy’s liquidity requirements.
- Focus on maintaining a well-functioning banking system to mobilize funds and channel them to productive uses.
- Prudential measures to continue:
  - Improve governance.
  - Strengthen bank capitalization.
  - Clean up banks’ balance sheets.
  - Enhance risk management.
- Regulatory coordination:
  - Continue engagement with other regulators to harmonize standards and procedures and align domestic banking policies with global practices, taking into account the economy’s circumstances and financial service requirements.
- On concentration risk related to conglomerates:
  - Three clarifications provided:
    1. The existence of conglomerates is part of the Philippine economy structure and they are a major driving force.
    2. Their funding needs are typically provided by banks within accepted underwriting standards.
    3. Conglomerates’ revenue sources are diversified across different business lines, mitigating concentration risk concerns.
- BSP Charter amendments submitted to Congress aim to:
  - Rationalize secrecy of bank deposit rules.
  - Allow the BSP more flexibility to order consolidations in the banking industry.
  - Clarify grounds for closing problem banks or declaring them insolvent.
  - Strengthen legal protections for BSP officers acting in their official capacity.

#### Structural Reforms
- Given limited fiscal space and need for infrastructure investment, the government strategy emphasizes increased private sector participation via the Public-Private Partnerships (PPP) program.
- PPP objectives:
  - Focus on infrastructure for tourism, agriculture, social services and growth centers.
  - Provide incentives to stimulate private resources.
  - Ensure competition, fairness and transparency.
  - Provide assistance to stakeholders to advance projects.
  - Improve the approval process of projects.
  - Protect public interest.
- Government is crafting the Medium-Term Philippine Development Plan, 2010-2016, to set growth strategies, policies, programs and activities for the medium-term.

### Final Remarks
- The Philippines aims to take advantage of the firm recovery from the global downturn and embark on a reform agenda to sustain and elevate growth and development.
- Authorities are fully cognizant of vulnerabilities and challenges and are committed to continued sound macroeconomic management and structural reforms to strengthen resilience and allow sustained rapid growth moving forward.

*Source: _cr1159 - Introduction_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1159.pdf_