## _cr15246 ## Source details **Canonical URL:** [_cr15246](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15246.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15246.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15246.pdf.json) --- ### Recent developments - Real GDP grew by 6.1 percent in 2014 and slowed to 5.2 percent in the first quarter of 2015. - Main 2014 growth drivers: household consumption, private construction, and exports of goods and services. - First-quarter 2015 slowdown driven by temporary factors: dry weather affecting agricultural production, weak global demand, and slow budget execution. - Inflation: - CPI (annual average) and CPI (end year) movements noted in table (see Key statistics). - Inflation fell below the bottom of the BSP’s target band (3±1 percent) in May 2015; reached 4.9 percent (y/y) in August 2014 and fell to 1.2 percent in June 2015. - Current dry weather associated with El Niño had not yet resulted in higher inflation as of June 2015. - Fiscal execution and public spending: - Fiscal deficit in 2014 was smaller than the 2 percent of GDP target due to slow budget execution. - Revenue increased as a share of GDP due to improvements in tax administration. - Expenditures, especially capital spending, fell short of budget because of weak implementation capacity and delayed post-typhoon reconstruction. - A Supreme Court ruling that made aspects of the Disbursement Acceleration Program unconstitutional further slowed budget execution in 2014. - Budget execution remained slow in the first quarter of 2015, particularly for capital spending, though momentum on PPP project implementation is building. - Financial sector and credit: - Credit growth was strong in 2014 but slowed and became more balanced in the first five months of 2015. - Slowdown in credit was sharper in sectors with previously faster credit growth, including construction and real estate. - Banks remain well capitalized, with low levels of nonperforming loans and abundant liquidity. - External sector: - Current account surplus rose in 2014 amid lower oil prices, subdued import volumes, and robust export growth. - Gross foreign reserves were US$81 billion in June 2015. - Peso stable vis-à-vis the U.S. dollar since early 2014 but appreciated significantly in effective terms. ### Outlook and risks - Growth and inflation projections: - Real GDP is projected to grow by 6.2 percent in 2015. - Inflation expected to remain in the bottom half of the BSP’s target band; lower fuel prices partly offset by somewhat higher food prices due to assumed moderate El Niño conditions. - Credit and financial deepening: - Credit is expected to grow at about 15 percent in 2015 (or about 2 percentage points of GDP), consistent with projected investment growth and a pace of financial deepening that appears sustainable but warrants close monitoring. - External position: - Current account surplus expected to widen to 5.0 percent of GDP in 2015 due to lower oil prices and continued inflows from Business Process Outsourcing (BPO) and remittances. - Risk assessment: - Risks to the outlook are tilted to the downside. - Specific risks identified: tighter global financial conditions and a surge in financial volatility leading to sharp capital outflows; continuing weak budget execution; severe El Niño conditions. - Authorities are described as well equipped to respond with suitable policies should risks materialize, given strong fundamentals and ample policy space. ### Policy recommendations and Executive Board assessment - Fiscal policy: - Encourage continued vigilance in managing risks. - Support plan to step up infrastructure investment and social spending, and return to the medium-term fiscal deficit target of 2 percent of GDP. - Planned increase in public expenditure in 2015 judged appropriate given low inflation, large infrastructure and social needs, and low and declining public debt. - Encourage further efforts to strengthen public financial management and budget execution, and to mobilize revenue to meet large social and infrastructure needs. - Monetary policy: - Current monetary policy stance considered appropriate given low inflation, moderating and more balanced credit growth, and moderating—albeit still robust—economic activity. - Encourage continued vigilance if inflation or credit growth accelerate with signs of potential overheating. - Support central bank plan to implement an interest rate corridor to improve monetary policy transmission, and encourage passage of central bank charter authorizing issuance of central bank bills and increasing minimum capital. - Emphasize continued exchange rate flexibility, with participation limited to smoothing excessive volatility. - Macroprudential and financial stability: - Financial system remains sound. - Welcome use of targeted prudential policies to limit financial excesses and strengthen resilience; more stringent prudential regulations may be needed if systemic risks emerge. - Encourage passage of draft law broadening the central bank’s financial stability mandate and central bank efforts to enhance access to information on conglomerates’ finances. - Structural and development priorities: - Support medium-term priorities: raise infrastructure spending, facilitate public private partnerships, improve the business climate, and enhance human capital and social services for the poor. - Focus on financial deepening and inclusion as essential elements of an inclusive growth strategy; alternative means of financing and hedging (bond and equity markets) could help finance large infrastructure needs. - Welcome release of the national strategy for financial inclusion. ### Key statistics (selected, as reported) - Real GDP growth: 2010: 7.6; 2011: 3.7; 2012: 6.7; 2013: 7.1; 2014: 6.1; 2015 (Staff proj.): 6.2; 2016 (Staff proj.): 6.5. - CPI (annual average): 2010: 3.8; 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014: 4.2; 2015 (Staff proj.): 2.1; 2016 (Staff proj.): 3.5. - CPI (end year): 2010: 3.6; 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014: 2.7; 2015 (Staff proj.): 3.4; 2016 (Staff proj.): 2.7. - Gross investment (percent of GDP): 2014: 20.9; 2015 (Staff proj.): 22.0; 2016 (Staff proj.): 22.3. - National saving (percent of GDP): 2014: 25.4; 2015 (Staff proj.): 27.1; 2016 (Staff proj.): 26.7. - National government balance (authorities' definition, percent of GDP): 2014: -0.6; 2015 (Staff proj.): -1.5; 2016 (Staff proj.): -2.0. - Nonfinancial public sector balance (percent of GDP): 2014: 0.9; 2015 (Staff proj.): 0.0; 2016 (Staff proj.): -0.5. - Revenue and grants (percent of GDP): 2014: 20.1; 2015 (Staff proj.): 20.6; 2016 (Staff proj.): 20.7. - Expenditure (percent of GDP): 2014: 19.2; 2015 (Staff proj.): 20.6; 2016 (Staff proj.): 21.2. - Nonfinancial public sector debt (percent of GDP): 2014: 47.8; 2015 (Staff proj.): 45.5; 2016 (Staff proj.): 42.5. - Broad money (M3) (percent change, end of period): 2014: 11.2; 2015 (May, year-on-year): 9.3. - Interest rate (91-day treasury bill, end of period, in percent): 2014: 2.5; 2015 (latest data point is May 2015): 2.1. - Credit to the private sector (in percent, year-on-year for Universal and Commercial Banks, May 2015): 2014: 19.9; 2015 (May): 14.5. - Current account (percent of GDP): 2014: 4.4; 2015 (Staff proj.): 5.0; 2016 (Staff proj.): 4.5. - Financial account (US$ billions, BPM6): 2014: 10.1; 2015 (Staff proj.): 7.1; 2016 (Staff proj.): 6.1. - Direct investment (net, US$ billions, BPM6): 2014: 0.8; 2015 (Staff proj.): 0.0; 2016 (Staff proj.): -0.7. - Errors and omissions (US$ billions): 2014: -5.5; 2015 (Staff proj.): -5.2; 2016 (Staff proj.): -4.9. - Overall balance (US$ billions): 2014: -2.9; 2015 (Staff proj.): 3.1; 2016 (Staff proj.): 4.3. - Total external debt (percent of GDP): 2014: 27.3; 2015 (Staff proj.): 25.6; 2016 (Staff proj.): 23.1. - Debt service ratio (percent of exports of goods and nonfactor services): 2014: 8.7; 2015 (Staff proj.): 7.8; 2016 (Staff proj.): 10.6. - Reserves (US$ billions): 2010: 62.4; 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014: 79.5; 2015 (June): 81.7; 2016 (Staff proj.): 84.5. - Reserves/short-term liabilities (reserves as a percent of short-term debt including medium- and long-term debt due in the following year): 2010: 403.3; 2011: 482.5; 2012: 397.9; 2013: 405.5; 2014: 406.5; 2015 (Staff proj.): 361.2; 2016 (Staff proj.): 366.8. - Exchange rate (period averages, Pesos per U.S. dollar): 2010: 45.1; 2011: 43.3; 2012: 42.2; 2013: 42.4; 2014: 44.4; 2015 (January–May): 44.5. - Nominal effective exchange rate (2005 =100): 2010: 100.0; 2011: 99.0; 2012: 102.6; 2013: 105.4; 2014: 102.7; 2015 (January–May): 109.6. - Real effective exchange rate (2005 =100): 2010: 100.0; 2011: 100.7; 2012: 105.6; 2013: 109.8; 2014: 109.5; 2015 (January–May): 117.9. ### Medium-term outlook and growth drivers - Economic growth projected at 6.5 percent over the medium term, in line with potential growth. - Public and private investments projected to lead growth, supported by: - Increased public infrastructure spending. - Implementation of PPP projects that should crowd in private investment. - Inflation: - Expected to increase as oil prices rise but projected to remain within the BSP’s target range. - External and domestic effects: - Pickup of public and private investments, together with a trend real effective appreciation of the peso, is expected to narrow the current account surplus and relieve pressure on domestic capacity constraints. - Higher U.S. interest rates expected to tend to tighten lending conditions consistent with moderate credit growth going forward. ### Investment challenges, priorities, and policy guidance - Investment constraints: - Public and private investment rates well below regional peers; low capital stock and infrastructure quality. - Main impediments: inadequate infrastructure, weak investment climate, restrictions on foreign direct investment. - Immediate infrastructure priorities: - Implementation of the transport system in Manila (Manila Dream Plan approved by NEDA). - Improvements in airports, road connectivity, and seaports across the country. - Fiscal policy and public investment: - Policy focus: support infrastructure investment and inclusive growth; return to medium-term deficit target of 2 percent of GDP. - Authorities plan to increase infrastructure spending from 3 percent of GDP in 2014 to 5 percent by 2016. - Staff projects public capital expenditure at 3.8 percent of GDP in 2016; PPP projects could amount to 1 percent of GDP, bringing overall infrastructure investment to 4.8 percent of GDP in 2016. - Staff urges passage of the Public Financial Management (PFM) bill and supports amendments to the Build Operate Transfer (BOT) law and Right of Way Bill. - Revenue and tax reform: - Staff supports tax administration reforms: arrears collection, VAT compliance, filing rates for large taxpayers. - Staff strongly encourages a tax reform package that is net revenue enhancing (examples: rationalization of tax incentives, reducing certain VAT exemptions, increases in fuel excises to more than compensate for revenue-losing measures). - Staff estimate: Revenue mobilization of 2–3 percentage points of GDP is attainable. ### Monetary policy assessment and guidance - Current stance: - Monetary settings deemed appropriate: inflation projections within the target band; output gap near zero; credit growth within normal metrics. - BSP actions in 2014: required reserve ratio increased by 200 basis points, to 20 percent; policy rates increased by 50 basis points. - Autonomous tightening since then due to rising real interest rates and an appreciating REER moderated credit growth and reduced inflation by the first half of 2015. - Policy guidance: - BSP should remain vigilant and be ready to tighten policy if signs of rising inflation pressure and accelerating broad-based credit growth emerge. - Rapid food price increases due to El Niño should be addressed by allowing food imports in a timely manner and would not justify monetary tightening unless second round effects appear. - Transmission and reforms: - Monetary transmission improved as structural liquidity overhang reduced but pass-through to retail rates remains weak. - Staff supports implementation of an interest rate corridor, deposit auctions, and reforming the reverse repo auction mechanism. - With greater use of open market operations, the required reserve ratio can be lowered over the medium term. ### Financial cycles, systemic risks, and macroprudential policy - Financial structure and risks: - Bank-centric system with high concentration of conglomerates; macrofinancial linkages largely corporate leverage cycles financed by banks. - Rapid credit growth since 2010 but below typical metrics of credit booms; 2014 tightening brought credit back down. - Household debt at 7 percent of GDP does not appear to pose systemic risks. - Nonfinancial corporates broadly resilient but leverage unevenly distributed; some firms vulnerable to interest rate rises. - NBFIs small but growing rapidly; data gaps on NBFI exposure to real estate. - Macroprudential measures and recommendations: - Continue macroprudential policies to limit systemic vulnerabilities, including excessive credit growth in specific sectors. - Enforcement of single borrower limits (set at 25 percent of core capital) and allow additional 25 percent allowance for exposures to PPPs to lapse. - Enhance monitoring of banks’ exposures to real estate; guidance setting maximum loan value at 60 percent of the appraised value for real estate mortgage loans. - Support draft bill broadening BSP’s financial stability mandate and improving access to nonbank financial information. - Strengthen surveillance on nonbank activities and map conglomerate exposures. ### Financial development and inclusion priorities - Expand role of capital markets for long-term financing (PPPs); instruments: project bonds, asset backed securities. - Develop organized repo and risk management markets; smooth liquidity profile across government yield curve; revitalize SME equity listings. - Financial inclusion: increase banking and payment services outside urban regions; encourage formal micro-lending; expand micro-insurance penetration. - Authorities’ actions: national financial inclusion strategy; BSP liberalized entry for foreign banks (five foreign banks approved) to increase competition and ease single borrower limit constraints. ### Staff appraisal: macroeconomic outlook and policy recommendations - Outlook summary: - Economy expected to grow at a robust 6.2 percent in 2015, with credit growing at a moderate pace, and inflation in the lower half of the target range. - Key policy support: - Staff supports raising infrastructure investment and returning to a 2 percent of GDP deficit target. - Public expenditure management should be strengthened: passage of PFM bill, improved expenditure tracking and cash management, amendments to BOT law and Right of Way bill. - Additional revenue needed; staff urges net revenue enhancing tax reform and improved tax administration (including access to bank deposit information and making tax evasion a predicate crime). - Monetary policy currently appropriate; BSP to remain vigilant and implement interest rate corridor and BSP charter amendments. - Macroprudential policies to guard against systemic risks and broaden BSP financial stability mandate. - Medium-term priorities: - Increase infrastructure spending, facilitate PPPs, improve investment climate, enhance human capital and social services, develop alternative financing for infrastructure. - Consultation timing: - Recommendation that the next Article IV consultation take place on the standard 12­month cycle. ### Box findings — Real and financial cycles; external vulnerabilities; model simulations - Output and credit gaps: - Output gap near zero in 2015 even when augmented by financial variables. - Potential output growth accelerating to 6.5 percent in 2015‒16; credit gap zero or slightly positive in 2015. - Global financial cycle effects: - Higher U.S. interest rates likely tighten Philippine financial conditions significantly; VIX and U.S. rates affect capital flows and domestic demand. - Nonfinancial corporates more sensitive to interest rate shocks than FX shocks. - Public infrastructure model simulations (GIMF): - Scenario (i): permanent increase in public investment from 3 percent to 5 percent of GDP financed by borrowing. - Scenario (ii): same increase financed by an increase in consumption taxes. - Both scenarios produce sustained output increases; debt-financed scenario raises public debt-to-GDP and borrowing costs; tax-financed scenario initially subdues consumption. - Improvements in public investment efficiency enhance benefits in both scenarios. ### Risk Assessment Matrix — main threats, impacts, and policy responses (selected entries) - Tighter global financial conditions and surge in financial volatility - Likelihood/Time Horizon: High/Short Term - Expected impact: asset price falls, rising credit costs, potential NPL increases, leveraged corporate stress. - Recommended response: ensure bank capital buffers, enforce single borrower limits, consider countercyclical macroprudential policies, allow exchange rate flexibility, ease monetary/fiscal policy if real economy slows significantly. - Severe El Niño weather conditions - Likelihood/Time Horizon: Low/Short Term - Expected impact: poor harvest, rapid food price increases, inflation breaching target band, adverse effects on the poor. - Recommended response: relax food import restrictions, release buffer stocks, consider monetary tightening if second-round effects appear. - Continued low infrastructure and social spending - Likelihood/Time Horizon: Medium/Short and Medium Term - Expected impact: constrained potential output growth, persistent poverty. - Recommended response: strengthen public expenditure framework, improve PPP scope, broaden tax base and improve tax administration, expand conditional cash transfer and universal health care. ### External sector assessment and technical considerations - Structural shifts: - Current account moved to a structural surplus; gross international reserves increased to US$80 billion (28 percent of GDP) or 217 percent of the IMF’s metric of reserve adequacy at end­2014. - External position assessment: - External sector moderately stronger than warranted by fundamentals and desired policies, consistent with moderate currency undervaluation reflecting mainly low investment. - IMF EBA model: predicted current account at 7.8 percent of GDP below actual current account in 2014; Philippines‑specific factors (natural disaster risk and remittances) could explain up to 4 percentage points of GDP of the residual. - Technical assessment of EBA approaches: - Current account regression approach preferred due to cross-country information use and avoidance of price measurement issues. - Rescaling variables by GNI (GNI about 15 percent above GDP) reduces current account gap by about 1.5 percentage points to 6.3 percent. - Philippines-specific factors (natural disaster risk, infrastructure vulnerability, underreporting of income when using GDP) could approach 4 percentage points of GDP in total contribution to the current account gap. ### Debt sustainability and external debt - General government debt-to-GDP ratio projected to fall from 36 percent of GDP in 2014 to 27 percent in 2020 under baseline. - Primary surpluses main factor behind projected decline; authorities’ commitment to 2 percent of GDP overall deficit implies average annual primary surplus of well over 1 percent of GDP at general government level. - Gross financing needs to remain around 4 percent of GDP through projection period. - External debt fell from 76 percent of GDP in 2001 to 27 percent in 2014; projected to fall to 16 percent of GDP in 2020 under staff baseline. - A one-time real depreciation of 30 percent in 2015 would raise the external debt-to-GDP ratio by about 11 percentage points. ### Authorities’ views (summary of authorities’ statement) - Authorities express strong appreciation for IMF engagement and TA. - Growth and inflation: - Authorities target GDP growth of 7.0-8.0 percent for 2015. - Headline inflation decelerated to 0.8 percent in July 2015 from 1.2 percent in June 2015; first seven months of 2015 averaged 1.9 percent. - Fiscal policy and budget: - Fiscal deficit target set at 2.0 percent of GDP for 2016. - Proposed expenditure program for 2016: PhP3 trillion, 15.2 percent higher than 2015; corresponds to 19.5 percent of GDP (2015: 18.7 percent of GDP). - Proposed capital spending allocation increased by 30 percent; proposed social spending allocation increased by 16 percent. - PDP strategy: increase public infrastructure spending to at least 5.0 percent of GDP in 2016; PPP pipeline of 50 projects worth over US$23 billion. - Monetary policy: - Monetary Board (13 August 2015) maintained key policy interest rates at 4.0 percent (RRP) and 6.0 percent (RP); reserve requirement ratios unchanged. - BSP studying interest rate corridor with IMF TA; RRP e-Trading System launched in February 2015. - Financial sector and structural reforms: - Ongoing supervisory and regulatory reforms, competition and foreign bank entry liberalization, amendments to cabotage law, MSME support, education and health laws, and pending legislative priorities including PFM law and BSP charter amendments. - Final outlook: - Authorities expect sustained medium-term strong growth supported by low and stable inflation, ample fiscal policy space, sound banking system, inclusive financial system, and healthy external position; continued structural reforms critical. *Source: PHILIPPINES STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (Mission dates: May 14–26, 2015; July 24, 2015).* ### 406.5 percent of short-term debt by residual maturity), a national government fiscal deficit of ### _cr15246 - 406.5 percent of short-term debt by residual maturity), a national government fiscal deficit of ### Recent developments - Real GDP grew by 6.1 percent in 2014 and slowed to 5.2 percent in the first quarter of 2015. - Main 2014 growth drivers: household consumption, private construction, and exports of goods and services. - First-quarter 2015 slowdown driven by temporary factors: dry weather affecting agricultural production, weak global demand, and slow budget execution. - Inflation developments: - CPI (annual average) and CPI (end year) movements noted in table (see Key statistics). - Inflation fell below the bottom of the BSP’s target band (3±1 percent) in May 2015; reached 4.9 percent (y/y) in August 2014 and fell to 1.2 percent in June 2015. - Current dry weather associated with El Niño had not yet resulted in higher inflation as of June 2015. - Fiscal execution and public spending: - Fiscal deficit in 2014 was smaller than the 2 percent of GDP target due to slow budget execution. - Revenue increased as a share of GDP due to improvements in tax administration. - Expenditures, especially capital spending, fell short of budget because of weak implementation capacity and delayed post-typhoon reconstruction. - A Supreme Court ruling that made aspects of the Disbursement Acceleration Program unconstitutional further slowed budget execution in 2014. - Budget execution remained slow in the first quarter of 2015, particularly for capital spending, though momentum on PPP project implementation is building. - Financial sector and credit: - Credit growth was strong in 2014 but slowed and became more balanced in the first five months of 2015. - Slowdown in credit was sharper in sectors with previously faster credit growth, including construction and real estate. - Banks remain well capitalized, with low levels of nonperforming loans and abundant liquidity. - External sector: - Current account surplus rose in 2014 amid lower oil prices, subdued import volumes, and robust export growth. - Gross foreign reserves were US$81 billion in June 2015. - Peso stable vis-à-vis the U.S. dollar since early 2014 but appreciated significantly in effective terms. ### Outlook and risks - Growth and inflation projections: - Real GDP is projected to grow by 6.2 percent in 2015. - Inflation expected to remain in the bottom half of the BSP’s target band; lower fuel prices partly offset by somewhat higher food prices due to assumed moderate El Niño conditions. - Credit and financial deepening: - Credit is expected to grow at about 15 percent in 2015 (or about 2 percentage points of GDP), consistent with projected investment growth and a pace of financial deepening that appears sustainable but warrants close monitoring. - External position: - Current account surplus expected to widen to 5.0 percent of GDP in 2015 due to lower oil prices and continued inflows from Business Process Outsourcing (BPO) and remittances. - Risk assessment: - Risks to the outlook are tilted to the downside. - Specific risks identified: tighter global financial conditions and a surge in financial volatility leading to sharp capital outflows; continuing weak budget execution; severe El Niño conditions. - Authorities are described as well equipped to respond with suitable policies should risks materialize, given strong fundamentals and ample policy space. ### Policy recommendations and Executive Board assessment - Fiscal policy: - Encourage continued vigilance in managing risks. - Support plan to step up infrastructure investment and social spending, and return to the medium-term fiscal deficit target of 2 percent of GDP. - Planned increase in public expenditure in 2015 judged appropriate given low inflation, large infrastructure and social needs, and low and declining public debt. - Encourage further efforts to strengthen public financial management and budget execution, and to mobilize revenue to meet large social and infrastructure needs. - Monetary policy: - Current monetary policy stance considered appropriate given low inflation, moderating and more balanced credit growth, and moderating—albeit still robust—economic activity. - Encourage continued vigilance if inflation or credit growth accelerate with signs of potential overheating. - Support central bank plan to implement an interest rate corridor to improve monetary policy transmission, and encourage passage of central bank charter authorizing issuance of central bank bills and increasing minimum capital. - Emphasize continued exchange rate flexibility, with participation limited to smoothing excessive volatility. - Macroprudential and financial stability: - Financial system remains sound. - Welcome use of targeted prudential policies to limit financial excesses and strengthen resilience; more stringent prudential regulations may be needed if systemic risks emerge. - Encourage passage of draft law broadening the central bank’s financial stability mandate and central bank efforts to enhance access to information on conglomerates’ finances. - Structural and development priorities: - Support medium-term priorities to reap dividends from a young and growing population: raise infrastructure spending, facilitate public private partnerships, improve the business climate, and enhance human capital and social services for the poor. - Focus on financial deepening and inclusion as essential elements of an inclusive growth strategy; alternative means of financing and hedging (bond and equity markets) could help finance large infrastructure needs. - Welcome release of the national strategy for financial inclusion. ### Key statistics (selected, as reported) - Real GDP growth: 2010: 7.6; 2011: 3.7; 2012: 6.7; 2013: 7.1; 2014: 6.1; 2015 (Staff proj.): 6.2; 2016 (Staff proj.): 6.5. - CPI (annual average): 2010: 3.8; 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014: 4.2; 2015 (Staff proj.): 2.1; 2016 (Staff proj.): 3.5. - CPI (end year): 2010: 3.6; 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014: 2.7; 2015 (Staff proj.): 3.4; 2016 (Staff proj.): 2.7. - Gross investment (percent of GDP): 2014: 20.9; 2015 (Staff proj.): 22.0; 2016 (Staff proj.): 22.3. - National saving (percent of GDP): 2014: 25.4; 2015 (Staff proj.): 27.1; 2016 (Staff proj.): 26.7. - National government balance (authorities' definition, percent of GDP): 2014: -0.6; 2015 (Staff proj.): -1.5; 2016 (Staff proj.): -2.0. - Nonfinancial public sector balance (percent of GDP): 2014: 0.9; 2015 (Staff proj.): 0.0; 2016 (Staff proj.): -0.5. - Revenue and grants (percent of GDP): 2014: 20.1; 2015 (Staff proj.): 20.6; 2016 (Staff proj.): 20.7. - Expenditure (percent of GDP): 2014: 19.2; 2015 (Staff proj.): 20.6; 2016 (Staff proj.): 21.2. - Nonfinancial public sector debt (percent of GDP): 2014: 47.8; 2015 (Staff proj.): 45.5; 2016 (Staff proj.): 42.5. - Broad money (M3) (percent change, end of period): 2014: 11.2; 2015 (May, year-on-year): 9.3. - Interest rate (91-day treasury bill, end of period, in percent): 2014: 2.5; 2015 (latest data point is May 2015): 2.1. - Credit to the private sector (in percent, year-on-year for Universal and Commercial Banks, May 2015): 2014: 19.9; 2015 (May): 14.5. - Current account (percent of GDP): 2014: 4.4; 2015 (Staff proj.): 5.0; 2016 (Staff proj.): 4.5. - Financial account (US$ billions, BPM6): 2014: 10.1; 2015 (Staff proj.): 7.1; 2016 (Staff proj.): 6.1. - Direct investment (net, US$ billions, BPM6): 2014: 0.8; 2015 (Staff proj.): 0.0; 2016 (Staff proj.): -0.7. - Errors and omissions (US$ billions): 2014: -5.5; 2015 (Staff proj.): -5.2; 2016 (Staff proj.): -4.9. - Overall balance (US$ billions): 2014: -2.9; 2015 (Staff proj.): 3.1; 2016 (Staff proj.): 4.3. - Total external debt (percent of GDP): 2014: 27.3; 2015 (Staff proj.): 25.6; 2016 (Staff proj.): 23.1. - Debt service ratio (percent of exports of goods and nonfactor services): 2014: 8.7; 2015 (Staff proj.): 7.8; 2016 (Staff proj.): 10.6. - Reserves (US$ billions): 2010: 62.4; 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014: 79.5; 2015 (June): 81.7; 2016 (Staff proj.): 84.5. - Reserves/short-term liabilities (reserves as a percent of short-term debt including medium- and long-term debt due in the following year): 2010: 403.3; 2011: 482.5; 2012: 397.9; 2013: 405.5; 2014: 406.5; 2015 (Staff proj.): 361.2; 2016 (Staff proj.): 366.8. - Exchange rate (period averages, Pesos per U.S. dollar): 2010: 45.1; 2011: 43.3; 2012: 42.2; 2013: 42.4; 2014: 44.4; 2015 (January–May): 44.5. - Nominal effective exchange rate (2005 =100): 2010: 100.0; 2011: 99.0; 2012: 102.6; 2013: 105.4; 2014: 102.7; 2015 (January–May): 109.6. - Real effective exchange rate (2005 =100): 2010: 100.0; 2011: 100.7; 2012: 105.6; 2013: 109.8; 2014: 109.5; 2015 (January–May): 117.9. *Source: PHILIPPINES STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (Mission dates: May 14–26, 2015; July 24, 2015).* ### 11. Over the medium term, economic growth is projected at 6.5 percent, in line with ### _cr15246 - 11. Over the medium term, economic growth is projected at 6.5 percent, in line with ### Medium-term outlook and growth drivers - Economic growth is projected at 6.5 percent over the medium term, in line with potential growth. - Public and private investments are projected to lead growth, supported by: - Increased public infrastructure spending. - Implementation of PPP projects that should crowd in private investment. - Inflation: - Expected to increase as oil prices rise but projected to remain within the BSP’s target range. - External and domestic effects: - Pickup of public and private investments, together with a trend real effective appreciation of the peso, is expected to narrow the current account surplus and relieve pressure on domestic capacity constraints. - Higher U.S. interest rates are expected to tend to tighten lending conditions consistent with moderate credit growth going forward. ### Risks to the outlook - Overall tilt: Risks to the outlook are tilted to the downside. - Upside risk: - Stronger lift to demand from lower oil prices. - Downside risks: - Tighter global financial conditions and a surge in financial volatility, amplified by low market liquidity, could lead to sharp capital outflows and tightening of domestic financing conditions with significant macrofinancial spillovers. - Continued weak budget execution could slow needed improvements in public infrastructure. - Risk of a larger than budgeted deficit due to election spending is limited given the government’s strong commitment. - Severe El Niño conditions could cause: - Poor harvest regionally. - Rapid run-up in food prices. - Sharp rise in inflation breaching the target band and severe effects on the poor. - Policy capacity: - Philippine authorities are well equipped to respond with suitable policies given strong fundamentals, ample policy space, and a strong foreign reserve position. ### External sector assessment and key statistics - Structural shifts since 2010: - Current account has moved to a structural surplus. - Gross international reserves increased to US$80 billion (28 percent of GDP) or 217 percent of the IMF’s metric of reserve adequacy at end­2014. - Reserves are well in excess of the 100‒150 percent suggested range. - External position assessment: - The external sector is moderately stronger than warranted by fundamentals and desired policies, consistent with moderate currency undervaluation, reflecting mainly the low level of investment. - Current account detail: - The IMF External Balance Assessment (EBA) model places the predicted current account at 7.8 percent of GDP below the actual current account in 2014. - Philippines‑specific factors such as natural disaster risk and remittances could explain up to 4 percentage points of GDP of the residual. - Recent appreciation of the peso could help narrow the current account gap over time, but lower oil prices are likely to more than offset this effect in 2015. - Addressing imbalances: - Current account gap attributable to low investment compared with other EMEs. - Raising the investment rate by improving the business environment and infrastructure would help reduce external imbalances. - Current account gap would also decrease as budget execution improves. - International reserves and exchange rate guidance: - Reserve accumulation since 2010 reflected current and financial account surpluses. - BSP accumulated sizable reserves in 2010–12 when ultra accommodative monetary policies in the AEs stimulated large capital flows. - Since the taper tantrum in mid­2013 there were large capital outflows, but foreign reserves remained broadly stable supported by current account surpluses. - Staff recommendation: allow the exchange rate to move freely in line with market forces with intervention limited to smoothing excessive volatility in both directions. ### Authorities’ views (external and reserves) - Authorities emphasized structural causes of the current account surplus and the unique role of worker remittances not well captured in the EBA model. - Observations: - Peso broadly unchanged vis-à-vis the U.S. dollar since early­2014. - Gross international reserves broadly stable. - Low investment likely to be addressed given large pipeline of infrastructure projects. - Exchange rate continues to be market determined; foreign exchange intervention limited to smoothing excessive volatility. ### Fiscal policy: objectives, projections, and recommendations - Policy focus: - Fiscal policy should support infrastructure investment and inclusive growth. - Return to authorities’ medium-term deficit target of 2 percent of GDP by increasing public infrastructure spending and implementing post-typhoon reconstruction and social spending in the 2015 budget. - Debt dynamics: - A 2 percent of GDP deficit target would steadily reduce general government debt-to-GDP ratio over the medium term to below 30 percent (from 36.4 percent of GDP in 2014). - Authorities’ infrastructure plans and staff projections: - Authorities plan to increase infrastructure spending from 3 percent of GDP in 2014 to 5 percent by 2016, including facilitating PPP projects. - Staff projects public capital expenditure at 3.8 percent of GDP in 2016. - PPP projects could amount to 1 percent of GDP, bringing overall infrastructure investment to 4.8 percent of GDP in 2016. - Public expenditure management: - Need to strengthen investment selection and implementation processes. - Need for a better system for projecting and tracking spending to strengthen budgeting and cash management. - Staff urges passage of the Public Financial Management (PFM) bill. - Support for amendments to the Build Operate Transfer (BOT) law and Right of Way Bill to institutionalize progress and strengthen legal framework for PPPs. - Scope for reallocation: - Limited scope to cut other expenditure to support infrastructure and social needs. - Total expenditure for general government is less than 20 percent of GDP, lower than ASEAN­5 and emerging and developing country averages. - No energy subsidies; public wage bill is small; key public services face manpower shortages. - Revenue effort: - Authorities’ initiative to strengthen revenue collections is welcome. - Congress has passed the Tax Incentives Management and Transparency Act (TIMTA). - Staff supports tax administration reform improving arrears collection, VAT compliance, and filing rates for large taxpayers. - These gains should more than offset negative effects from lower oil prices and slightly increase the tax revenue-to-GDP ratio in 2015. - Tax reform recommendation: - Staff strongly encourages a tax reform package that is net revenue enhancing (examples: rationalization of tax incentives, reducing certain VAT exemptions, increases in fuel excises to more than compensate for revenue-losing measures). - Authorities are crafting a tax reform package that appears to be net revenue enhancing and have requested Fund TA. - Staff urges avoidance of any tax package that would entail a net revenue loss. - Support for Department of Finance efforts to amend bank secrecy law to allow tax authorities access to individual bank deposit information and make tax evasion a predicate crime for money laundering. - Staff simulations indicate that a tax-financed public investment increase would result in a more favorable public debt trajectory and superior output growth over the medium term. - Staff estimate (from prior staff report): - Revenue mobilization of 2–3 percentage points of GDP is attainable. ### Authorities’ views (fiscal) - Authorities acknowledge sizeable challenges in accelerating infrastructure project implementation and identify capacity constraints as major causes of 2014 delays. - Remedies underway: - Strengthening procurement units at spending agencies. - Revising operational regulations. - Presidential order to create a Delivery Unit in major departments to monitor and report on implementation delays. - Commitment: - Increase share of infrastructure in the budget and implement several PPP projects. - Recognize that revenue targets are challenging but provide incentives for increased collections and administrative reforms. - Need for comprehensive tax reform and allowing tax collectors access to bank deposits; making tax evasion a predicate crime to improve compliance. - Authorities value IMF TA and hope to benefit from additional TA. ### Monetary policy: assessment and guidance - Current stance: - Monetary settings deemed appropriate: inflation projections within the target band; estimates of the output gap near zero even with financial variables added; credit growth within normal metrics. - Credit growth was strong in 2014, notably in construction and real estate, raising macrofinancial imbalance concerns. - BSP actions in 2014: - Required reserve ratio increased by 200 basis points, to 20 percent. - Policy rates increased by 50 basis points. - Autonomous tightening since then due to rising real interest rates and an appreciating REER moderated credit growth and reduced inflation by the first half of 2015. - Outlook for inflation and labor market: - One-off effects of lower oil prices expected to dissipate by late 2015; inflation still expected to remain comfortably within the target band. - Significant slack remains in the labor market. - Policy guidance: - BSP should remain vigilant and be ready to tighten policy if signs of rising inflation pressure and accelerating broad-based credit growth emerge. - Rapid food price increases due to El Niño should be addressed by allowing food imports in a timely manner and would not justify monetary tightening unless second round effects appear. - Monetary transmission and structural liquidity: - Monetary transmission has improved as structural liquidity overhang has been reduced but pass-through from policy rates to retail rates remains weak. - Liquidity overhang persists but has declined significantly from last year. - Staff supports BSP efforts to improve effectiveness of monetary policy transmission through: - Implementation of an interest rate corridor (following up on Fund TA). - Implementing deposit auctions and reforming the reverse repo auction mechanism. - Passage of the BSP charter authorizing issuance of central bank bills and a minimum capital level. - With greater use of open market operations to manage liquidity, the required reserve ratio can be lowered over the medium term to reduce intermediation cost and improve efficiency. ### Authorities’ views (monetary) - BSP views current monetary policy stance as appropriate: inflation in lower end of target band, credit growth moderating, robust economic growth. - BSP will remain vigilant. - El Niño risks: - BSP shares staff’s assessment that El Niño could pose a major risk to food prices in 2015. - National Food Authority council authorized an additional 500 thousand metric tons of rice imports in 2015 to mitigate El Niño effects on rice prices and inflation. ### Financial cycles, systemic risks, and macroprudential policies - Financial system structure and linkages: - Bank-centric system with high concentration of conglomerates; macrofinancial linkages largely corporate leverage cycles financed by banks. - Boom phase of global financial cycle led to leveraged investment in construction and real estate, with rising capital market issuances. - Banks constrained by 25 percent single borrower limits in some cases. - BSP macroprudential response: - Tightened monetary policy and used macroprudential tools to target risky activities; credit moderated and sectoral composition became more balanced. - Wholesale bank funding from abroad minimal and subject to strict limits. - Household debt: - At 7 percent of GDP, household debt does not appear to pose systemic risks. - Credit growth assessment: - Credit growth since 2010 has been rapid but below typical metrics of credit booms. - In 2014 credit growth came close to exceeding some metrics but BSP action brought it back down. - Going forward, credit is expected to increase by about 2 percentage points of GDP per year, a rate of financial deepening that appears sustainable based on cross-country studies. - Sustainability needs ongoing assessment given concentration and other risks. - Credit to real estate and construction has moderated. - Nonfinancial corporates and data gaps: - Nonfinancial corporates appear broadly resilient but definitive assessment requires finer data, particularly intra-group linkages. - Nonfinancial corporate debt is low but rising; leverage is unevenly distributed, making some firms vulnerable to a rise in interest rates. - Foreign exchange exposure appears low given moderate foreign exchange debt and existing natural hedges. - Real estate and NBFIs: - Bank and nonfinancial corporate exposure to real estate has risen but risks remain moderate. - NBFIs remain small but are growing rapidly; data on NBFI exposure to real estate are scarce. - Plan developed to fill data gaps with IMF TA. - Official residential price index under construction by BSP and Philippines Statistical Agency; commercially available measures show modest price growth in most segments. - Macroprudential policy recommendations and actions: - Continue macroprudential policies to limit buildup of systemic vulnerabilities, including excessive credit growth in specific sectors. - BSP conducted stress tests on banks’ real estate loan exposures and required corrective actions. - Enhanced monitoring of banks’ exposures to all types of real estate. - Guidance on real estate mortgage loans setting maximum loan value at 60 percent of the appraised value. - Measures helped restrain credit growth to the real estate sector. - Single borrower limits (set at 25 percent of core capital) should be strictly enforced with the additional 25 percent allowance for exposures to PPPs allowed to lapse. - Ongoing efforts encouraged to strengthen financial stability supervisory framework, including capacity building and enhanced coordination among Financial Stability Coordinating Council stakeholders. - Staff supports draft bill broadening BSP’s financial stability mandate and providing greater access to nonbank financial information under discussion in Congress. - SEC steps to enhance corporate data collection and promote capital market development are encouraged. - Supervisory gaps noted: - Real estate financing provided by developers and conglomerates. - Bank secrecy laws. - Legal restrictions on interagency information sharing. - Mapping conglomerate exposures. - Financial system composition: - Banks account for nearly 80 percent of financial system assets. - BSP supervises NBFIs accounting for a further 4 percent of the system. - Insurance industry accounts for 7 percent of assets (supervised by the Insurance Commission). - Remainder largely under the Securities and Exchange Commission (SEC). ### Authorities’ views (financial development) - BSP views credit expansion by banks, with other forms of financial deepening and inclusion, as needed to support medium-term growth. - Welcomed shift in credit growth away from real estate into productive areas like manufacturing. - Philippines cannot rely solely on banking to finance ambitious infrastructure investment; financial market development needed to help finance large PPP projects. - BSP liberalized entry for foreign banks; five foreign banks approved for entry to increase competition, reduce concentration risks, and ease single borrower limit constraints on aggregate financing of infrastructure investment. *Source: _cr15246 - 11. Over the medium term, economic growth is projected at 6.5 percent, in line with* ### 32. Boosting the level of investment is a ### 32. Boosting the level of investment is a ### Investment challenges and priorities - Public and private investment rates in the Philippines are well below regional peers, reflected in low capital stock and infrastructure quality. - Main impediments to private investment: - Inadequate infrastructure. - Weak investment climate. - Restrictions on foreign direct investment. - Immediate infrastructure priorities: - Implementation of the transport system in Manila (Manila Dream Plan approved by NEDA). - Improvements in airports, road connectivity, and seaports across the country. ### Making growth more inclusive - Poverty has fallen but remains high. - Policy recommendations to lower rice prices and help the poor: - Proceed with reform of the National Food Authority. - Ease quantitative rice import restrictions to lower rice prices. - Employment creation priorities: - Develop agribusiness, tourism, and mining sectors to create labor-intensive jobs. - Address uncertainty and non-transferability of property rights on agricultural land to allow land use as collateral for bank loans and improve access to financing. - Measures to reduce business costs and support MSMEs: - Recent amendments to the cabotage law (reduces high cost of inter-island shipping) and enactment of a competition law help level the playing field. - Further reduce costs of doing business particularly for micro- and small- and medium-sized enterprises (MSMEs). - Skills and job matching: - Expand education and training programs (examples: Technical Education and Skills Development Authority). - Create jobs via expansion of BPOs into higher value added segments and promotion of light manufacturing for under-skilled workers. ### Authorities’ views on inclusive spending - Government expanded growth-inclusive budgetary expenditures: - Expanded Conditional Cash Transfer (CCT) program to high school students, indigenous peoples, homeless itinerants, and families. - Strengthened kindergarten and high school education as part of the K to 12 program. - Expanded health insurance to cover the poor and informal sectors; hiring and assignment of doctors and nurses to rural areas; construction and equipping of rural and barangay health stations. - Financing: Many initiatives financed by revenue from “sin taxes.” - Government agreed that phasing out quota restrictions on rice importation with adequate support for farmers is important for poverty reduction. - Worsening of poverty indicators in 2014 attributed to a sharp rice price increase caused by delayed rice imports and distribution. - Allowing the market to determine level of rice importation expected to make rice prices less susceptible to supply shocks and more favorable to the poor. ### Financial development and inclusion: constraints and priorities - Tension exists between financial deepening/inclusion and financial stability. - Financial development is broadly in line with income level but considerable growth potential remains. - Priorities to advance financial development and inclusive growth: - Expand role of capital markets, emphasizing long-term financing for infrastructure investment (PPPs). - Expand existing financial inclusion initiatives (access, education, consumer protection). - Focus on long-term financing instruments: project bonds, asset backed securities, etc., to match duration and diversification needs of investors like pension funds and insurers. - Specific capital market policy priorities: - Develop organized repo and risk management markets. - Smooth liquidity profile across the government yield curve. - Establish guidelines for structured credit issuance. - Revitalize the ‘second board’ for SME equity listings by lowering listing and transaction costs. - Taxation policy should incentivize greater activity from issuers and investors (examples suggested: concessionary tax treatment for long-term savings vehicles, streamlining withholding tax registration, reducing taxes on initial public offerings). - Full engagement in the ASEAN Capital Markets Forum to integrate and deepen markets. - Financial inclusion specifics: - Need to increase banking and payment services outside heavily urbanized regions. - Encourage formal micro-lending initiatives. - Continue increase in micro-insurance penetration given low coverage. - Authorities’ views: - BSP agrees capital market development is needed for PPP financing and to mitigate bank concentration risk. - Integration with ASEAN capital markets should be pursued. - New national financial inclusion strategy provides a framework; policy frameworks for micro health insurance and agriculture micro insurance under consultation. - Blueprint for a movable collateral registry covering an expanded list of financial assets is being finalized. ### Staff appraisal: macroeconomic outlook and policy recommendations - Recent performance and outlook: - Philippine economy continued to perform strongly due to sound macro policies and prudent financial sector supervision. - Macroeconomic outlook: economy expected to grow at a robust 6.2 percent in 2015, with credit growing at a moderate pace, and inflation in the lower half of the target range. - Downside risks: - Tighter global financial conditions and surge in financial volatility could lead to sharp capital outflows. - Continued weak budget execution could slow infrastructure improvements. - More severe El Niño conditions could raise inflation and affect the poor severely. - Fiscal and investment policy: - Staff supports government plan to raise infrastructure investment and return to medium-term fiscal deficit target of 2 percent of GDP. - Increase in public spending in the 2015 budget judged appropriate given low inflation, large infrastructure and social needs, low and declining public debt, low long-term interest rates, and post-typhoon reconstruction needs. - Public expenditure management should be strengthened: passage of the PFM bill, improved expenditure tracking and cash management, amendments to the BOT law and Right of Way bill to strengthen PPP implementation. - Revenue and tax policy: - Additional revenue needed to finance infrastructure and social needs. - Authorities urged to ensure net revenue enhancement in tax reform by: - Rationalizing tax incentives. - Streamlining VAT exemptions. - Raising fuel excises to offset proposed reductions in corporate and personal income taxes. - To strengthen tax collection: give tax authorities access to individual bank deposit information and make tax evasion a predicate crime. - Monetary and macroprudential policy: - Monetary policy currently appropriate; BSP should remain vigilant and be ready to tighten if inflation or credit growth accelerate. - BSP encouraged to implement the interest rate corridor to improve monetary policy transmission, supported by passage of the BSP charter that authorizes issuance of central bank bills and a minimum capital level. - With official reserves more than adequate, exchange rate should continue to move freely while smoothing excessive volatility. - Macroprudential policies should guard against systemic risks; support for targeted prudential policies and broadened BSP financial stability mandate. - Support for allowing authorities better access to conglomerates’ financial information. - Medium-term priorities: - Increase infrastructure spending, facilitate PPPs, improve investment climate, and improve human capital and social services for the poor. - Monitor composition of credit growth to avoid risks from credit booms. - Further develop alternative financing and hedging (corporate bond and equity markets) to support infrastructure investment. - Overall assessment: - Strong growth attributable to prudent macro policies, strong capital inflows from global financial cycle expansion, and BPO industry boom. - Potential for stronger performance if poverty incidence falls further, infrastructure quality improves, financial market access for poor households and SMEs improves, and financial sector develops further. - Government advised to push economic reforms firmly while maintaining macroeconomic and financial stability. - Consultation timing: - Recommendation that the next Article IV consultation take place on the standard 12­month cycle. ### Box findings — Real and financial cycles - Output gap: - Output gap is near zero in 2015 even when augmented by financial variables. - Potential output growth accelerating to 6.5 percent in 2015‒16, with the output gap closing in 2015. - Financial cycle / credit gap: - After 2014 monetary tightening, the credit gap is zero or slightly positive in 2015. - Mendoza and Terrones (2008) approach suggests a slightly positive credit gap in 2015‒16 but below the credit boom threshold. - Dell’Ariccia and others (2012) define a credit boom when deviation of credit-to-GDP from trend exceeds a threshold and growth of credit-to-GDP is larger than 10 percent, or growth is larger than 20 percent. - Deviation of credit-to-GDP from trend was zero in 2014 (below boom threshold), but growth of credit-to-GDP was close to 10 percent. - Integration of financial variables (real credit and stock prices) indicates the output gap in 2015‒16 is slightly larger when financial variables are included, consistent with a slightly positive credit gap; however the output gap remains very small. ### Box findings — Global financial cycle and corporate sector vulnerabilities - Higher U.S. interest rates likely tighten Philippine financial conditions significantly, particularly if accompanied by higher volatility. - Surge in capital inflows between 2010 and mid-2013 largely explained by global financial factors (VIX and U.S. short-term interest rates), with exchange rate expectations and domestic fundamentals supporting. - Local bond yields and retail bank rates appear driven largely by global factors and U.S. term premia. - A BVAR model shows: - VIX affects domestic demand via capital flows and asset re-pricing. - U.S. 10-year T-bond yields affect bank credit and investment. - Nonfinancial corporates: - Despite recent borrowing, nonfinancial corporates appear resilient. - Nonfinancial corporate debt grew substantially since 2007 but total debt remains low compared to peers. - Firm-level data show leverage and debt-at-risk vary significantly across sectors; small firms are more leveraged but do not pose systemic risks given small debt share. - Firms are more sensitive to interest rate shocks than FX shocks due to low FX debt and natural hedges. - Some real estate developers may be more vulnerable, particularly those involved in rising unregulated shadow banking activity. - Firm-level developments should be closely monitored. ### Box findings — Improving public infrastructure (model simulations) - Public capital is among the lowest in ASEAN at about 35 percent of GDP. - Need both to increase public investment and enhance public investment efficiency (better planning, budget allocation, implementation). - GIMF model scenarios considered: - Scenario (i): permanent increase in public investment from 3 percent to 5 percent of GDP in all subsequent years, financed by borrowing. - Scenario (ii): same permanent increase from 3 percent to 5 percent of GDP, financed by an increase in consumption taxes. - Each scenario is divided into sub-scenarios with and without a gradual improvement in public investment efficiency. - Common result: all scenarios exhibit sustained output increases because public infrastructure improvement is a permanent productivity improvement that crowds in private investment. - Differential effects: - Debt-financed scenario results in substantial increase in public debt-to-GDP, raising borrowing cost and constraining investment. - Tax-financed scenario initially subdues consumption due to lower disposable income. - Both scenarios benefit from increased efficiency. - Initial level of public investment efficiency is set according to the Public Investment Management Index (PIMI). *Italic: IMF staff report excerpt on the Philippines summarizing structural challenges, financial development and inclusion, staff appraisal, and model simulations contained in the source content.* ### Box 3. Philippines: Improving Public Infrastructure (Concluded) ### Box 3. Philippines: Improving Public Infrastructure (Concluded) ### Infrastructure effects on external sector and inflation - Public infrastructure improvement influences the current account and inflation as well. - It worsens the current account, helping with external rebalancing. - It also generates additional domestic demand initially and thus creates inflationary pressures. - Over time, the increase in supply capacity alleviates the inflationary pressures. ### Risk Assessment Matrix — main threats, expected impacts, and recommended policy responses - Tighter global financial conditions and a surge in financial volatility - Likelihood/Time Horizon: High/Short Term - Transmission channels: - Sharp asset price adjustment and decompression of credit spreads. - Volatility surge amplified by low market liquidity. - Sharp capital outflows, leading to a peso depreciation. - Expected impact: - Asset prices fall, generating negative wealth effects. - Rising credit cost slows down real estate and construction activity. - Banks’ NPLs may increase from very low levels, but effect on capital is likely manageable. - Some leveraged corporates may face debt service difficulties. - The impact should be limited due to strong macro fundamentals. Effective depreciation would cushion the effect on growth. - Recommended policy response: - Ensure banks have adequate capital buffers and do not exceed standard ceilings on exposures to a single borrower (defined to include all affiliated entities). - Consider adopting countercyclical macroprudential policies. - Allow for exchange rate flexibility, limiting intervention to smoothing excessive volatility. - Ease monetary or fiscal policy if real economy slows down significantly. - Sharp growth slowdown in China and other regional economies in the medium term - Likelihood/Time Horizon: Low/Short and Medium Term - Transmission channels: - A slowdown in China reduces regional exports and GDP growth. - Investor sentiment toward the region would weaken. - Expected impact: - Direct exports to China have grown rapidly over the decade, but less so in value-added terms. - 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: - Allow for exchange rate flexibility to serve as a shock absorber. Let the exchange rate adjust to the new equilibrium if China’s growth slowdown is persistent. - Implement structural reforms and consider accelerating public infrastructure spending to spur new sources of growth. - Domestic asset price boom fueled by abundant liquidity - Likelihood/Time Horizon: Low/Medium Term - Transmission channels: - Continued inflows into financial assets and real estate. - Construction and real estate related activity accelerates. - Credit exposure to the real estate sector grows. - Expected impact: - Real estate prices grow rapidly, attracting additional real and financial resources to the sector, and boosting near-term growth. - Vulnerability of the financial system builds. - Asset price correction weakens growth, including through financial sector deleveraging. - Recommended policy response: - Enforce existing macroprudential policies and implement additional real estate specific measures. - Ensure adequate bank capital to absorb credit losses. - Coordinated and strengthened surveillance on nonbank activities, including expansion of the BSP’s mandate to include nonbanks. - Stronger lift to domestic demand from lower commodity prices - Likelihood/Time Horizon: Low/Short Term - Transmission channels: - Low commodity prices lead to overheating. - Pick-up in government spending adds to demand pressures. - Expected impact: - Inflation begins to pick up. - Rapid credit growth increases financial stability risks. - Recommended policy response: - Monetary policy should focus on maintaining price stability. - Macroprudential policy should be deployed to limit the buildup of systemic vulnerabilities, including in specific sectors. - Continued low infrastructure and social spending - Likelihood/Time Horizon: Medium/Short and Medium Term - Transmission channels: - Continued weak budget execution limits social and infrastructure spending in the near term. - Continued low revenue base limits social and infrastructure spending in the medium term. - Technical factors limit PPP deployment. - Expected impact: - Fails to crowd in private investment. - Limits potential output growth over the longer term. - Limits opportunities to the growing working age population and stimulates migration. - Poverty remains high with risk of social fragmentation, impeding economic growth. - Recommended policy response: - Strengthen the public expenditure framework in support of infrastructure and social spending. - Improve the scope for PPPs to develop infrastructure. - Broaden the tax base and improve tax administration to raise additional revenue. - Further expand conditional cash transfer and universal health care. - Climate change related natural disaster - Likelihood/Time Horizon: Medium/Medium Term - Transmission channels: - Natural disaster destroys physical and human capital. - Results in population displacement and closure of businesses. - Going forward, increases uncertainty and discourages investment. - Expected impact: - Results in a loss of output and high unemployment and poverty. - Requires additional budgetary resources for reconstruction and social needs. - Increased uncertainty reduces investment and potential growth. - Recommended policy response: - Accelerate infrastructure improvements, especially in the areas which make it more resilient to natural disasters. - Establish a fund to finance social and reconstruction spending after natural disasters. - Explore private and public sector options for insurance. - Severe El Niño weather conditions - Likelihood/Time Horizon: Low/Short Term - Transmission channels: - Drought in many regions results in a poor harvest. - Reduced supply leads to agricultural price increases. - Expected impact: - Results in consumer price inflation above the upper limit of the BSP’s target band. - Increases the cost of food for consumers, particularly the poor. - The loss of real income to consumers reduces economic growth. - Recommended policy response: - Relax food import restrictions to avoid sharp agricultural price increases and release buffer stocks. - Consider monetary policy tightening if second-round price effects appear. ### External sector assessment — key findings and indicators - Current account - The Philippines’ current account balance (CAB) has recorded significant surpluses in the last decade, with strong remittances and service exports more than offsetting persistent trade deficits. - After being in deficit during most of the 1990s, the CAB turned into surplus since 2003, peaking at 5.7 percent of GDP in 2006. - The CAB increased to over 4 percent of GDP in 2013‒14 mainly due to smaller trade deficits. - The strengthening of the CAB since the late‐1990s mainly corresponds to a sustained fall in the investment-to-GDP ratio since the Asian financial crisis: gross capital formation declined from above 25 percent of GDP in the pre‑Asian crisis period to below 20 percent of GDP since 2006. - National saving also rose, but only by about 1 percent of GDP. The recent increase in the CAB in 2013‒14 has reflected a faster pickup in saving than in investment. - Relative to GDP, the Philippine CAB was similar to that of other EMEs in the 1990s, but larger than most peers in the 2000s. - The Philippines has always had a lower investment ratio relative to the average Asian EME, especially since 2003; the national saving ratio has risen only marginally and has consistently been somewhat higher than ratios in Latin America and other regions, but lower than for Asian EMEs. - Effective Exchange Rate (REER/NEER) - After declining continuously since the Asian financial crisis, the Philippines’ REER has been on an upward trend since 2004. - The post Asian crisis real depreciation was mostly due to a fall in the NEER. - Since 2007 the REER appreciation has been due to the inflation differential between the Philippines and its trading partners, with the NEER remaining stable. - The post‑2004 appreciation was stronger in the Philippines (46 percent) compared to Thailand (26 percent) and Malaysia (9 percent). - Reserve accumulation, reserve adequacy, and NIIP - The Philippines accumulated sizable international reserves since the Asian financial crisis, and especially since the global financial crisis. - The stock of foreign reserves has risen by 18 percent of GDP since 1997. - At end 2014, reserves were 28 percent of GDP and 2.2 times the IMF’s 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 11 months of imports of goods and services. - This suggests the Philippines holds more reserves than is warranted to meet normal contingencies. - The Philippines’ NIIP has improved sharply mirroring sustained current account surpluses: the NIIP rose from －49 percent of GDP in 2001 to －14 percent in 2014. - Three-fifths of the NIIP improvement was due to the fall in other investment liabilities, and two-fifths due to increased assets, mostly official reserves and foreign direct investment. - Reserve assets accounted for 54 percent of total assets (US$149 billion) in 2014; portfolio investment and other investment liabilities amounted to 43 percent and 26 percent of total liabilities (US$189 billion), respectively. - External Balance Assessment (EBA) model results (summary) - The EBA’s Current Account Regression approach suggests a current account deficit—rather than a surplus—is appropriate for the Philippines, reflecting low per capita income, fast growing population, and strong growth prospects, despite sizable institutional risk. - The gap between the actual and the fitted CAB turned positive since 2002, reaching a peak of 6.1 percent of GDP in 2014. - The gap rises to 7.8 percent of GDP when deviations of domestic and foreign policies from their desired levels are considered, with about half of the deviation due to domestic policies (mainly a too tight fiscal policy stance in the Philippines), and the other half due to policy deviations abroad. - The External Sustainability approach suggests the Philippines’ medium-term CAB is larger than the CAB needed to stabilize the NFA-to-GDP ratio. - The EBA’s REER index approach suggests the REER was slightly stronger than warranted by fundamentals and desired policies in 2014. - The EBA’s REER level approach suggests the REER was stronger than warranted by fundamentals and desired policies, with a larger degree of overvaluation than for the EBA’s REER index approach. *Source: IMF staff analysis in "Box 3. Philippines: Improving Public Infrastructure (Concluded)".* ### 8. Technical factors suggest that the current account regression approach is preferable to the ### _cr15246 - 8. Technical factors suggest that the current account regression approach is preferable to the ### Technical assessment of approaches - EBA REER index approach limitations: - Less reliable in countries with large structural changes and short data spans. - Cannot use cross-country information because REER indexes are set equal to 100 for all countries in a given year regardless of their external position. - Using country fixed effects forces gaps for each country to average to zero over time, which tends to understate the REER gaps. - EBA REER level approach: - Relies on purchasing power parity prices from the International Comparison Program (ICP) for REER levels and relative prices of tradable to non-tradable goods. - Depends on ICP price level data; despite recent progress in ICP’s sampling and methodology, overall data quality is still a concern. - Current account regression approach advantages: - Does not have price measurement issues. - Takes full advantage of cross-country information. - External Sustainability approach limitation: - Does not assess the appropriateness of the level of the NFA that is being stabilized. - In the Philippine case, a more negative NFA position and a lower CAB could be consistent with the country’s stage of development and population dynamics. ### Extensions to EBA and country-specific considerations - The EBA current account regression approach does not account for several Philippines-specific factors affecting the CAB: - Risk of natural disasters: - Natural disasters are a significant uninsurable risk for the Philippines. - Could lead to higher precautionary saving and lower investment (owing to reduced risk­adjusted returns). - Post-disaster reconstruction may boost investment spending, but in practice such effects have been limited. - Worker remittances: - Increase in the Philippines’ CAB coincided with a raise in remittances, which have been relatively resilient to changes in the external environment. - Philippine gross national income (GNI) is about 15 percent above GDP. - This increase in income may have pushed up the equilibrium real exchange rate by raising prices of nontraded goods and services, thereby weakening the trade balance. - Spending from remittances could be lower than that from other types of income if remittance income is perceived as more uncertain; higher saving rate out of remittances would tend to raise the CAB. - Impediments to investment: - Strengthening of the Philippines’ CAB since the late­1990s coincided with a marked fall in the investment-to-GDP ratio. - Balance sheet repair after the Asian financial crisis could have depressed investment persistently. - Weak business environment and inadequate infrastructure could be restraining investment. ### GNI versus GDP in EBA rescaling - Rationale: - GNI is a better measure of income and the basis for saving-investment decisions; CAB should be scaled by GNI instead of GDP for the Philippines. - GNI is nearly 15 percent larger than GDP in the Philippines due to worker remittances. - Variables that should be scaled by GNI (instead of GDP) in EBA: - income per capita - net foreign assets to GDP - public health spending to GDP - the cyclically adjusted fiscal balance to GDP - the change in foreign reserves to GDP - credit to private sector to GDP - Quantitative impacts: - Rescaling the CAB and relevant explanatory variables with GNI reduces the current account gap by about 1.5 percentage points to 6.3 percent. - It also reduces the contribution of policy gaps by about 0.3 percentage points to 1.4 percent. ### Role of natural disasters, infrastructure, and remittances (empirical findings) - Cross-country empirical analysis findings: - Precautionary saving and disincentives to investment due to exposure to natural disasters—including through low infrastructure quality—has a significant impact on the CAB. - Worker remittances do not have a statistically significant effect on the CAB (based on the cited 2014 Staff Report). - The Country Risk Index from the World Risk Report had a significant impact, indicating exposure to natural disasters raises the CAB for high-risk countries. - Quantified impacts for the Philippines: - The Philippines has the third highest global risk ranking; this increased its CAB by 3½ percent of GDP due to the country’s risk of natural disasters. - Reducing vulnerability (infrastructure quality) to the level of Malaysia, while keeping exposure unchanged, would lower the predicted CAB by 1 percent of GDP (i.e., a net rise 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 percent of GDP (i.e., a net increase of 1½ percent of GDP). - For conservatism, staff assume the impact of high exposure and vulnerability to natural disasters on the Philippine current account is 2½ percent of GDP (corresponding to vulnerability improved to the level of Malaysia). ### Overall assessment of the external sector - Philippine-specific factors strengthening the CAB: - Heightened exposure to natural disaster risk. - Understating national income by using GDP instead of GNI. - Low infrastructure quality. - Weak investment climate. - Aggregate quantitative estimate: - Total contribution of these factors could approach 4 percentage points of GDP. - This would reduce the current account gap to 3.8 percent of GDP, of which 1.4 percentage points of GDP corresponds to deviations of policies from desired levels. - Staff view and outlook: - The external sector is moderately stronger than warranted by fundamentals and desired policies, implying moderate currency undervaluation. - With official reserves 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 — Philippines: Debt Sustainability Analysis (key points) - Baseline projection: - General government debt-to-GDP ratio projected to fall from 36 percent of GDP in 2014 to 27 percent in 2020. - Primary surpluses are the main factor behind the projected decline. - Authorities’ commitment to the 2 percent of GDP overall deficit target at the national government level implies an average annual primary surplus of well over 1 percent of GDP at the general government level. - This exceeds the debt-stabilizing primary balance by about 2 percentage points of GDP, based on the assumption of 6.5 percent real GDP growth and 3.5 percent average inflation in the medium term. - Growth-interest rate differential will contribute to debt reduction, with robust real GDP growth offsetting gradually increasing interest rates. - Gross financing needs will remain comfortably around 4 percent of GDP throughout the projection period. - Debt composition projected to remain stable with a relatively low share of short-term debt and foreign currency-denominated debt. - Alternative scenarios: - Historical scenario (real GDP growth, real interest rates, and primary balances equal to their 2005‒2014 averages) leads to faster reduction in debt and gross financing needs than staff’s baseline. - Scenario with a constant primary surplus at projected 2015 level of 2.3 percent of GDP also leads to lower debt-to-GDP ratios and gross financing needs than staff’s baseline. *Source: _cr15246 - 8. Technical factors suggest that the current account regression approach is preferable to the* ### 3. Overall external debt in the Philippines is also sustainable. External debt fell sharply in the 2000s, ### 3. Overall external debt in the Philippines is also sustainable. External debt fell sharply in the 2000s, ### External debt trends and baseline projection - External debt fell from a peak of 76 percent of GDP in 2001 to 27 percent in 2014. - Drivers of the decline cited: sustained current account surpluses, strong output growth, and peso appreciation. - Under staff’s baseline scenario, external debt is projected to fall to 16 percent of GDP in 2020. ### Alternative scenarios and historical benchmark - The historical scenario (where real GDP growth, real interest rates, and the non-interest current account balance are equal to their 2005‒2014 averages) leads to faster reduction in external debt than staff’s baseline. - Staff notes that the baseline is conservative relative to the historical scenario. ### Resilience to shocks - One-half standard deviation shocks to interest rates, growth, and the current account: - Lead to only modest hikes in external debt ratios over the medium term (no numeric magnitudes provided in the text beyond "modest"). - Exchange rate shock vulnerability: - A one-time real depreciation of 30 percent in 2015 would raise the external debt-to-GDP ratio by about 11 percentage points. *Source: Philippines—Staff Report for the 2015 Article IV Consultation—Informational Annex (prepared by Asia and Pacific Department, July 24, 2015).* ### 1. The Philippine authorities express their strong appreciation to staff for the ### _cr15246 - 1. The Philippine authorities express their strong appreciation to staff for the ### Recent Economic Developments and Outlook - Authorities express strong appreciation for constructive engagement during the 2015 Article IV Consultation and value ongoing IMF technical assistance and Executive Board support. - Real GDP growth: - Real GDP grew by 6.1 percent in 2014. - Growth moderated to 5.2 percent in the first quarter of 2015 due mainly to temporary factors (lower-than-programmed public spending, dry weather effects on agriculture, slower export growth). - Authorities target GDP growth of 7.0-8.0 percent for 2015. - Inflation and price developments: - Headline inflation decelerated to 0.8 percent in July 2015 from 1.2 percent in June 2015. - Headline inflation for the first seven months of 2015 averaged 1.9 percent, slightly below the government’s inflation target of 2.0-4.0 percent for the year. - Expectation that lower oil prices, partly offset by El Niño impacts on food prices and utility rates, should keep inflation in the lower half of the BSP target range of 2.0-4.0 percent. - External sector and reserves: - Philippines has recorded current account surpluses in the past 10 years supported by remittances, tourism, and BPO revenues. - Balance of payments registered a surplus in Q1 2015 due to rising current account surplus and lower capital outflows. - Gross international reserves of US$80.4 billion as of July 2015, which is more than 10 months of imports of goods and services. - Banking and financial intermediation: - Banking system: low non-performing loan ratios of below 2 percent for universal and commercial banks. - Capitalization: capital ratio of 16.2 percent (well above national requirement of 10 percent and twice the Basel standard of 8 percent). - Loans to key productive sectors stood at 14.5 percent in June 2015. - BSP Senior Bank Loan Officers survey indicates lending standards remain high. - Risks to the outlook: - Key risks identified: divergent monetary policy in advanced economies, weaker growth prospects in Asia, and volatility in oil prices. - Authorities welcome staff’s view that strong macroeconomic fundamentals provide a cushion. ### Fiscal Policy - Fiscal stance and budget: - Fiscal deficit target set at 2.0 percent of GDP for 2016, consistent with the Philippine Development Plan’s medium-term targets. - Proposed expenditure program for 2016 amounts to PhP3 trillion, 15.2 percent higher than the 2015 expenditure program and corresponds to 19.5 percent of GDP (2015: 18.7 percent of GDP). - Proposed budget priorities include: (a) curbing corruption and public financial management reform; (b) increasing provision of basic education, universal health care, socialized housing, and expanding targeted conditional cash transfer programs to benefit 4.6 million poor households; (c) strategic infrastructure development, tourism and agricultural strengthening, reviving industrial development, expanding tertiary and technical and vocational education and training programs; and (d) disaster risk management through reforestation, water supply development, flood mitigation and drainage programs. - Proposed capital spending allocation increased by 30 percent. - Proposed social spending allocation increased by 16 percent. - Implementation and procurement reforms: - Lump sum funds reduced and channeled into specific programs and projects. - DBM made majority of funds available at the start of the year; as of June 2015, 95 percent of agency budgets released. - Presidential administrative order (March 2015) directed measures to clear procurement bottlenecks, improve reporting, and complete documentary requirements for allotment release. - DBM budget circular (June 2015) strengthened procurement units and provided additional staff. - Cashless and checkless disbursement schemes introduced; about 80 percent of payments to government suppliers done through bank-to-bank transactions. - National government disbursements: capital outlays and maintenance and other operating expenditures increased by 20.1 percent in May 2015; total year-on-year spending higher by 9.2 percent in May 2015. - Infrastructure and PPPs: - PDP strategy: increase public infrastructure spending to at least 5.0 percent of GDP in 2016. - PPP pipeline: 50 PPP projects worth over US$23 billion. - Since 2011: ten PPP contracts totaling over US$4 billion awarded. - Transparency and tax policy: - July 2015 guidelines issued to implement government’s open data program and promote digital payments. - Authorities focusing on improving tax administration and compliance, broadening tax base and reducing exemptions to raise tax efforts to levels at par with regional peers. ### Monetary Policy - Inflation targeting: - Monetary policy will focus on achieving the inflation target of 2.0-4.0 percent in 2015-2016. - Medium-term inflation target of 2.0-4.0 percent approved for 2017-2018. - Policy settings and instruments: - Monetary Board meeting on 13 August 2015 decided to maintain key policy interest rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.0 percent for the overnight lending or repurchase (RP) facility. - Interest rates on term RRPs, RPs and special deposit accounts kept steady; reserve requirement ratios left unchanged. - BSP committed to timely and calibrated responses using enhanced toolkit and sharpened surveillance to prevent overly tight liquidity and excessive interest rate volatility. - Market and operational enhancements: - RRP e-Trading System launched in February 2015 to improve efficiency, security and flexibility in BSP’s RRP transactions. - BSP studying adoption of an interest rate corridor framework with IMF technical assistance to strengthen transmission of policy rate adjustments. - Demonetization: old banknote series launched in 1985 usable for payments up to 31 December 2015; new banknotes issued in December 2010 use enhanced security features. - Exchange rate stance: - Authorities will adhere to a market-based exchange rate policy with scope for occasional presence to maintain orderly conditions. - External Balance Assessment (EBA) methodology: - Authorities caution staff on EBA application limitations and stress importance of capturing country-specific factors such as the role of remittances. ### Financial Sector Policy - Supervisory and regulatory reforms: - Strengthening financial stability supervisory framework via capacity building and enhanced coordination among Financial Sector Forum and Financial Stability Coordinating Council stakeholders. - Recent measures include: - Enhanced reporting requirements on licenses banks acquire or renew to perform securities-related operations. - Establishment of a cross-border liquidity arrangement between the BSP and the Bank of Japan. - Strengthened internal control and internal audit standards for financial institutions. - Adoption of Basel III leverage ratio requirements. - Identification of domestic systemically important banks. - Capital market and regulatory initiatives: - Issued enhanced rule on delivery of securities. - Amended Unit Investment Trust Fund regulations to allow a unit-paying feature. - Revised guidelines on listing of long-term negotiable certificates of time deposits in an accredited exchange. - New guidelines on establishment and operation of trust corporations. - New guidelines to segregate clients’ assets from bank assets under securities brokering arrangements. - Revised implementing rules and regulations of the Securities Regulation Code. - Approved further amendments to foreign exchange regulations. - Financial inclusion: - Initiatives on policy, regulation and supervision; financial education and consumer protection; advocacy programs (development of credit surety funds); financial inclusion data and measurement. - Regulations offering incentives for banks to extend reach into unbanked areas; consolidation program for rural banks to promote mergers and expand market reach. - Launch of the National Strategy for Financial Inclusion (NSFI) to coordinate government and private sector efforts for an accessible financial system. ### Structural Reforms - Competition and financial sector liberalization: - Competition Act establishing national competition policy and Competition Commission. - Law allowing full entry of foreign banks: increased ownership ceiling to 100 percent from 60 percent and liberalized branching requirements; positions Philippines for ASEAN Banking Integration Framework. - Sector-specific reforms: - Cabotage law amended to allow foreign ships to transport import/export cargo directly to/from any local port other than Port of Manila to lower shipping costs. - Sugarcane industry law mandates allocation for infrastructure, product diversification, access to finance, and human resource development. - MSME development law mandates establishment of MSME support centers for business registration assistance, advisory services, information and monitoring. - Human capital and social policy: - Education laws introduced: - Law on open distance learning to expand access to tertiary education. - Law establishing college scholarship program for top graduates of all public high schools in state universities and colleges. - Law on ladderized education to formalize accreditation/interface between technical-vocational education and higher education. - Health: law mandates all senior citizens be covered by PhilHealth national health insurance. - Taxation: law raised tax exemption ceiling on bonuses benefiting around half a million private and government employees. - Veterans: law increased burial assistance for veterans. - Governance: law strengthening Sandiganbayan allows creation of more divisions to speed resolution of corruption cases. - Pending legislative priorities for 2015-2016: - (a) Tax Incentives Management and Transparency Act. - (b) Fiscal Incentives Rationalization Bill. - (c) Amendments to the BSP charter (increase BSP minimum capital; allow BSP to put up reserves against FX fluctuations; allow BSP to issue own debt securities for open market operations). - (d) Amendments to the Build-Operate-Transfer Law to strengthen PPP implementation. - (e) Amendments to law on right-of-way acquisition to address infrastructure bottlenecks. - (f) Public Financial Management (PFM) law consolidating PFM reforms supported by IMF technical assistance. - (g) Unified Uniformed Personnel Pension Reform Bill to establish sustainable pension system for uniformed services. ### Final Remarks - Authorities expect sustained medium-term strong growth supported by: - Low and stable inflation. - Ample fiscal policy space. - Sound and responsive banking system. - Increasingly inclusive financial system. - Healthy external position (strengthened robustness and resilience to external volatilities). - Continued commitment to structural reform agenda viewed as critical to lifting the country’s growth potential. *Source: Philippine authorities’ statement accompanying the 2015 Article IV Consultation.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15246.pdf_