## _cr14245

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### Natural disaster risks and social and economic consequences
- Macroeconomic impact:
  - Typhoon Yolanda (late 2013) is estimated to have reduced annual 2013 GDP by ¼ percentage point.
  - A somewhat greater impact from Yolanda is likely in 2014, as reconstruction needs affect output and imports.
  - Natural disasters are identified as a material downside risk alongside asset-price pressures, volatile capital flows, and external shocks.
- Social vulnerability and labor-market implications:
  - A large share of the population is vulnerable to falling into poverty as a result of natural disasters and other shocks.
  - Job creation has not kept pace with the rapidly growing labor force; structural under- and unemployment rates remain relatively high, sustaining outward migration and inward remittances.
  - Government commitment: “build back better”; reconstruction spending expected to support activity.
- Disaster exposure and Yolanda-specific figures:
  - 6,201 people were killed.
  - 1,785 remain missing.
  - 4.1 million people were displaced.
  - 1.1 million houses were damaged or destroyed.
  - 14 million people (more than 14 percent of the population) were impacted by the storm.
  - Prior to the storm, the affected region accounted for 17½ percent of GDP and included 31 percent of the population (29 million people).
  - The area is intensive in agriculture (27 percent of national output).
  - Average household income in 2012 was 75 percent of the national average.
  - Poverty rates in the region ranged between 29 percent and 41 percent; national average was 22 percent.
  - Official estimate of typhoon-related damage and loss amounts to US$13 billion (about 5 percent of GDP).
  - The private sector is thought to have incurred about 90 percent of the cost; private losses were uninsured.
- Fiscal response to Yolanda:
  - Government’s Reconstruction Assistance on Yolanda (RAY) plan (December 2013) guided by “building back better.”
  - Government earmarked some ₱ 120 billion (1 percent of GDP) for reconstruction spending in 2014.
  - A Multi-donor Trust Fund will be established to coordinate deployment of foreign grants.
  - Consideration of a Climate Change and Disaster Resiliency Fund for the longer term.
- Policy recommendations related to disasters:
  - Create policy space for post-typhoon reconstruction and infrastructure upgrading by withdrawing excess liquidity and raising real interest rates.
  - Allow the exchange rate to appreciate more fully in response to sustained structural balance of payments inflows while smoothing and sterilizing cyclical capital flows.

### Monetary and liquidity management
- Liquidity and instruments:
  - BSP restriction on nonbanks’ direct access to the SDA since late 2013 released some 5 percent of GDP in liquidity in late 2013, though two reserve requirement increases (by 1 percentage point each in April and May) absorbed part of the net injection.
  - SDA restriction affected some 11 percent of GDP in assets, although net liquidity released was less than half that amount after flows through deposits and trusts.
  - RRs are now 20 percent for universal and commercial banks, and 8 percent and 5 percent, respectively, for thrift or rural banks (which comprise 10 percent of banking sector assets). RRs for rural banks were adjusted in March only.
  - The 3-month T-bill rate is currently 1.1 percent, the policy (reverse repo) interest rate is 3.5 percent, and the SDA rate is 2 percent; real market interest rates remain very low or negative.
  - Credit growth by universal and commercial banks accelerated to an annual rate of almost 21 percent in April.
- BSP policy responses and recommendations:
  - Rely on a range of sterilization instruments; resume forex swaps; consider Treasury overfunding the fiscal deficit in the local debt market with proceeds kept at the BSP in the Treasury Single Account or make government securities available to the BSP for repo operations.
  - Raise the SDA and policy rates to attract additional funds to BSP facilities and pull up market interest rates.
  - Approve draft revisions to the BSP Charter to allow the BSP to issue its own bills and ensure a minimum level of capital, increasing BSP policy space.
  - Further normalization of U.S. monetary and financial conditions would help drain domestic liquidity, but changing market expectations on Fed actions could trigger volatility.
  - Any further policy adjustments will be data dependent and based on evolving outlooks for inflation and output.

### Financial-sector performance, exposures, and stability recommendations
- Banking system performance:
  - Philippine banks in 2013: robust profits, low NPLs, and capital adequacy ratios well above newly introduced Basel III requirements.
  - Banks are not dependent on external financing, relying mainly on domestic deposit funding.
  - Credit penetration through banks is around 35 percent of GDP.
  - Bank lending accelerated to almost 21 percent in April.
- Capital and regulatory minima:
  - From January 1, 2014, minimum CET1 ratio of 6.0 percent. Including the 2.5 percent capital-conservation buffer, minimum required CET1 ratio is 8.5 percent.
  - Minimum total capital adequacy ratio (CAR) is 10.0 percent.
- Real estate and nonbank finance exposures:
  - Property price increases in high-end metro Manila areas: 13 percent year-on-year for condominiums and 5¾ percent for office space in Q4:2013.
  - Banks’ real estate exposure amounted 21¾ percent of total loan portfolios at end-2013.
  - Sixty percent of real estate loans are to commercial entities (developers and construction companies); the rest to households.
  - Developers and several public agencies provide credit directly to home buyers, thought to total around 7½ percent of GDP (including mortgage lending by banks).
  - Nonbank real estate lenders tend to apply weaker credit standards than banks.
  - Market development: issuance by large corporates during January-May 2014 exceeded the 2013 annual total.
- Emerging risks and staff recommendations:
  - Risks: abundant liquidity, very low short-term market rates, rising aggregate leverage (aggregate leverage ratio for listed companies was 100 percent in 2012), skewed debt distribution toward more leveraged firms, migration of credit provision to less regulated lenders.
  - Real estate measures:
    - Strictly enforce existing LtV ceilings on bank mortgages (standard cap is 60 percent, but banks routinely offer 80 percent).
    - Require standardized contracts for nonbank financing of property purchases, overseen by the SEC and the BSP.
    - Consider applying higher risk weights than the standard 50 percent for borrowers with multiple mortgages.
    - Eliminate tax advantages that favor real estate and replace tax holidays with well-targeted subsidies for low-income buyers.
  - Loan concentration and conglomerates:
    - Roll back exemptions to single borrower limits (SBLs) and tighten related conditions; classify interdependent companies within a conglomerate as a single borrower.
    - Amend the BSP Charter to allow BSP to request and receive information on all members of conglomerate groups affiliated with banks.
  - Financial stability architecture:
    - Expand BSP’s remit to include broad financial stability as a secondary objective to price stability.
    - Rapidly approve amendments to the BSP Charter addressing limited scope to access data on related entities, weak legal protection for supervisors, and the "extraordinary due diligence" requirement on supervisors.
    - Establish the Financial Stability Coordination Council.

### Fiscal policy stance, financing, and revenue mobilization
- Recent outcomes and targets:
  - General government debt moderated to 39 percent of GDP at end-2013.
  - Consolidated general government account in 2013 was close to balance—with a deficit of less than 1½ percent of GDP at the national government level.
  - Authorities target an NG deficit of 2 percent of GDP through 2016 (consistent with a general government deficit of about 1 percent of GDP).
  - The 2014 budget includes 1 percentage point of GDP in post-disaster reconstruction spending, of which one-fifth is financed by reallocating other expenditure.
- Staff view on deficit increase:
  - Raising the NG deficit from below 1½ percent of GDP in 2013 to 2 percent of GDP in 2014 would imply a stimulus on the order of 1 percent of potential GDP and should therefore be countered with tighter monetary and credit conditions.
  - Keeping the NG deficit unchanged thereafter is projected to moderate the public debt ratio to below 30 percent of GDP by 2019.
- Revenue mobilization recommendations:
  - Mobilization should rely primarily on broadening the tax base by reducing corporate income tax holidays, narrowing the VAT gap, and adopting a new mining strategy, supported by further improvements in tax administration.
  - If adopted, identified tax policy measures could yield 2‒3 percentage points of GDP, sufficient to finance the envisaged doubling in infrastructure spending.

### Structural transformation, employment, and inclusiveness
- Growth and competitiveness constraints:
  - Philippines advanced 28 places since 2009 to 59th in World Economic Forum rankings, but gaps remain in infrastructure adequacy, government bureaucracy, and labor regulations.
  - Government plans to more than double infrastructure spending to 5 percent of GDP by 2016 and has established a pipeline of PPP projects.
  - Foreign ownership limits are among the most restrictive in East Asia and FDI stock is very low; statutory corporate income tax rate is 30 percent with widespread tax holidays.
- Labor-market and social indicators:
  - Poverty incidence fell to 25 percent in mid-2013 from 28 percent in 2012.
  - Employment grew only half as fast as GDP in 2013; unemployment rate declined to 7 percent in April 2014, nearly ½ percentage point lower than a year earlier.
  - Underemployment moderated to 18¼ percent in April.
  - Agriculture provides some 31 percent of employment and has stagnated.
- Structural reform priorities:
  - Rationalize fiscal incentives and improve tax administration.
  - Develop a new mining strategy (mineral deposits estimated at US$1.4 trillion; mining currently accounts for 1 percent of GDP).
  - Relax unnecessary foreign ownership limits, cut red tape, improve infrastructure, and stimulate competition to attract investment and support inclusive growth.
  - Grant individual ownership titles to small land parcels; build farm-to-market roads; increase competition on inter island shipping; expand access to formal credit for small-scale entrepreneurs; reduce labor market rigidities.

### External sector assessment and current account analysis
- Current account balance (CAB) and context:
  - CAB moved into surplus in 2003, peaking at 5.7 percent of GDP in 2006.
  - Since the GFC, the CAB moderated but rose by 0.7 percent of GDP in 2013 to 3.5 percent of GDP on a stronger trade balance.
  - Strengthening CAB since the mid-1990s reflects mainly sustained fall in the investment-to-GDP ratio: gross capital formation declined from above 25 percent of GDP pre-Asian crisis to below 20 percent of GDP since the mid 2000s.
- Reserve adequacy and NIIP:
  - At end 2013, reserves stood at 31 percent of GDP, and 2.7 times the Fund’s EM reserve adequacy metric (against the benchmark of 1 to 1½ times).
  - Reserves were 3½ times short-term external debt on a residual maturity basis and more than 12 months of imports of goods and services.
  - NIIP: -49 percent of GDP in 2001, rising to −14 percent of GDP at end 2012.
- EBA results (2013 figures):
  - Actual CAB (percent of GDP): 3.5
  - CAB norm (percent of GDP, Current Account Regression): -3.5
  - CAB gap (percent of GDP, Current Account Regression): 6.9 (gap rises to 6.9 percent of GDP when policy deviations are considered)
  - Staff interpretation: external sector is moderately stronger than warranted by medium-term fundamentals and desired policies; moderate currency undervaluation implied.
- Extensions and nonstandard factors:
  - Staff conservatively assume impact of high exposure and vulnerability to natural disasters on the Philippine CAB is 2½ percent of GDP.
  - Staff estimate total nonstandard factors could approach 4 percentage points of GDP, reducing the CAB gap to about 3 percent of GDP.
  - Using GNI rather than GDP reduces the estimated current account gap by 1.5 percentage points to 5.4 percent (GNI assumption: total remittances = 1½ times the officially reported amount = 15 percent of GDP).
- Policy implications:
  - With official reserves more than adequate, the exchange rate should adjust more fully to structural balance of payments flows, and stepped up imports of investment goods over the medium term are expected to narrow the current account gap.

### Potential growth (Box 4) — methods, results, and policy implications
- Summary finding:
  - Potential growth has increased from around 4−5 percent in the 2000s to about 6−6½ percent by 2013.
- Methods applied:
  - Univariate filtering (HP extended for financial cycle), production function (growth accounting), and multivariate time-series filter.
- Production-function decomposition (selected entries, In percent):
  - 1998:Q2-2001:Q4 — PotentialHuman Growth: 3.71; TFP: 1.57; Capital: 0.72; Capital: 0.45; Labor: 0.97
  - 2002:Q1-2004:Q4 — PotentialHuman Growth: 4.88; TFP: 2.10; Capital: 0.80; Capital: 0.48; Labor: 1.51
  - 2005:Q1-2009:Q4 — PotentialHuman Growth: 5.11; TFP: 2.06; Capital: 0.91; Capital: 0.47; Labor: 1.66
  - 2010:Q1-2012:Q4 — PotentialHuman Growth: 5.26; TFP: 2.16; Capital: 1.18; Capital: 0.47; Labor: 1.44
  - 2013:Q1 — PotentialHuman Growth: 6.20; TFP: 2.56; Capital: 1.37; Capital: 0.47; Labor: 1.79
  - 2013:Q2 — PotentialHuman Growth: 6.02; TFP: 2.57; Capital: 1.40; Capital: 0.47; Labor: 1.58
  - 2013:Q3 — PotentialHuman Growth: 6.08; TFP: 2.57; Capital: 1.43; Capital: 0.47; Labor: 1.61
  - 2013:Q4 — PotentialHuman Growth: 6.12; TFP: 2.56; Capital: 1.46; Capital: 0.47; Labor: 1.63
- Policy implications:
  - Scope to further raise potential growth through capital deepening, higher employment, and sustaining TFP gains via business climate improvements.

### Debt sustainability and public debt projections (selected figures)
- External debt outlook:
  - External debt declined from close to 80 percent of GDP in 2001 to below 30 percent of GDP at end-2013.
  - One-time real depreciation of 30 percent in 2014 would raise the external debt-to-GDP ratio by 12 percentage points.
- Nominal gross public debt (percent of GDP):
  - 2012: 51.4
  - 2013: 40.6
  - 2014: 39.1
  - 2015: 36.2
  - 2016: 33.8
  - 2017: 31.9
  - 2018: 30.2
  - 2019: 28.7
- Public gross financing needs (percent of GDP):
  - 2012: 15.9
  - 2013: 7.4
  - 2014: 4.6
  - 2015: 6.0
  - 2016: 5.6
  - 2017: 5.2
  - 2018: 4.9
  - 2019: 4.7
- Real GDP growth (percent):
  - 2012: 5.0
  - 2013: 6.8
  - 2014: 7.2
  - 2015: 6.2
  - 2016: 6.5
  - 2017: 6.2
  - 2018: 6.0
  - 2019: 6.0
- Inflation (GDP deflator, percent):
  - 2012: 4.6
  - 2013: 1.9
  - 2014: 2.0
  - 2015: 4.1
  - 2016: 3.8
  - 2017: 3.5
  - 2018: 3.5
  - 2019: 3.5
- Contribution to changes in public debt (cumulative 2012–2019):
  - Change in gross public sector debt: -11.8 (percent of GDP)
  - Identified debt-creating flows: -10.4
  - Automatic debt dynamics (cumulative): -3.8
  - Residual, including asset changes (cumulative): -1.4
- DSA baseline conclusions:
  - Public debt is sustainable. Baseline projects general government debt-to-GDP will moderate from about 39 percent in 2013 to about 27 percent of GDP in 2019.
  - Primary surpluses are the main reason for the expected decrease.
  - Gross financing needs will remain moderate at around 4−6 percent of GDP throughout the projection period.

### Risk assessment and contingency measures (Risk Assessment Matrix highlights)
- Surges in global financial market volatility — Likelihood: High
  - Expected impact: Medium
  - Recommended response: Countercyclical macroprudential policies; undertake some forex intervention; ensure banks have adequate capital buffers; do not exceed standard ceilings on exposures to a single borrower.
- Sharp growth slowdown in China — Likelihood: Medium
  - Expected impact: High
  - Recommended response: Implement structural reforms to improve business environment and spur new sources of growth.
- Domestic asset price bubble fueled by abundant liquidity — Likelihood: Medium
  - Expected impact: Medium
  - Recommended response: Strictly enforce and tighten macroprudential measures; ensure adequate bank capital; expand BSP’s remit to oversee nonbank credit provision.
- Default by a highly-leveraged domestic conglomerate — Likelihood: Low
  - Expected impact: Medium
  - Recommended response: Proactive rollback of SBL exemptions; rapid recapitalization of banks if needed; avoid regulatory forbearance and fiscal transfers to the conglomerate; enhance BSP supervisory capacity.

### IMF appraisal, policy mix, and key recommendations (Press Release/Executive Board summary)
- Macro performance and outlook:
  - GDP grew by 7¼ percent in 2013.
  - Growth expected to ease in 2014 due to normalizing domestic financial conditions; typhoon effects likely larger in 2014.
  - Inflation picked up and was around 4½ percent due to pass-through of weaker peso, typhoon-related food disruptions, increases in rice prices and higher electricity prices.
  - Current account surplus rose to 3½ percent of GDP in 2013.
- Policy recommendations:
  - Rebalance policy mix toward expansionary fiscal policy while tightening monetary conditions:
    - Continue to proactively tighten monetary conditions; focus on measures that do not encourage shift to nonbanks, including raising official interest rates.
    - Provide BSP with instruments to undertake sterilization.
    - Allow exchange rate to adjust more fully to structural flows while smoothing cyclical capital flows.
  - Contain financial system risks:
    - Early adoption of Basel III capital requirements.
    - Monitor broader definition of banks’ real estate exposure.
    - Standardize “contract to sell” financing arrangements.
    - Establish the Financial Stability Coordination Council.
    - Widen BSP’s mandate to include financial stability.
  - Mobilize stable revenue sources:
    - Maintain national government deficit at 2 percent of GDP in 2014 and thereafter.
    - Increase public spending for disaster remediation, infrastructure upgrading, and improved social outcomes.
    - Undertake sizable tax effort focused on broadening the tax base.
  - Structural reforms to attract investment and create employment:
    - Relax foreign ownership limits; reduce red tape; limit tax holidays that favor incumbents; support PPP execution; increase job creation in agriculture and micro and small firms.
- Selected indicators (2010–15):
  - Real GDP (percent change): 2010: 7.6; 2011: 3.7; 2012: 6.8; 2013: 7.2; 2014 (Proj.): 6.2; 2015 (Proj.): 6.5
  - CPI (annual average): 2013: 2.9; 2014 (Proj.): 4.4; 2015 (Proj.): 3.8
  - Broad money (M3, percent change end of period): 2013: 31.8; 2014 (Apr 2014, year-on-year): 32.1
  - Credit to the private sector (percent change): 2013: 16.4; 2014 (Apr 2014, year-on-year): 20.9
  - Current account (percent of GDP): 2013: 3.5; 2014 (Proj.): 3.2; 2015 (Proj.): 2.6

*Source: IMF staff report chapter "1. Natural Disaster Risks and Addressing Their Social and Economic Consequences" and related excerpts from the IMF staff report and press release.*

### 1. Natural Disaster Risks and Addressing Their Social and Economic Consequences ___________ 20

### 1. Natural Disaster Risks and Addressing Their Social and Economic Consequences

### Macroeconomic impact of natural disasters
- Typhoon Yolanda (late 2013) is estimated to have reduced annual 2013 GDP by ¼ percentage point.
- A somewhat greater impact from Yolanda is likely in 2014, as reconstruction needs affect output and imports.
- Natural disasters are identified as a material downside risk to economic activity alongside asset-price pressures, volatile capital flows, and external shocks.

### Social vulnerability and labor market implications
- A large share of the population is vulnerable to falling into poverty as a result of natural disasters and other shocks.
- Job creation has not kept pace with the rapidly growing labor force; structural under- and unemployment rates remain relatively high, sustaining outward migration and inward remittances.
- The government’s response commitment is to “build back better” to strengthen resilience to natural disasters, with reconstruction spending expected to support activity.

### Interaction with macroeconomic conditions and policy space
- Reconstruction needs are expected to increase imports, which staff projects will marginally narrow the current account surplus in 2014.
- Staff forecasts assume tighter domestic financial conditions in 2014; under this baseline:
  - Growth is expected to moderate to 6¼ percent in 2014.
  - Potential growth is estimated to have edged up to around 6¼ percent.
  - End-2014 inflation is projected to be 4 percent, reflecting second-round effects from supply shocks and exchange rate depreciation offsetting subdued external prices.
- Without further structural reforms, growth is projected to converge to 6 percent thereafter as the positive output gap unwinds.

### Policy recommendations relevant to disaster-related fiscal and financial management
- Create policy space to accommodate fiscal spending for post-typhoon reconstruction and infrastructure upgrading by withdrawing excess liquidity and raising real interest rates.
- Use a mix of instruments to sterilize liquidity from reserve operations and limit excessive domestic accommodation:
  - Raise the SDA and policy rates to attract additional funds to BSP facilities and pull up market interest rates.
  - Resume forex swaps and consider Treasury overfunding the fiscal deficit in the local debt market with proceeds kept at the BSP in the Treasury Single Account or make government securities available to the BSP for repo operations.
  - Approve draft revisions to the BSP Charter to allow the BSP to issue its own bills and ensure a minimum level of capital, increasing BSP policy space.
- On exchange rate policy, allow the exchange rate to appreciate more fully in response to sustained structural balance of payments inflows (including remittances and FDI), while smoothing and sterilizing the liquidity impact of cyclical capital flows (portfolio and currency and deposit flows).

### Financial-sector and liquidity considerations affecting disaster response
- Recent policy and market developments that influence fiscal/financial capacity for reconstruction:
  - The BSP’s restriction on nonbanks’ direct access to its Special Deposit Account (SDA) released some 5 percent of GDP in liquidity in late 2013, though two reserve requirement (RR) increases (by 1 percentage point each in April and May) absorbed part of the net injection.
  - The SDA restriction affected some 11 percent of GDP in assets, although the net liquidity released—after flow back through deposits placed with banks (subject to RR) and trusts—was less than half that amount.
  - RRs are now 20 percent for universal and commercial banks, and 8 percent and 5 percent, respectively, for thrift or rural banks (which comprise 10 percent of banking sector assets). RRs for rural banks were adjusted in March only.
  - The 3-month T-bill rate is currently 1.1 percent, the policy (reverse repo) interest rate is 3.5 percent, and the SDA rate is 2 percent; real market interest rates remain very low or negative.
  - Credit growth by universal and commercial banks accelerated to an annual rate of almost 21 percent in April.

### Strategic priorities for resilience and inclusive recovery
- Accelerate implementation of social and structural reforms—poverty reduction, vital infrastructure delivery, reducing business costs, and agrarian reform—to limit long-term vulnerability to disasters and support job creation.
- Ensure reconstruction is leveraged to “build back better,” improving resilience to future natural disasters and supporting the welfare of regions disproportionately affected (e.g., Mindanao, referenced in broader context).
- Monitor and address channels by which excessive flow of resources to property and other sectors could amplify short-term growth but increase medium-term volatility, which could hamper sustainable, inclusive recovery after disasters.

*Source: IMF staff report chapter "1. Natural Disaster Risks and Addressing Their Social and Economic Consequences" from the Philippines report.*

### 18.      In recent years, large and volatile capital inflows have augmented current

### _cr14245 - 18.      In recent years, large and volatile capital inflows have augmented current

### Monetary and liquidity management
- Large and volatile capital inflows augmented current account-related inflows, complicating liquidity management.
- BSP policy responses and outcomes:
  - Restricted nonbanks’ direct access to the SDA since late 2013 to encourage migration of funds toward productive investment and align access to standing facilities with international norms.
  - Relied on a range of sterilization instruments; liquidity nevertheless expanded strongly due to both the operational adjustment in the SDA facility and sustained credit growth.
  - In early 2014, the BSP siphoned off liquidity by raising reserve requirements by 2 percentage points and allowing official reserves to decline.
  - Continued to rely on an enhanced policy toolkit rather than the policy rate alone while inflation is expected to be within target and inflation expectations remain well-anchored.
  - Further normalization of U.S. monetary and financial conditions would help drain domestic liquidity but changing market expectations on Fed actions could trigger volatility.
  - Allowing the BSP to issue its own securities and ensuring a minimum level of capital would increase flexibility over the amount, timing, and duration of sterilization operations.
- Recent macroprudential action:
  - BSP raised reserve requirements as a preemptive macroprudential measure against financial stability risks from strong liquidity and credit growth.
  - Any further policy adjustments will be data dependent and based on evolving outlooks for inflation and output.

### Financial sector performance and exposures
- Banks and credit:
  - Philippine banks in 2013: robust profits, low NPLs, and capital adequacy ratios well above newly introduced Basel III requirements.
  - Banks are not dependent on external financing, relying mainly on domestic deposit funding.
  - Bank lending accelerated since end-2013, reaching almost 21 percent in April.
  - Credit penetration through banks is around 35 percent of GDP.
- Capital and regulatory minima:
  - From January 1, 2014, Philippine banks must maintain a minimum common equity tier 1 (CET1) ratio of 6.0 percent (BIS recommends 4.0 percent by January 1, 2014 and 4.5 percent by January 1, 2015).
  - Including the 2.5 percent capital-conservation buffer, the minimum required CET1 ratio is 8.5 percent (BIS recommends 7 percent).
  - The minimum total capital adequacy ratio (CAR) is 10.0 percent (BIS recommends 8.0 percent).
- Real estate and nonbank finance:
  - Property price increases in high-end metro Manila areas: 13 percent year-on-year for condominiums and 5¾ percent for office space in Q4:2013.
  - Banks’ real estate exposure amounted 21¾ percent of total loan portfolios at end-2013 and has been growing faster than other segments.
  - Sixty percent of real estate loans are to commercial entities (developers and construction companies); the rest to households.
  - Real estate developer and affiliated conglomerate activity in debt and equity markets is significant; developers and several public agencies provide credit directly to home buyers, thought to total around 7½ percent of GDP (including mortgage lending by banks).
  - Nonbank real estate lenders tend to apply weaker credit standards than banks.
- Market developments:
  - Large corporates issuing securities to lock in fixed rate funding, lengthen maturities, and bypass bank exposure limits; issuance during January-May 2014 exceeded the 2013 annual total.

### Staff assessment — risks and recommended measures
- Emerging risks:
  - Abundant liquidity and very low short-term market rates increase risk that property and financial asset prices could move ahead of fundamentals.
  - Aggregate leverage ratio for listed companies was 100 percent in 2012; corporate indebtedness rise needs monitoring.
  - Debt distribution is skewed toward more leveraged firms, raising interest rate and refinancing vulnerabilities.
  - Financial deepening and search for yield amid low interest rates, and migration of credit provision to less regulated lenders, raises repricing and credit quality risks and reduces transparency.
- Recommended preemptive measures:
  - Real estate:
    - Strictly enforce existing loan-to-value (LtV) ceilings on bank mortgages (standard cap is 60 percent, but banks routinely offer 80 percent).
    - Require standardized contracts for nonbank (including real estate developer) financing of property purchases, overseen by the SEC and the BSP, to strengthen credit underwriting, consumer protection, and data collection.
    - Consider applying higher risk weights than the standard 50 percent for individual and corporate borrowers with multiple mortgages to discourage speculative activity.
    - Eliminate tax advantages in the corporate tax system that favor real estate—preferential treatment of real estate capital gains for firms whose primary business is not related to real estate, and tax holidays for constructing low-mid price housing—and replace tax holidays with well-targeted subsidies for low-income buyers.
  - Loan concentration:
    - Roll back exemptions to single borrower limits (SBLs) and tighten related conditions; classify interdependent companies within a conglomerate group as a single borrower, consistent with Basel Committee guidelines for large exposures.
    - Amend the BSP Charter to allow BSP to request and receive information on all members of conglomerate groups affiliated with banks.
  - Financial stability architecture:
    - Expand the BSP’s remit to include broad financial stability as a secondary objective to price stability to counteract migration of risk beyond the current regulatory perimeter.
    - Rapidly approve amendments to the BSP Charter addressing limited scope to access data on related entities, weak legal protection for supervisors, and the "extraordinary due diligence" requirement on supervisors.
    - Vigilant oversight and strong coordination with home country supervisors are needed given the law allowing additional foreign bank entry (to a maximum of 40 percent of sector assets) in preparation for ASEAN Economic Community.

### Authorities’ views and supervisory practice
- Authorities remain watchful for financial stability risks from strong credit growth and stand ready to adopt new macroprudential measures as necessary.
- Support to real estate fundamentals:
  - Large unmet housing needs, sustained remittances, and business process outsourcing growth support real estate demand; prudent practices of major developers noted.
  - Standard indicators—price to rent ratios, occupancy rates, and bank exposures—do not signal quantity imbalances or property price bubbles, though notable demand increases by young professionals, expatriates, and Overseas Filipinos are observed.
- BSP monitoring and stress testing:
  - BSP requires banks to carry out stress tests twice a year on the effect of a 20 percent and 50 percent write off of various credit exposures, including real estate, on banks’ balance sheets.
  - Banks are expected to maintain a capital adequacy ratio of 10 percent after adjusting for stress test results, with universal and commercial banks also required to maintain a common equity Tier 1 ratio of at least 6 percent.
  - The existing 20 percent cap on banks’ real estate exposures may be modified or new macroprudential measures introduced based on stress test results and enhanced monitoring.
- On SBL exemptions and foreign bank entry:
  - Temporary SBL exemption for oil purchases (additional 15 percentage points) lapsed in March 2014.
  - Temporary SBL exemption to finance PPPs (additional 25 percent) was kept until 2016, with new provisions excluding affiliates of the lending bank from the SBL exemption.
  - Banks’ PPP exposures are currently very small.
  - Scope exists to increase market participants in preparation for ASEAN integration by 2020.

### Fiscal policy — stance and fiscal space
- Recent fiscal outcomes and targets:
  - General government debt moderated to 39 percent of GDP at end-2013.
  - Consolidated general government account in 2013 was close to balance—with a deficit of less than 1½ percent of GDP at the national government (NG) level, well below the 2 percent target—on higher revenue collection coupled with slow budget execution.
  - Authorities target an NG deficit of 2 percent of GDP through 2016 (consistent with a general government deficit of about 1 percent of GDP).
  - The 2014 budget includes 1 percentage point of GDP in post-disaster reconstruction spending, of which one-fifth is financed by reallocating other expenditure.
- Staff view on 2014 deficit increase:
  - Raising the fiscal deficit from 2014 is warranted to accommodate reconstruction and other priority spending, conditioned on appropriately restrictive monetary and financial policies.
  - Raising the NG deficit from below 1½ percent of GDP in 2013 to 2 percent of GDP in 2014 would imply a stimulus on the order of 1 percent of potential GDP and should therefore be countered with tighter monetary and credit conditions.
  - Keeping the NG deficit unchanged thereafter would be broadly neutral and is projected to moderate the public debt ratio to below 30 percent of GDP by 2019.
- Revenue needs and recommendations:
  - Significant additional revenue is required to finance large recurrent priority spending needs and offset potential revenue losses.
  - Mobilization should rely primarily on broadening the tax base by reducing corporate income tax holidays, narrowing the VAT gap, and adopting a new mining strategy, supported by further improvements in tax administration.
  - If adopted, identified tax policy measures could yield 2‒3 percentage points of GDP, sufficient to finance the envisaged doubling in infrastructure spending.

### Structural transformation and inclusiveness
- Growth and competitiveness constraints:
  - Philippines advanced 28 places since 2009 to 59th in World Economic Forum rankings, but gaps remain in infrastructure adequacy, government bureaucracy, and labor regulations.
  - Government plans to more than double infrastructure spending to 5 percent of GDP by 2016 and has established a pipeline of PPP projects.
  - Foreign ownership limits are among the most restrictive in East Asia and FDI stock is very low; high statutory corporate income tax rate (30 percent) combined with widespread tax holidays creates inefficiencies.
- Social outcomes and labor market:
  - Poverty incidence fell to 25 percent in mid-2013 from 28 percent in 2012.
  - Employment grew only half as fast as GDP in 2013; unemployment rate declined to 7 percent in April 2014, nearly ½ percentage point lower than a year earlier.
  - Underemployment moderated to 18¼ percent in April.
  - Agriculture provides some 31 percent of employment and has stagnated on high transport costs and unclear property rights from land reform, resulting in low productivity and employment growth.
- Structural recommendations (summarized across sections):
  - Rationalize fiscal incentives and improve tax administration to sustain revenue momentum.
  - Develop a new mining strategy based on stewardship and equitable tax arrangements to realize mining’s potential (mineral deposits estimated at US$1.4 trillion; mining currently accounts for 1 percent of GDP).
  - Pursue reforms to improve infrastructure, reduce bureaucracy, relax unnecessary foreign ownership limits, and stimulate competition to attract investment and support inclusive growth.

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

### 30.      Continuing to improve the business climate would help maintain the economy’s

### Continuing to improve the business climate would help maintain the economy’s growth momentum and broaden its sectoral underpinnings

### Business climate, integration, and investment bottlenecks
- Recent improvements in fiscal transparency and public financial management have increased the efficiency of public spending and instilled better governance, which should help catalyze private sector activity.
- Deeper integration through the ASEAN Economic Community 2015 and prospective multilateral trade agreements (RCEP, TPP) will intensify regional competition in product markets and for investment.
- Policy and regulatory actions recommended to realize benefits from integration:
  - Scale back generous perpetual income tax holidays that favor incumbents.
  - Relax limits on foreign ownership.
  - Approve a comprehensive Competition Law establishing an independent fair trade commission.
  - Further improve the investment climate by cutting red tape that raises the level and unpredictability of business costs.
- Infrastructure priorities and execution constraints:
  - Reducing the infrastructure backlog in transport and electricity is critical.
  - Removing operational bottlenecks and regulatory uncertainty that impede execution of public projects and PPPs is essential.

### Employment, poverty reduction, and labor-market reforms
- Sustained job-rich growth is needed to help break the cycle of poverty and outward labor flows.
- Social spending improvements:
  - Increased public spending on CCTs, universal health coverage for the poor, and public education are helping to better social outcomes.
- To create stable jobs and achieve permanent poverty reduction, focus is needed on:
  - Faster growth in labor intensive sectors—agro business and activities of micro, small, and medium sized firms—to absorb the large pool of less skilled workers, many underemployed.
  - Granting individual ownership titles to small land parcels to allow land to be used as collateral for business loans.
  - Building farm-to-market roads and increasing competition on inter island shipping to lower transport costs.
  - Reducing red tape and labor market rigidities (including high firing costs and strict limits on apprenticeships and fixed-term contracts) that disproportionately burden SMEs.
  - Expanding access to formal credit services for small-scale entrepreneurs, where intermediation costs are lower.
- Disaster resilience and labor prospects:
  - Boosting resilience to natural disasters through “build back better” programs and low cost insurance schemes would reduce the risk that households fall back into poverty when a natural disaster strikes.
  - Improving prospects for domestic employment would reduce incentives for working abroad and the social hardships and macroeconomic management challenges from large remittances in the absence of compensating productivity gains.

### Authorities’ stated priorities
- Authorities remain committed to rapid, socially inclusive economic growth.
- Planned policy directions:
  - Further boost public spending on social programs and infrastructure in line with available revenue, with PPPs to mobilize private sector resources for infrastructure development.
  - To reap benefits of ASEAN integration: relax foreign ownership limits that do not require amending the constitution, rationalize tax incentives, and institutionalize transparency and governance reforms to ensure irreversibility.

### Staff appraisal: recent performance, risks, and policy mix
- Recent performance and conditions:
  - The Philippine economy continued to perform robustly in 2013.
  - Strong macroeconomic fundamentals and financial sector buffers, and a flexible policy response to evolving external conditions, cushioned the impact of volatile capital flows.
  - Domestic monetary and financial conditions are now very accommodative.
  - Notable progress was achieved in lowering the poverty rate, although the incidence of poverty and under- and unemployment remain elevated.
- Outlook and risks:
  - Macroeconomic prospects are expected to remain favorable going forward.
  - Reconstruction from super typhoon Yolanda, infrastructure spending and remittance-driven private consumption will support rapid GDP growth, but the pace is likely to ease on more restrictive financing conditions that would help temper inflation, narrow the positive output gap, and enhance financial stability.
  - The current account surplus is forecast to decline gradually, with the real effective exchange rate moving in line with structural flows.
  - External and domestic downside risks include:
    - Abrupt exit from exceptionally loose monetary policies abroad.
    - A sharp slowdown in China or other emerging markets.
    - A major geopolitical incident impacting trade and capital flows.
    - Rapid credit growth or a disproportionate flow of resources to the property sector boosting short-term growth but heightening volatility thereafter.
- Policy challenges and recommended rebalancing:
  - Delivering high quality growth requires further reducing bottlenecks to investment and formal sector employment, diversifying production structure, and absorbing the growing working age population.
  - The economy is well positioned for a more restrictive policy setting, together with rebalancing toward an expansionary fiscal policy.
  - Evidence of a large buildup of reserves from leaning against sustained inflows suggests the external sector is moderately stronger than warranted by medium-term fundamentals.
  - A tighter overall policy stance is needed to maintain macrofinancial stability, while rebalancing the policy mix to accommodate fiscal spending for post-typhoon reconstruction and infrastructure upgrading.

### Monetary and financial stability recommendations
- Monetary stance and instruments:
  - Continue to proactively tighten monetary conditions to address potential inflation and generalized financial stability risks.
  - The BSP’s earlier actions to withdraw liquidity by drawing down reserves and raising reserve requirements were appropriate.
  - Additional tightening of monetary and financial conditions is needed, focusing on measures that would not encourage further shift in financial intermediation to nonbanks, including by raising official interest rates.
  - Providing the BSP with suitable instruments to undertake sterilization would improve the effectiveness of monetary policy.
  - With official reserves more than adequate, the exchange rate should adjust more fully to structural balance of payments flows, while symmetrically smoothing the effect of cyclical capital flows.
- Financial sector measures:
  - Additional targeted action to contain specific risks is needed:
    - Early adoption of Basel III capital requirements.
    - Monitor a broader definition of banks’ real estate exposure.
    - Standardize “contract to sell” financing arrangements for developers.
    - Establish the Financial Stability Coordination Council.
  - Recently-announced bank stress tests for real estate exposure are commendable.
  - Widening the BSP’s mandate to include financial stability would help prevent diversion of systemic risk to the shadow-banking sector and strengthen powers for managing risks associated with greater cross border financial integration.
  - Take further measures to contain risks in the property sector and to improve oversight and better manage risks from large exposures.

### Fiscal policy and revenue mobilization
- Fiscal stance and spending needs:
  - Continue to focus on mobilizing stable sources of revenue to ensure room for structural spending priorities while preserving fiscal prudence.
  - Increasing the national government deficit to 2 percent of GDP in 2014 and maintaining it thereafter is appropriate to continue to build fiscal buffers and moderate the debt ratio.
  - Larger public spending is needed for disaster remediation, infrastructure upgrading and to support improved social outcomes.
- Tax strategy:
  - Meeting spending demands requires a sizable tax effort focused mainly on broadening the tax base by reducing exemptions and allowances and adopting a new mining strategy, supported by improvements in tax administration.

### Structural reforms to boost investment and employment
- Reforms to attract investment and create employment:
  - Relax limits on foreign ownership.
  - Reduce red tape.
  - Limit tax holidays that tend to favor incumbents and distort the tax system.
  - Increase market contestability to support execution of PPPs and better position the Philippines to benefit from deeper regional integration.
- Measures to increase job creation in agriculture and micro and small firms:
  - Establish clear property rights for small-scale farms.
  - Expand access to formal credit.
  - Reduce labor market rigidities.

### Natural disaster risks and fiscal response (Box 1) — key figures and measures
- Disaster exposure and historical statistics:
  - The Philippines ranked third highest in the 2012 World Risk Index.
  - According to the Center for Research on the Epidemiology of Disasters, 225 significant natural disasters were recorded in the Philippines during 2000−12.
  - The private sector has typically borne 90 percent of the damage and losses from natural disasters in the Philippines.
- Typhoon Yolanda (November 8, 2013) impacts:
  - 6,201 people were killed.
  - 1,785 remain missing.
  - 4.1 million people were displaced.
  - 1.1 million houses were damaged or destroyed.
  - 14 million people (more than 14 percent of the population) were impacted by the storm.
  - Prior to the storm, the affected region accounted for 17½ percent of GDP and included 31 percent of the population (29 million people).
  - The area is intensive in agriculture (27 percent of national output).
  - Average household income in 2012 was 75 percent of the national average.
  - Poverty rates in the region ranged between 29 percent and 41 percent; national average was 22 percent.
  - Official estimate of typhoon-related damage and loss amounts to US$13 billion (about 5 percent of GDP).
  - The private sector is thought to have incurred about 90 percent of the cost; private losses were uninsured.
- Fiscal response measures:
  - Government’s Reconstruction Assistance on Yolanda (RAY) plan (December 2013) is guided by “building back better.”
  - The government has earmarked some ₱ 120 billion (1 percent of GDP) for reconstruction spending in 2014.
  - A Multi-donor Trust Fund will be established to coordinate deployment of foreign grants.
  - The government is considering establishing a Climate Change and Disaster Resiliency Fund for the longer term.

### Drivers of recent growth (Box 2) — empirical findings
- Structural VAR analysis findings:
  - Since the GFC, the explanatory power of external factors has gradually waned, giving a greater role to internal factors (obtained residually).
  - China’s contribution has generally been smaller than that of other external factors, although typically of the same sign.
  - Contributions from external and internal factors have generally been of the same sign for much of the post-GFC period, but recently they have moved in opposite directions, with external factors creating a small drag on growth, reflecting the China slowdown.
- Reasons for stronger internal role in the Philippines:
  - The Philippines is relatively less open to trade and financial flows than most other EMEs.
  - Ongoing structural reforms have likely raised actual (and potential) growth.
  - Domestic interest rates were influenced by sizable structural current account inflows that—being only partly sterilized—further loosened domestic monetary and financial conditions and provided additional support for GDP growth.

### Financial flows overview (Box 3) — patterns and sectoral shifts
- Net financial flows:
  - As a share of GDP, net financial flows into the Philippines moved broadly in line with the emerging market average over the past two decades.
  - Net financial flows peaked at 12¼ percent of GDP in 1996 and were near zero in 2013.
- Gross flow characteristics:
  - Offsetting pattern: nonresidents lend to Philippine residents while residents place assets abroad, and vice versa.
  - This offsetting pattern may reflect portfolio diversification, placement abroad of collateral for external loans, and round tripping by domestic banks.
  - During the GFC’s extreme risk aversion, the offsetting pattern was interrupted: asset and liability flows were reinforcing as both residents and nonresidents exited.
- Cumulative sectoral developments since 2005:
  - Banks initially experienced financial outflows (placement of assets abroad), then drew down those assets beginning in early 2010 to reach a small net external liability position in 2012.
  - Banks cut external borrowing immediately following the Fed’s taper talk in Q2:2013.
  - Government liabilities picked up in the two years following the GFC but have stabilized since 2011.
  - Liabilities of other sectors to nonresidents ticked up since the GFC.
  - Cumulative net FDI flows are marginally negative, indicating residents’ outward FDI exceeds nonresidents’ inward FDI.

*Source: IMF staff report excerpts provided in the content unit.*

### Box 4. Philippines: What is Happening to Potential Growth?

### Box 4. Philippines: What is Happening to Potential Growth?

### Summary
- The Philippines recorded among the fastest growth in Asia during the past two years, alongside strong macroeconomic outcomes and an investment grade credit rating in 2013.
- Key question: does recent growth reflect increased potential or cyclical factors? Three widely-used approaches produce a similar picture: potential growth has increased from around 4−5 percent in the 2000s to about 6−6½ percent by 2013.

### Methods and Results
- Three approaches applied:
  - Univariate filtering (Hodrick-Prescott, extended for the financial cycle): 
    - Finance-neutral estimate indicates potential growth rose more in the Philippines in 2013 than other ASEAN-5, even controlling for cyclical growth.
    - The cyclical component of growth was around 1 percent of GDP.
  - Production function (growth accounting decomposition into human capital-augmented labor, capital, and a residual interpreted as total factor productivity, TFP):
    - Results suggest potential growth rose to about 6−6¼ in 2013, led by an increase in TFP and capital accumulation.
  - Multivariate time-series filter (leveraging output, inflation, unemployment, capacity utilization, and expectations of inflation and growth):
    - Shows a rising trend in potential growth to 6−6½ percent by end-2013.

### Potential Growth Decomposition (Philippines)
- The production-function decomposition results (In percent) by period:
  - 1998:Q2-2001:Q4
    - PotentialHuman Growth: 3.71
    - TFP: 1.57
    - Capital: 0.72
    - Capital (label repeated): 0.45
    - Labor: 0.97
  - 2002:Q1-2004:Q4
    - PotentialHuman Growth: 4.88
    - TFP: 2.10
    - Capital: 0.80
    - Capital (label repeated): 0.48
    - Labor: 1.51
  - 2005:Q1-2009:Q4
    - PotentialHuman Growth: 5.11
    - TFP: 2.06
    - Capital: 0.91
    - Capital (label repeated): 0.47
    - Labor: 1.66
  - 2010:Q1-2012:Q4
    - PotentialHuman Growth: 5.26
    - TFP: 2.16
    - Capital: 1.18
    - Capital (label repeated): 0.47
    - Labor: 1.44
  - 2013:Q1
    - PotentialHuman Growth: 6.20
    - TFP: 2.56
    - Capital: 1.37
    - Capital (label repeated): 0.47
    - Labor: 1.79
  - 2013:Q2
    - PotentialHuman Growth: 6.02
    - TFP: 2.57
    - Capital: 1.40
    - Capital (label repeated): 0.47
    - Labor: 1.58
  - 2013:Q3
    - PotentialHuman Growth: 6.08
    - TFP: 2.57
    - Capital: 1.43
    - Capital (label repeated): 0.47
    - Labor: 1.61
  - 2013:Q4
    - PotentialHuman Growth: 6.12
    - TFP: 2.56
    - Capital: 1.46
    - Capital (label repeated): 0.47
    - Labor: 1.63

- Note: Table header labels in source include a repeated "Capital" column; numeric values above preserve the source formatting and values exactly.

### Policy Implications and Scope for Further Gains
- Unlike many Emerging Market countries with declining potential growth, the Philippines has recently experienced rising potential growth.
- With a low investment rate and an expected demographic dividend, there is scope to further raise potential growth through:
  - Capital deepening and higher employment.
  - Sustaining the trend rise in TFP, contingent on further progress in improving the business climate.

*Source: IMF staff calculations.*

### Box 9. Philippines: Progress in Fiscal Transparency

### Box 9. Philippines: Progress in Fiscal Transparency

### Overview
- Improving fiscal transparency has been a priority in the Philippines in recent years.
- The public financial management (PFM) reform strategy is a key plank in support of the Philippines governance reform agenda.
- The Philippines has played a leading role in international fiscal transparency initiatives, such as the Global Initiative for Fiscal Transparency (GIFT).
- The IMF’s Fiscal Transparency Evaluation in early 2014 reached a broadly favorable conclusion, assessing PFM practices against the draft Fiscal Transparency Code covering the three pillars: fiscal reporting; fiscal forecasting and budgeting; and fiscal risk analysis and management.
- The evaluation proposed twelve priority recommendations to address existing gaps.

### Fiscal reporting
- Fiscal reporting is relatively comprehensive, frequent and timely.
- Comparability of fiscal data against the original budget is difficult, reflecting fragmentation of agencies involved.

### Fiscal forecasting and budgeting
- Fiscal forecasting and budgeting is generally good, with several recent improvements.
- Noted improvements include:
  - fiscal policy objectives,
  - performance orientation,
  - public participation,
  - the comprehensiveness and orderliness of the budget.
- However, budget credibility is undermined by the complexity and large flexibility of the annual budget framework.

### Fiscal risk analysis and management
- Fiscal risk analysis and management is relatively strong.
  - Evidence: publication of a comprehensive fiscal risk statement with a relatively comprehensive collation of risks that could affect public finances.
- Improvements needed in a few areas:
  - capture risks from guarantees and PPPs,
  - assess the scope of tax expenditures,
  - introduce a longer-term perspective in the fiscal sustainability analysis.

### Crosscutting issues identified by the evaluation
- Fragmentation of responsibilities for fiscal management in the public sector.
- Complexity and flexibility of the budget system, which complicates fiscal reporting.

### Progress since the evaluation
- Authorities are rolling out technological innovations to speed up budget release and procurement transactions, improve information flows and strengthen transparency and accountability.
- Government Integrated Financial Management Information System (GIFMIS):
  - Enables timely and more comprehensive monitoring of budget execution and agency utilization of funds.
  - Planned pilot in 2015 and full implementation in 2016.
- Treasury Single Account (TSA):
  - Adopted in 2014 for central government deposits.
  - Will be progressively expanded to the wider public sector.
- New public websites:
  - Track expenditures of public calamity-related resources.
  - Monitor foreign aid receipts.
- Fiscal risk management intentions:
  - Authorities intend to strengthen disclosure and management of contingent liabilities, including PPPs.
- Budget innovations:
  - The 2014 budget introduced performance-informed budgeting.

*Source: Box 9. Philippines: Progress in Fiscal Transparency (from the provided IMF content).*

### Appendix 1. Philippines: Risk Assessment Matrix 1/

### Appendix 1. Philippines: Risk Assessment Matrix 1/

### Main risks, transmission channels, expected impacts
- Surges in global financial market volatility
  - Likelihood: High
  - Transmission channels:
    - Bouts of heightened risk aversion and a sharp increase in long-term interest rates
    - Sharp reversal in external financing, leading to a further peso depreciation
  - Expected impact (Medium):
    - Prices of financial assets decline further, generating negative wealth effects and mark-to-market losses.
    - Rising credit cost causes real estate prices to fall and construction activity to drop.
    - Banks’ NPLs may increase from very low levels, but effect on capital is likely manageable.
    - Some leveraged real estate developers and related corporate entities could face debt service difficulties.
    - Remittances are an important funding source for bank credit, which should help avoid severe funding pressures and a credit crunch and help insulate domestic demand.
    - Effective depreciation would boost net exports to cushion effect on growth.
  - Recommended policy response:
    - Adopt countercyclical macroprudential policies (e.g., countercyclical capital charge on RE or general provisioning requirement on new RE loans).
    - Undertake some forex intervention to avert a vicious depreciation-outflows cycle that would stoke inflation, but a weaker exchange rate would be appropriate.
    - Ensure banks have adequate capital buffers and do not exceed standard ceilings on exposures to a single borrower (defined to include all affiliated entities).

- Sharp growth slowdown in China in the medium term
  - Likelihood: Medium
  - Transmission channels:
    - A slowdown in China’s domestic demand contracts regional exports and GDP growth.
    - Investor sentiment toward the region would weaken.
    - Financial and real investment linkages by Chinese corporates to the Philippines are small.
    - Some Philippine conglomerates have significant real estate and retail investments in China.
  - Expected impact (High):
    - Philippine direct exports to China have grown rapidly over the decade and amount to 13 percent of total (3 percent of GDP), but domestic value-added content is much smaller.
    - Indirect effects through weaker regional growth could dominate.
    - Some corporates could face problems servicing debt, with knock-on effects to local equity markets and credit conditions.
  - Recommended policy response:
    - If China’s growth slowdown is persistent, the equilibrium real exchange rate will likely decline. In addition, the Philippines should implement structural reforms to improve its business environment to spur new sources of growth.

- Domestic asset price bubble fueled by abundant liquidity
  - Likelihood: Medium
  - Transmission channels:
    - Continued inflows into financial assets and real estate as perceived future returns exceed higher funding costs.
    - Activity in construction and related services and manufacturing accelerates. Credit exposure to the real estate sector grows.
  - Expected impact (Medium):
    - Real estate prices continue to grow rapidly, attracting additional resources to the sector, and boosting near-term growth.
    - Vulnerability of the financial system builds.
    - Asset price correction through financial accelerator channels weakens growth.
  - Recommended policy response:
    - Strictly enforce existing macroprudential policies and tighten further.
    - Ensure adequate bank capital to absorb credit losses.
    - Expand the BSP’s mandate to include financial stability, allowing it to oversee all nonbank credit provision.

- Default by a highly-leveraged domestic conglomerate
  - Likelihood: Low
  - Transmission channels:
    - Default by one part of a group on its foreign obligations and/or domestic loans.
    - With a handful of large conglomerates following broadly similar business models, and bank exposure to them equivalent to a sizable share of total capital, systemic risks are heightened.
  - Expected impact (Medium):
    - Loans to the entire group are written down, causing a major reduction in bank capital. Reduced bank capital could create a domestic credit crunch.
    - Concerns arise about the profitability and liquidity of other major conglomerates, raising their funding costs.
  - Recommended policy response:
    - Proactive rollback by the BSP of banks’ single borrower limit (defined to encompass all affiliated entities), underpinned by credible agreements between banks and the conglomerate.
    - In case of default, rapidly recapitalize banks to prevent disruptive credit contraction.
    - Avoid regulatory forbearance and fiscal transfers to the affected conglomerate.
    - Enhance the BSP’s bank supervisory capacity by allowing it to collect information on all bank-affiliated entities.

*The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.*

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### Appendix 2. Philippines—External Sector Assessment

### Current account balance and historical context
- Findings:
  - The Philippines’s current account balance (CAB) has been in surplus during most of the 2000s, supported by strong worker remittances and dynamic service exports.
  - The CAB moved into surplus in 2003, peaking at 5.7 percent of GDP in 2006.
  - Since the global financial crisis, the CAB has been on a moderating trend, but rose by 0.7 percent of GDP in 2013 to 3.5 percent of GDP on a stronger trade balance.
  - The strengthening of the CAB since the mid-1990s reflects mainly a sustained fall in the investment-to-GDP ratio: gross capital formation declined from above 25 percent of GDP in the pre-Asian crisis period to below 20 percent of GDP since the mid 2000s.
  - National saving increased by about 1 percent of GDP on average over that period; since the global financial crisis, the smaller CAB reflects the faster decline in saving than investment, although in 2013 both rose, with saving rising faster.
- Comparative position:
  - Relative to GDP, the Philippines’ CAB was similar to other EMEs during the 1990s, but stronger than most peers in the 2000s.
  - The Philippines has always had a lower investment ratio relative to the median Asian EME, while its national saving ratio has been somewhat higher than Latin America and other regions, but lower than Asian EMEs.

### Effective exchange rate
- Findings:
  - After declining continuously since the Asian financial crisis, the Philippines’ real effective exchange rate (REER) has been on an upward trend since 2004.
  - The post-Asian crisis real depreciation was mostly due to a fall in the nominal effective exchange rate (NEER).
  - Since 2007 the real appreciation has been fully due to the inflation differential between the Philippines and its trading partners, with the NEER remaining stable.
  - The Philippines’ post-Asian crisis real depreciation was stronger than in Malaysia and Thailand, but since 2004 the Philippine peso appreciated faster in real terms: 46 percent on average in the Philippines, against 21 and 9 percent, respectively in Thailand and Malaysia.

### Reserve accumulation, reserve adequacy, and NIIP
- Findings:
  - The Philippines has accumulated sizable international reserves since the Asian financial crisis, and especially since the global financial crisis.
  - The BoP surplus reflects mainly current flows, although net financial inflows contributed to reserve accumulation on occasion (2000, and 2010−12).
  - The stock of foreign reserves rose by 11 percentage points of GDP since 1997.
  - Reserve accumulation accelerated after the global financial crisis, but slowed in 2013 due to financial outflows.
  - At end 2013, reserves stood at 31 percent of GDP, and 2.7 times the Fund’s EM reserve adequacy metric (against the benchmark of 1 to 1½ times).
  - Reserves were also 3½ times short-term external debt on a residual maturity basis and more than 12 months of imports of goods and services.
  - Conclusion: This suggests the Philippines holds more reserves than is warranted to meet normal expected contingencies.
- Net international investment position (NIIP):
  - The NIIP improved considerably on net foreign asset buildup by the private and public sectors, mirroring sustained current account surpluses.
  - NIIP: -49 percent of GDP in 2001, rising to −14 percent of GDP at end 2012.
  - About three-quarters of the increase reflects a decline in liabilities (mostly other investment and to some extent direct investment). The remaining part is due to increased foreign assets, mostly official reserves.
  - As of end-2012, reserve assets accounted for 70 percent of total external assets (US$120 billion), while liabilities from portfolio investment and other investment accounted for 47 and 35 percent of total external liabilities (US$154 billion), respectively.

### External Balance Assessment (EBA) results and interpretation
- EBA methodology:
  - The IMF uses three approaches in EBA to assess the CAB and REER: Current Account Regression, External Sustainability, and REER approach.
- Key quantitative results and gaps (2013 unless noted):
  - Actual CAB (percent of GDP): 3.5
  - CAB norm (percent of GDP, Current Account Regression): -3.5
  - CAB gap (percent of GDP, Current Account Regression): 6.9 (gap rises to 6.9 percent of GDP when policy deviations are considered)
  - External Sustainability approach: suggests the medium-term CAB is slightly larger than the CAB needed to stabilize the NFA-to-GDP ratio.
  - EBA’s REER approach: suggests the REER was mildly stronger than warranted by fundamentals and desired policies in 2013.
  - REER gap (percent) reported in table: -0.6 under one assessment and 7.0–8.3 under others as summarized in the source table.
- Staff interpretation:
  - Technical factors indicate more weight should be given to the current account regression approach for the Philippines because the REER regression cannot capture the effect on the REER of the rise in permanent income from remittances and other current earnings, and is sensitive to sample period and large REER swings.
  - The External Sustainability approach does not assess the appropriateness of the level of the NFA being stabilized; for the Philippines a more negative NFA and a lower CAB could be consistent with development stage and population dynamics.

### Extensions to EBA and other considerations
- Factors not fully captured in the EBA current account regression:
  - Risk of natural disasters:
    - Natural disasters represent a significant uninsurable risk for the Philippines, especially the private sector, potentially leading to higher precautionary saving and lower investment.
    - Post-disaster reconstruction spending has had limited effects on boosting investment in practice.
  - Worker remittances:
    - The strengthening in the Philippines’ CAB coincided with an increase in remittances from overseas workers.
    - Philippine gross national income (GNI) is now some 15 percent above GDP when accounting for likely underreporting (staff assumes total remittances are 1½ times the officially reported amount, i.e., 15 percent of GDP).
    - This increase in income may have pushed up the equilibrium real exchange rate by raising prices of nontraded goods and services, weakening the trade balance (and the CAB excluding remittances) relative to the counterfactual.
    - Alternatively, remittance income may be saved more if perceived as uncertain, which would tend to raise the CAB.
  - Income inequality and target savers:
    - High-income inequality may boost the saving rate as high-income households tend to have a lower propensity to consume.
    - Lack of access to formal banking services may increase the saving rate because of the need to pre-finance purchases of housing or durable goods.
  - Impediments to investment:
    - The strengthening of the CAB since the Asian crisis coincided with a marked decline in the investment ratio.
    - Balance sheet repair and rebuilding financial wealth after the Asian financial crisis could have depressed investment persistently.
    - A weak business environment and inadequate infrastructure could depress investment beyond what is captured by the institutional/political risk variable in EBA.
- GNI versus GDP in assessments:
  - Using GNI rather than GDP to evaluate the current account in EBA reduces the estimated current account gap.
  - GNI is nearly 15 percent larger than GDP in the Philippines owing to worker remittances (staff assumes total remittances = 1½ times official amount = 15 percent of GDP).
  - Rescaling CAB and relevant explanatory variables by GNI reduces the estimated current account gap by 1.5 percentage points to 5.4 percent (Table 2.2).
  - Table 2.2 figures:
    - CA with GDP: Actual CA = 3.5%, Predicted CA/Y = -2.8%, Residual = 6.3%, EBA norm = -3.5%, EBA total CA gap = 6.9%
    - CA with GNI: Actual CA = 3.0%, Predicted CA/Y = -1.8%, Residual = 4.8%, EBA norm = -2.3%, EBA total CA gap = 5.4%

### Role of natural disasters and remittances (empirical extension)
- Empirical findings from a CGER-type macro-balance methodology covering 184 countries (1973–2012):
  - Cross-country analysis suggests precautionary saving due to exposure to natural disasters has a significant impact on the CAB, but worker remittances do not (Table 2.3).
  - Adding the Country Risk Index from the 2013 World Risk Report as an explanatory variable produces a significant result at the 10 percent level in the restricted model, indicating that exposure to natural disasters raises the CAB for high-risk countries.
  - Notes on remittances in regressions:
    - In EBA current account regression, adding gross remittance inflows yields results driven largely by the Philippines; when a Philippines dummy is included or net remittance inflows are used, the variable is not statistically significant.
    - The EBA country sample is not appropriate for assessing the effect of remittances or exposure to natural disasters because most countries in the sample are not affected by these phenomena.

*Source: Appendix 1 and Appendix 2 content provided in the IMF staff document.*

### 12.      For the Philippines—with the third highest global risk ranking—these empirical results

### 12.      For the Philippines—with the third highest global risk ranking—these empirical results

### Natural disaster risk and impact on the current account balance (CAB)
- The empirical results suggest that the CAB is raised by 3½ percentage points of GDP relative to peers on account of the country’s risk of natural disasters.
- The world risk index consists of two parts—exposure and vulnerability—and the Philippines scores high on both components.
  - High exposure reflects the Philippines’ geography.
  - High vulnerability reflects low level of development, poor infrastructure and building standards, and lagging coping and adaptive capacities.
- Vulnerability is amenable to improvement. Scenario impacts on predicted CAB (holding exposure unchanged unless stated):
  - Reducing vulnerability to the level of Malaysia would lower the predicted CAB by about 1 percentage point of GDP (i.e., a net increase of 2½ percent of GDP relative to the cross-country average).
  - Reducing vulnerability to the level of Japan would lower the CAB by about 2 percentage points of GDP (i.e., a net increase of 1½ percent of GDP).
- Conservatively, staff assume the impact of high exposure and vulnerability to natural disasters on the Philippine current account is 2½ percent of GDP (midpoint between 3½ percent of GDP at current levels and 1½ percent of GDP in the best case where exposure is reduced to the level of Japan).
- Footnote calculation basis: difference between the Philippines’ world risk index and the cross-country mean value for 2013 times the coefficient on this variable shown in Table 3, Column D (i.e., 0.2*0.187).

### Worker remittances, real effective exchange rate (REER), and trade balance
- Cross-country empirical analysis suggests worker remittances do not have a significant impact on the CAB (Table 2.3, columns A and C).
- Vitek (2014) finds remittances are associated with a significantly more appreciated REER.
- Combined interpretation:
  - Stronger REER brought by remittances weakens the trade balance.
  - The decline in the trade balance fully offsets the amount of remittance inflows, leaving the CAB unchanged in general.
- The Philippines is an exception: the increase in worker remittances was accompanied by a stronger CAB.
  - Among countries receiving worker remittances of 5 percent of GDP or more, only the Philippines and Nigeria had a current account surplus in 2012 (Figure 2.6).

### Overall assessment and accounting for nonstandard factors (Table 2.4 summary)
- Several nonstandard factors are thought to have strengthened the Philippines’ current account balance:
  - Heightened exposure to natural disaster risk
  - Understating national income by using GDP
  - Lingering effects of the Asian financial crisis on saving and investment behavior
  - Elevated income inequality
  - Limited access to credit by much of the population
  - Risk of contract nonrenewal for foreign workers
  - Weak investment climate
- Total contribution of these nonstandard factors could approach 4 percentage points of GDP, which would reduce the current account gap to about 3 percent of GDP.
- Key figures (Assessment period: 2013) from Table 2.4:
  - Actual CAB (percent of GDP) A: 3.5
  - EBA's CAB norm (percent of GDP) B: -3.5
  - EBA's CAB gap (percent of GDP) (A-B): 6.9
  - Effect of GNI Adjustment C: 1.5
  - Effect of Natural Disasters Adjustment D: 2.5
  - Revised CAB gap (percent of GDP) (A-B-C-D): 2.9

### Staff view and medium-term outlook for external sector
- Staff view: the external sector is moderately stronger than warranted by medium-term fundamentals and desired policies, implying moderate currency undervaluation.
- With official reserves now more than adequate for precautionary purposes:
  - Sustained gradual real appreciation and stepped up imports of investment goods over the medium term are expected to narrow the current account gap and bring the external sector toward its multilaterally consistent equilibrium.

### Appendix 3 — Developments in real estate (selected findings)
- Real activity:
  - Construction, real estate and ownership of dwellings sectors account for 12 percent of aggregate output.
  - These sectors contributed 1.1 percentage points to GDP growth in 2013 (down from 1.4 percentage points in 2012).
  - Private construction activity declined by 6 percent (y/y) in Q1:2014, pulling down GDP growth by 0.4 percentage point.
  - Construction activity is shifting toward socialized and low-cost housing, which provide tax exemptions to developers.
- Property prices:
  - In Q4:2013, prices of mid- and high-end condominiums in upscale areas of metro Manila rose by 13 percent, y/y.
  - In real terms, condo prices remain below their peak prior to the Asian financial crisis.
  - Residential price-to-rent ratios have remained relatively stable at around 14 percent.
- Real estate financing:
  - Overseas Filipino workers are thought to account for 20 percent of buyers from major developers.
  - Household real estate debt amounted to just over 7½ percent of GDP in 2012, with government nonbank lenders providing half the total.
  - Receivables from buyers amount to only 1½ percent of GDP.
  - Loans to property developers and construction companies account for 45 percent of banks’ RE loans; RE loans account for 18 percent of banks’ total loan portfolios.
- Cross-country comparisons:
  - Cumulative increases in real house prices in the Philippines are modest compared to many other countries.
  - Philippines’ real price increases during 2010‒13 were considerably smaller than in India, Hong Kong SAR, Taiwan POC, and Malaysia.
  - The Philippines’ price-to-rent ratio declined modestly since 2010 and does not signal price misalignment.
- Construction share:
  - The share of total construction activity in GDP in the Philippines has tended to be relatively high and inched up in recent years, surpassing shares in numerous Asia-Pacific countries except Australia, India, Indonesia, China and Japan.

### Appendix 4 — Debt Sustainability Analysis (selected findings)
- Improvements in public debt composition:
  - The average maturity of debt has increased sharply: for peso-denominated central government debt, the share with maturity of 10 years or longer rose from 10 percent in 2009 to 42 percent in 2013.
  - With some 90 percent of net general government financing needs having been met by issuing debt with maturities of 10 years or longer in 2013, maturity extension is set to continue.
  - Foreign currency denominated debt has fallen below one-half of the total general government debt, and its share is projected to continue to decrease.
  - The ratio of public debt with floating interest rates is around 7.5 percent.
  - Authorities are diversifying the investor base, including by issuing retail bonds, with maturities of up to 25 years.
- Ratings:
  - The three major rating agencies elevated the Philippines to investment grade status during 2013, with a further upgrade by one agency in early 2014.
- Sustainability and projections:
  - Public debt is sustainable. Baseline projects general government debt-to-GDP will moderate from about 39 percent in 2013 to about 27 percent of GDP in 2019.
  - Primary surpluses are the main reason for the expected decrease.
  - Authorities’ commitment to a 2 percent of GDP headline deficit at the national government level over the medium term implies an average annual primary surplus of over 1 percent of GDP at the general government level.
  - This exceeds the debt stabilizing primary deficit of 0.6 percent of GDP, based on the assumption of 6 percent real GDP growth, and 3.5 percent inflation in the medium term.
  - Gross financing needs will remain moderate at around 4−6 percent of GDP throughout the projection period, although representing a relatively high one-third of general government tax revenue.
- Alternative scenarios:
  - The baseline scenario is conservative.
  - The historical scenario (real GDP growth, real interest rates, and primary balances set to 2004−2013 averages) would lead to more rapid reduction in debt and gross financing needs than the baseline.
  - Keeping the primary surplus constant at the level projected for 2014 (1.9 percent of GDP) would also lead to a lower path for the debt-to-GDP ratio and gross financing needs than in the baseline scenario.

*Source: IMF staff estimates from the referenced IMF chapter/section.*

### 5.      The outlook for economy-wide external debt also remains positive. In recent years, external

### _cr14245 - 5.      The outlook for economy-wide external debt also remains positive. In recent years, external

### External debt outlook and key finding
- External debt has steadily declined from close to 80 percent of GDP in 2001 to below 30 percent of GDP at end2013.
- Under staff’s baseline scenario, external debt as a ratio to GDP is expected to continue falling over the medium term due to:
  - sustained current account surpluses,
  - strong GDP growth,
  - continued peso appreciation.
- Resilience to shocks:
  - One-half standard deviation shocks to interest rates, growth, and the current account lead to only modest deteriorations in external debt ratios over the medium term.
  - Exchange rate vulnerability: a one-time real depreciation of 30 percent in 2014 would raise the external debt-to-GDP ratio by 12 percentage points.

### Public sector debt — baseline projections and dynamics (selected figures)
- Nominal gross public debt:
  - 2012: 51.4
  - 2013: 40.6
  - 2014: 39.1
  - 2015: 36.2
  - 2016: 33.8
  - 2017: 31.9
  - 2018: 30.2
  - 2019: 28.7 (in percent of GDP)
- Public gross financing needs (in percent of GDP):
  - 2012: 15.9
  - 2013: 7.4
  - 2014: 4.6
  - 2015: 6.0
  - 2016: 5.6
  - 2017: 5.2
  - 2018: 4.9
  - 2019: 4.7
- Real GDP growth (in percent):
  - 2012: 5.0
  - 2013: 6.8
  - 2014: 7.2
  - 2015: 6.2
  - 2016: 6.5
  - 2017: 6.2
  - 2018: 6.0
  - 2019: 6.0
- Inflation (GDP deflator, in percent):
  - 2012: 4.6
  - 2013: 1.9
  - 2014: 2.0
  - 2015: 4.1
  - 2016: 3.8
  - 2017: 3.5
  - 2018: 3.5
  - 2019: 3.5
- Effective interest rate (in percent):
  - 2012: 8.4
  - 2013: 7.8
  - 2014: 7.5
  - 2015: 7.8
  - 2016: 7.9
  - 2017: 8.0
  - 2018: 8.0
  - 2019: 8.1

### Contribution to changes in public debt (selected cumulative and flow items)
- Change in gross public sector debt (cumulative 2012–2019): -11.8 (percent of GDP)
- Identified debt-creating flows (cumulative 2012–2019): -10.4
- Primary deficit (annual figures):
  - 2012: -2.6
  - 2013: -2.3
  - 2014: -2.7
  - 2015: -1.9
  - 2016: -1.6
  - 2017: -1.4
  - 2018: -1.3
  - 2019: -1.0
- Primary (noninterest) revenue and grants:
  - 2012: 17.9
  - 2013: 18.3
  - 2014: 18.5
  - 2015: 18.9
  - 2016: 18.8
  - 2017: 18.9
  - 2018: 18.9
  - 2019: 18.8
- Primary (noninterest) expenditure:
  - 2012: 15.3
  - 2013: 15.9
  - 2014: 15.8
  - 2015: 17.0
  - 2016: 17.3
  - 2017: 17.5
  - 2018: 17.6
  - 2019: 17.8
- Automatic debt dynamics (cumulative 2012–2019): -3.8
  - Interest rate/growth differential (contribution): -3.8 (cumulative)
  - Real interest rate (annual contributions):
    - 2012: 1.8
    - 2013: 2.2
    - 2014: 2.0
    - 2015: 1.2
    - 2016: 1.3
    - 2017: 1.3
    - 2018: 1.3
    - 2019: 1.2
  - Real GDP growth (annual contributions):
    - 2012: -2.5
    - 2013: -2.6
    - 2014: -2.7
    - 2015: -2.2
    - 2016: -2.1
    - 2017: -1.9
    - 2018: -1.8
    - 2019: -1.7
- Exchange rate depreciation contribution (selected annual):
  - 2012: -0.6
  - 2013: -1.3
  - 2014: 1.4
- Other identified debt-creating flows (annual):
  - 2012: 1.4
  - 2013: 3.1
  - 2014: 0.5
  - 2015: 0.4
  - 2016: 0.3
  - 2017: 0.3
  - 2018: 0.2
  - 2019: 0.2
- Privatization proceeds (negative) (cumulative): -0.1
- GG Accumulation of liquid assets (annual):
  - 2012: 1.6
  - 2013: 3.2
  - 2014: 0.6
  - 2015: 0.4
  - 2016: 0.3
  - 2017: 0.3
  - 2018: 0.2
  - 2019: 0.2
- Residual, including asset changes (cumulative 2012–2019): -1.4

### Composition of public debt and alternative scenarios (selected assumptions and comparisons)
- Baseline, Historical, and Constant Primary Balance scenarios reported with key underlying assumptions:
  - Baseline Real GDP growth (2014–2019): 6.2, 6.5, 6.2, 6.0, 6.0, 6.0 (annual)
  - Baseline Inflation (2014–2019): 4.1, 3.8, 3.5, 3.5, 3.5, 3.5 (GDP deflator, percent)
  - Baseline Primary Balance (2014–2019): 1.9, 1.6, 1.4, 1.3, 1.0, 0.8 (percent of GDP)
  - Historical scenario Primary Balance (2014–2019): 1.9, 2.7, 2.7, 2.7, 2.7, 2.7
  - Constant Primary Balance scenario Primary Balance (2014–2019): 1.9 each year
  - Effective interest rate assumptions differ slightly across scenarios but remain around 7.8–8.4 percent.

### External Debt Sustainability Framework (2009–2019) — baseline metrics
- Baseline external debt (external debt, percent of GDP):
  - 2009: 38.4
  - 2010: 36.9
  - 2011: 33.7
  - 2012: 31.9
  - 2013: 28.8
  - 2014: 27.9
  - 2015: 25.5
  - 2016: 23.7
  - 2017: 22.0
  - 2018: 20.4
  - 2019: 18.9
- Change in external debt (annual):
  - 2009: 0.9
  - 2010: -1.5
  - 2011: -3.2
  - 2012: -1.8
  - 2013: -3.1
  - 2014: -0.9
  - 2015: -2.4
  - 2016: -1.8
  - 2017: -1.7
  - 2018: -1.6
  - 2019: -1.5
- Identified external debt-creating flows (sum of current account deficit excl. interest, net non-debt creating capital inflows, and automatic debt dynamics):
  - 2009: -4.2
  - 2010: -9.2
  - 2011: -6.8
  - 2012: -6.6
  - 2013: -6.1
  - 2014: -5.2
  - 2015: -4.9
  - 2016: -4.4
  - 2017: -3.8
  - 2018: -3.2
  - 2019: -2.6
- Current account deficit, excluding interest payments (percent of GDP):
  - 2009: -6.5
  - 2010: -4.9
  - 2011: -3.8
  - 2012: -4.0
  - 2013: -4.5
  - 2014: -4.2
  - 2015: -3.5
  - 2016: -2.8
  - 2017: -2.2
  - 2018: -1.6
  - 2019: -1.1
- Automatic debt dynamics (annual contributions):
  - 2009: 2.6
  - 2010: -4.7
  - 2011: -2.7
  - 2012: -2.2
  - 2013: -1.5
  - 2014: -0.7
  - 2015: -0.7
  - 2016: -0.7
  - 2017: -0.6
  - 2018: -0.6
  - 2019: -0.6
- External debt-to-exports ratio (in percent):
  - 2009: 149.8
  - 2010: 135.0
  - 2011: 132.1
  - 2012: 119.5
  - 2013: 117.8
  - 2014: 113.3
  - 2015: 109.2
  - 2016: 105.1
  - 2017: 100.9
  - 2018: 96.6
  - 2019: 92.6
- Gross external financing need (in billions of US dollars):
  - 2009: 5.9
  - 2010: 4.1
  - 2011: 9.9
  - 2012: 8.9
  - 2013: 11.2
  - 2014: 13.3
  - 2015: 14.8
  - 2016: 17.4
  - 2017: 20.0
  - 2018: 22.9
  - 2019: 26.2
  - As percent of GDP: 3.5, 2.1, 4.4, 3.6, 4.1, 4.6, 4.5, 4.7, 4.8, 4.9, 5.0 (2009–2019)

### Key macroeconomic assumptions underlying the baseline (selected)
- Real GDP growth (percent):
  - Historical average and projection series show values such as 1.1 (historical), 7.6, 3.7, 6.8, 7.2, 5.4, 2.0, 6.2, 6.5, 6.2, 6.0, 6.0, 6.0 (as reported)
- GDP deflator in US dollars (change in percent) (selected):
  - -4.0, 10.1, 8.3, 4.5, 1.4, 6.9, 5.8, 0.4, 7.2, 5.5, 5.5, 5.6
- Nominal external interest rate (in percent) (selected):
  - 3.9, 4.1, 3.9, 4.0, 3.6, 4.1, 0.3, 3.7, 3.7, 3.3, 3.2, 2.9
- Growth of exports (US dollar terms, percent) (selected):
  - -9.4, 26.2, 4.8, 16.9, -0.4, 9.1, 11.0, 7.5, 8.2, 8.1, 8.2, 8.3
- Growth of imports (US dollar terms, percent) (selected):
  - -19.0, 25.8, 8.2, 12.0, -1.7, 8.4, 12.0, 8.5, 8.4, 9.4, 9.7, 9.8
- Current account balance, excluding interest payments (percent of GDP) (selected):
  - 6.5, 4.9, 3.8, 4.0, 4.5, 5.0, 1.8, 4.2, 3.5, 2.8, 2.2, 1.6, 1.1
- Net non-debt creating capital inflows (percent of GDP) (selected):
  - 0.3, -0.4, 0.3, 0.3, 0.1, 0.3, 1.0, 0.3, 0.7, 0.9, 1.0, 1.0, 1.0

### Resilience, scenarios, and policy implications (implicit in analysis)
- Debt ratios are projected to decline under the baseline and display resilience to moderate shocks in interest rates, growth, and the current account.
- A large nominal shock to the exchange rate (one-time 30 percent real depreciation in 2014) materially increases external debt vulnerability by raising the external debt-to-GDP ratio by 12 percentage points, highlighting exchange rate management and reserve/FX policy as areas of vulnerability.

### IMF engagement, technical assistance, and coordination (selected substantive points)
- The Philippines is an intensive user of IMF technical assistance (TA), particularly in fiscal and financial areas.
- Fiscal TA outcomes and initiatives:
  - TA financed by the Millennium Challenge Corporation to improve basic functions of tax administration (BIR).
  - TA on tax policy in 2013 and early 2014 aimed to improve revenue yield, rationalize tax expenditures and reform natural resource-based taxation; contributed to reform of excises on tobacco and alcoholic beverages implemented in early 2013.
  - TA on public financial management (PFM) supporting Treasury Single Account adoption, cash management and planning, midyear macro/fiscal reporting, and presentation of off-budget account flows.
- Monetary and financial sector TA outcomes:
  - Adoption of Basel II in 2005 and implementation of Pillar 2 activities (ICAAP/supervisory review) begun in 2011.
  - Strengthened supervisory enforcement policies (e.g., CDO policy approved August 2011) and supervisory training initiatives rolled out since 2010.
  - TA on liquidity management and forecasting (February 2013) and supervisory enforcement (August 2013 and February 2014).
- STA TA on Government Finance Statistics and Balance of Payments, and other statistical areas took place in 2012–2013.
- IMF and World Bank collaboration focuses on three macro-critical structural reform areas: (1) raising investment including public capital spending; (2) strengthening public finance and social safety nets; and (3) the financial sector.

*Source: IMF staff.*

### 59.8 percent of the total) (Table 2). As of December 31, 2013, cumulative direct value˗added

### IMF Executive Board Concludes 2014 Article IV Consultation with the Philippines

### ADB Cumulative Lending and Private Sector Operations
- As of December 31, 2013, cumulative direct value-added cofinancing for Philippines since 1970 amounted to $2.75 billion for 51 investment projects and $81.9 million for 65 TA projects.
- Table 2. Cumulative ADB Lending to Philippines (As of December 2013):
  - Total: 222 loans, $14,423.4 million, 100.0 percent (by amount)
  - Energy: 32 loans, $3,384.7 million, 23.5 percent
  - Public sector management: 11 loans, $3,228.0 million, 22.4 percent
  - Agriculture and natural resources: 61 loans, $2,010.4 million, 14.0 percent
  - Transport and ICT: 30 loans, $1,463.9 million, 10.2 percent
  - Finance: 22 loans, $1,366.0 million, 9.5 percent
  - Multi-sector: 12 loans, $1,082.3 million, 7.5 percent
  - Water and other municipal infrastructure and services: 27 loans, $1,042.9 million, 7.2 percent
  - Health and social protection: 7 loans, $367.4 million, 2.6 percent
  - Education: 8 loans, $252.1 million, 1.8 percent
  - Industry and trade: 12 loans, $225.8 million, 1.6 percent
- ADB private sector operations in Philippines began in 1986. As of December 2013, cumulative approvals in 27 projects amounted to $792.2 million.
- Selected private-sector approvals:
  - 2008: $200 million loan for acquisition, rehabilitation, and operation of the existing 600-megawatt Masinloc coal-fired thermal power plant by Masinloc Power Partners Co. Ltd.
  - 2009: $120 million loan for KEPCO SPC Power Corporation for construction, operation and maintenance of a new coal fired power plant in the Visayas region using circulating fluidized bed technology.
  - 2012: $25 million equity investment approved for Philippine Investment Alliance for Infrastructure Fund.

### Country Partnership Strategy and Country Operations Business Plan
- Country Partnership Strategy (CPS) 2011−2016 endorsed by the ADB Board of Directors on October 26, 2011; aligned with the government’s Philippine Development Plan 2011−2016 and ADB’s Strategy 2020.
- Key objective of ADB support: help Philippines achieve high, inclusive, and sustainable growth.
- Intended CPS outcomes:
  - (i) improved investment climate and private sector development;
  - (ii) more efficient, effective, and equitable social service delivery;
  - (iii) reduced environmental degradation and vulnerability to climate change disasters;
  - (iv) strengthened governance and reduced corruption.
- Country Operations Business Plan (COBP) 2014–2016, the third under CPS 2011–2016, approved on October 1, 2013.

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of June 2, 2014)
- General: Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.
- National accounts:
  - NSCB rebased national accounts from 1985 to 2000 as part of a World Bank-funded project.
  - Ongoing efforts to fully implement the System of National Accounts, 2008.
  - Weaknesses remain: coverage of GDP and statistical discrepancies between expenditure and production sides.
  - Authorities are working to improve:
    - (i) accuracy of GDP volume measures;
    - (ii) coverage of the public corporations sector;
    - (iii) accuracy of quarterly GDP data;
    - (iv) adoption of benchmark techniques to reconcile quarterly and annual national accounts estimates.
  - NSCB participating in IMF Statistics Department’s Project on the Implementation of the System of National Accounts and the International Comparison Program (three-year technical assistance project funded by the Government of Japan).
- Price statistics:
  - July 2011: National Statistics Office introduced a rebased consumer price index (CPI) using weights based on the 2006 Family Income and Expenditure Survey and data from the 2008 Commodity and Outlet Survey.
  - Adopted Classification of Individual Consumption by Purpose (COICOP).
  - Assistance to improve quality of price statistics is planned.
- External sector statistics:
  - 2005: BSP created a Department of Economic Statistics, including a unit for balance of payments and international investment position.
  - International transactions increasingly flow through nontraditional channels not adequately covered.
  - New data sources introduced: Cross Border Transactions Survey and administrative-based reporting systems.
  - Foreign Currency Deposit Units (FCDUs), accounting for about 70−75 percent of foreign exchange settlements, are exempt from reporting due to banking secrecy rules.
- Monetary and financial statistics: Compilation largely conforms to Fund methodology.
- Government finance statistics: Provision broadly adequate; areas for improvement include detailed data beyond national government and transition to GFSM 2001 format.
- Philippines subscribed to the Special Data Dissemination Standards (SDDS) in August 1996. Data ROSC published in August 2004.

### Table of Common Indicators Required for Surveillance (As of May 31, 2014) — Selected entries
- Exchange rates: Date of latest observation 5/31/2014; Date received 5/31/2014; Frequency: D (Daily) reporting and publication.
- International reserve assets and reserve liabilities of the monetary authorities: Latest observation 4/2014; Date received 5/2014; Frequency: D reporting and D publication; Data quality—Methodological Soundness: LO; Data Quality—Accuracy and Reliability: LO.
- Reserve/base money: Latest observation 4/2014; Date received 5/2014; Frequency: D reporting, W publication.
- Broad money: Latest observation 3/2014; Date received 5/2014; Frequency: M reporting and publication.
- Central bank balance sheet: Latest observation 12/2013; Date received 5/2014; Frequency: M reporting and publication.
- Consolidated balance sheet of the banking system: Latest observation 3/2014; Date received 5/2014; Frequency: M reporting and publication.
- Consumer price index: Latest observation 4/2014; Date received 5/2014; Frequency: M reporting and publication; Data quality—Methodological Soundness: O; Data Quality—Accuracy and Reliability: O.

### IMF Press Release Key Findings and Economic Assessment (Press Release No. 14/388, August 8, 2014)
- Article IV consultation concluded on July 8, 2014; Executive Board considered and endorsed the staff appraisal without a meeting.
- 2013 macro performance:
  - GDP grew by 7¼ percent in 2013, supported by strong remittances and accommodative monetary and financial conditions.
  - Super-typhoon Yolanda occurred late in 2013; limited impact on 2013 growth, somewhat greater effect likely in 2014.
  - Growth expected to ease in 2014 due to normalizing domestic financial conditions; growth slowed in Q1 2014 partly due to temporary factors.
  - Inflation: remained below the bottom of the target band (4±1 percent) for much of last year, picked up since late 2013 and is currently around 4½ percent because of pass through of the weaker peso, typhoon-related disruptions to food production, increases in rice prices and higher electricity prices.
  - Current account surplus rose to 3½ percent of GDP in 2013 on a narrowing trade deficit.
- Monetary and financial conditions:
  - Domestic interest rates compressed by loose monetary policies abroad and ample domestic liquidity; BSP restricted nonbanks’ direct access to its Special Deposit Account (SDA).
  - Raising banks’ reserve requirements by 2 percentage points earlier this year helped absorb part of the earlier net injection.
  - More recent increase in the SDA rate by ¼ percentage point tightened conditions.
  - Banking system: financial soundness indicators signal continued strong performance; capital adequacy ratios well above newly-introduced Basel III requirements.
  - Bank credit growth accelerated to 21 percent; loan exposure to real estate has risen.
- Fiscal and external positions:
  - Public debt moderated to 39 percent of GDP, with improvements in maturity and currency composition.
  - 2014 budget targets a deficit of 2 percent of GDP—up from 1.4 percent of GDP achieved in 2013—to accommodate post-disaster reconstruction spending.
  - Government aims to double public infrastructure spending to 5 percent of GDP by 2016, financed by additional tax revenue, while keeping the deficit unchanged.
- Executive Board assessment highlights:
  - Philippine economy performed robustly in 2013; strong fundamentals and buffers cushioned volatile capital flows; domestic monetary and financial conditions are now very accommodative.
  - Macroeconomic prospects favorable: reconstruction from Yolanda, infrastructure spending and remittance-driven private consumption will support rapid GDP growth, though pace likely to ease on more restrictive financing conditions.
  - Risks to outlook: abrupt exit from loose monetary policies abroad, a sharp slowdown in China or other emerging markets, major geopolitical incident, rapid credit growth, or disproportionate flow of resources to property sector.
- Policy recommendations and priorities:
  - Rebalance policy mix toward expansionary fiscal policy while tightening monetary conditions:
    - Continue to proactively tighten monetary conditions to address inflation and financial stability risks.
    - Focus on measures that would not encourage further shift in intermediation to nonbanks, including raising official interest rates.
    - Provide BSP with suitable instruments to undertake sterilization to improve effectiveness of monetary policy.
    - Allow exchange rate to adjust more fully to structural balance of payments flows while symmetrically smoothing cyclical capital flows.
  - Contain financial system risks:
    - Early adoption of Basel III capital requirements.
    - Monitor a broader definition of banks’ real estate exposure.
    - Standardize “contract to sell” financing arrangements for developers.
    - Establish the Financial Stability Coordination Council.
    - Conduct bank stress tests for real estate exposure (recently announced and commended).
    - Widen BSP’s mandate to include financial stability to help prevent diversion of systemic risk to the shadow-banking sector and strengthen powers for managing cross-border integration risks.
  - Mobilize stable revenue sources to finance structural spending while preserving fiscal prudence:
    - Maintain national government deficit at 2 percent of GDP in 2014 and thereafter.
    - Increase public spending for disaster remediation, infrastructure upgrading, and improved social outcomes.
    - Undertake sizable tax effort focused on broadening the tax base by reducing exemptions and allowances and adopting a new mining strategy, supported by improvements in tax administration.
  - Reforms to attract investment and create employment:
    - Relax limits on foreign ownership, reduce red tape, limit tax holidays that favor incumbents and distort the tax system.
    - Support execution of public-private partnerships and deeper regional integration.
    - Increase job creation in agriculture and micro and small firms by establishing clear property rights for small-scale farms, expanding access to formal credit, and reducing labor market rigidities.

### Selected Economic Indicators, 2010–15 (as presented)
- Real GDP (percent change): 2010: 7.6; 2011: 3.7; 2012: 6.8; 2013: 7.2; 2014 (Proj.): 6.2; 2015 (Proj.): 6.5
- CPI (annual average): 2010: 3.8; 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014 (Proj.): 4.4; 2015 (Proj.): 3.8
- CPI (end year): 2010: 3.6; 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014 (Proj.): 4.1; 2015 (Proj.): 3.5
- Gross investment (percent of GDP): 2010: 20.5; 2011: 20.5; 2012: 18.1; 2013: 19.7; 2014 (Proj.): 20.7; 2015 (Proj.): 21.1
- National saving (percent of GDP): 2010: 25.0; 2011: 23.6; 2012: 21.0; 2013: 23.1; 2014 (Proj.): 23.9; 2015 (Proj.): 23.7
- National government balance (authorities' definition, percent of GDP): 2010: -3.5; 2011: -2.0; 2012: -2.3; 2013: -1.4; 2014 (Proj.): -2.0; 2015 (Proj.): -2.0
- Nonfinancial public sector balance (percent of GDP): 2010: -3.3; 2011: -0.8; 2012: -1.0; 2013: 0.3; 2014 (Proj.): -0.5; 2015 (Proj.): -0.6
- Revenue and grants (percent of GDP): 2010: 18.5; 2011: 18.6; 2012: 19.0; 2013: 19.8; 2014 (Proj.): 20.2; 2015 (Proj.): 20.1
- Expenditure (percent of GDP): 2010: 21.7; 2011: 19.4; 2012: 20.0; 2013: 19.5; 2014 (Proj.): 20.7; 2015 (Proj.): 20.7
- Nonfinancial public sector debt (percent of GDP): 2010: 54.8; 2011: 55.3; 2012: 52.9; 2013: 50.1; 2014 (Proj.): 45.6; 2015 (Proj.): 41.6
- Broad money (M3, percent change end of period): 2010: 10.0; 2011: 7.1; 2012: 9.4; 2013: 31.8; 2014 (Apr 2014, year-on-year): 32.1
- Interest rate (91-day treasury bill, end of period, percent, secondary market rate): 2010: 1.3; 2011: 1.7; 2012: 0.5; 2013: 0.5; 2014 (May 2014): 1.2
- Credit to the private sector (percent change): 2010: 8.9; 2011: 19.3; 2012: 16.2; 2013: 16.4; 2014 (Apr 2014, year-on-year): 20.9
- Exports (percent change): 2010: 26.2; 2011: 4.1; 2012: 21.2; 2013: -3.6; 2014 (Proj.): 5.5; 2015 (Proj.): 6.6
- Imports (percent change): 2010: 24.7; 2011: 9.5; 2012: 11.3; 2013: -3.1; 2014 (Proj.): 8.2; 2015 (Proj.): 9.0
- Current account (percent of GDP): 2010: 3.6; 2011: 2.5; 2012: 2.8; 2013: 3.5; 2014 (Proj.): 3.2; 2015 (Proj.): 2.6
- Financial account (US$ billions, BPM6): 2010: -11.5; 2011: -5.3; 2012: -6.8; 2013: 0.6; 2014 (Proj.): 1.7; 2015 (Proj.): -1.5
- Direct investment (net, US$ billions, BPM6): 2010: 1.6; 2011: 0.3; 2012: 1.0; 2013: -0.2; 2014 (Proj.): -0.8; 2015 (Proj.): -1.5
- Errors and omissions (US$ billions): 2010: -3.5; 2011: 0.3; 2012: -4.6; 2013: -3.8; 2014 (Proj.): -3.2; 2015 (Proj.): -2.5
- Overall balance (US$ billions): 2010: 15.2; 2011: 11.4; 2012: 9.2; 2013: 5.1; 2014 (Proj.): 4.5; 2015 (Proj.): 7.7
- Total external debt (percent of GDP): 2010: 36.9; 2011: 33.7; 2012: 31.9; 2013: 28.8; 2014 (Proj.): 27.9; 2015 (Proj.): 25.5
- Debt service ratio (percent of exports of goods and nonfactor services): 2010: 13.6; 2011: 13.6; 2012: 9.9; 2013: 10.3; 2014 (Proj.): 11.9; 2015 (Proj.): 11.3
- Reserves (US$ billions): 2010: 62.4; 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014 (Proj.): 87.7; 2015 (Proj.): 95.4
- Reserves/short-term liabilities (percent): 2010: 402.0; 2011: 475.3; 2012: 407.2; 2013: 369.0; 2014 (Proj.): 372.9; 2015 (Proj.): 381.8
- Pesos per U.S. dollar (period averages): 2010: 45.1; 2011: 43.3; 2012: 42.2; 2013: 42.4; 2014 (Average January-May 2014): 44.6
- Nominal effective exchange rate (2005 =100): 2010: 110.0; 2011: 108.9; 2012: 112.9; 2013: 116.0; 2014 (Average January-May 2014): 111.3
- Real effective exchange rate (2005 =100): 2010: 127.0; 2011: 127.8; 2012: 134.1; 2013: 139.4; 2014 (Average January-May 2014): 136.0

*Source: IMF press release and staff report materials provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14245.pdf_