## _cr16309 ## Source details **Canonical URL:** [_cr16309](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16309.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16309.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16309.pdf.json) --- ### Executive Board Assessment - Commended continued strong macroeconomic management with "robust growth and low inflation." - Noted favorable macro performance has not produced corresponding improvements in poverty, inequality, and unemployment. - Encouraged: - Increasing investments in infrastructure and human capital. - Improving targeting of social spending. - Enhancing competitiveness and foreign direct investment. - Deepening and making the financial system more inclusive. - Supported increase in the fiscal deficit target to 3 percent of GDP from 2017 to anchor fiscal policy to a broadly stable public debt-to-GDP ratio while allowing a boost to infrastructure and social spending. - Highlighted need for additional revenue to finance infrastructure and social spending; welcomed plans for comprehensive tax reform that would be revenue positive, more equitable, and efficient. - Urged formulation of a medium-term public infrastructure plan with clear project prioritization and appropriate choices between budget and PPP spending, considering contingent liabilities. - Encouraged further efforts to strengthen public financial management and budget execution. - Considered current monetary policy stance appropriate given low inflation and near zero output gap; noted need for vigilance given fiscal stimulus. - Encouraged Bangko Sentral ng Pilipinas (BSP) to stand ready to take measures if signs of overheating or accelerating credit growth emerge. - Commended BSP for smooth implementation of new interest rate corridor and deposit auctions to improve monetary policy transmission and develop domestic capital markets. - Encouraged passage of the central bank charter to authorize issuance of central bank bills and BSP recapitalization. - Emphasized need for continued exchange rate flexibility. - Noted the financial system remains sound; supported targeted prudential policies to strengthen resilience and limit systemic risks. - Encouraged broadening the central bank’s financial stability mandate. - Supported authorities’ goal to accelerate poverty reduction and structural reform priorities, calling for well-targeted infrastructure and social spending, including education and health in rural areas, and efforts to enhance competition and open the economy to foreign investment. - Welcomed focus on financial deepening and inclusion and emphasized strengthening the AML framework, including making tax evasion a predicate crime. ### Key issues and context - Context: - Philippine economy performed well with rising potential growth and strong macro fundamentals. - Growth supported by robust domestic demand and broadly in line with potential. - Outlook for inflation is well within the target band (3±1 percent). - External position is sound and fiscal policy is prudent, with a low and declining debt-to-GDP ratio. - Remaining challenges: - Strong performance has not fully benefited a wide range of the population: poverty and inequality remain high. - Poor infrastructure has constrained private investment and job creation. - Public investment has risen but remains low due to weak implementation capacity. - Progress has been made on fiscal transparency. - Policy priority: - Investment in infrastructure and human capital, financed through increased government revenues while allowing a small increase in the deficit, alongside structural reforms to reap the demographic dividend, promote inclusive growth and reduce poverty. - Risks: - Tilted to the downside; upside risks include stronger domestic demand from low commodity prices and improved budget execution. - Downside risks include lower growth in China, tighter global financial conditions, and a surge in global financial volatility leading to capital outflows. ### Main policy recommendations - Fiscal policy: - Focus on medium-term priorities of boosting investment in infrastructure and human capital. - Allow a small increase in the deficit (to 3 percent of GDP) but secure additional revenue and improve expenditure management to safeguard fiscal sustainability and stabilize the debt-to-GDP ratio at its current low level. - Monetary policy: - Current monetary policy stance, underpinned by an improved operational framework, is appropriate for now; there is space to respond to shocks if needed. - Financial stability: - BSP should continue to monitor the financial system and address emerging systemic risks through suitable macroprudential measures, including risks relating to credit growth in the real estate sector and concentration. - Structural reforms: - Priorities include opening up to foreign direct investment and enhancing competition. ### Selected economic indicators and projections (2011–17) - Real GDP (percent change): 2011: 3.7; 2012: 6.7; 2013: 7.1; 2014: 6.2; 2015: 5.9; 2016: 6.4; 2017: 6.7 - CPI (annual average): 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014: 4.2; 2015: 1.4; 2016: 2.0; 2017: 3.4 - CPI (end year): 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014: 2.7; 2015: 1.5; 2016: 2.9; 2017: 3.2 - Gross investment (percent of GDP): 2011: 20.5; 2012: 18.2; 2013: 20.0; 2014: 20.5; 2015: 20.6; 2016: 23.7; 2017: 24.7 - National saving (percent of GDP): 2011: 23.0; 2012: 21.0; 2013: 24.2; 2014: 24.3; 2015: 23.4; 2016: 25.5; 2017: 26.1 - National government balance (authorities' definition, percent of GDP): 2011: -2.0; 2012: -2.3; 2013: -1.4; 2014: -0.6; 2015: -0.9; 2016: -2.0; 2017: -3.0 - Nonfinancial public sector debt (percent of GDP): 2011: 55.3; 2012: 53.0; 2013: 51.3; 2014: 47.8; 2015: 45.8; 2016: 43.5; 2017: 41.4 - Broad money (M3, percent change, end of period): 2011: 7.1; 2012: 9.4; 2013: 31.8; 2014: 11.2; 2015: 9.4; 2016: 12.4 - Interest rate (91-day treasury bill, end of period, percent): 2011: 1.7; 2012: 0.5; 2013: 0.5; 2014: 2.5; 2015: 2.7; 2016: 1.8 - Credit to the private sector (percent, year-on-year): 2011: 19.3; 2012: 16.2; 2013: 16.4; 2014: 19.9; 2015: 13.6; 2016: 17.6 - Current account (percent of GDP): 2011: 2.5; 2012: 2.8; 2013: 4.2; 2014: 3.8; 2015: 2.9; 2016: 1.8; 2017: 1.4 - Reserves (US$ billions): 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014: 79.5; 2015: 80.7; 2016: 84.0; 2017: 86.5 - Exchange rate (period averages, Pesos per U.S. dollar): 2011: 43.3; 2012: 42.2; 2013: 42.4; 2014: 44.4; 2015: 45.5; 2016: 47.0 ### Outlook highlights - Growth: Real GDP projected at 6.4 percent in 2016 and 6.7 percent in 2017. - Inflation: CPI (annual average) projected at 2.0 percent in 2016 and 3.4 percent in 2017; CPI (end year) projected at 2.9 percent in 2016 and 3.2 percent in 2017. Inflation expected to return to within the BSP’s target range later this year and in 2017 as commodity prices stabilize and strong economic activity continues. - Current account: Surplus expected to decline in 2016−17 due to higher commodity prices and infrastructure-related imports. - Public debt: Public debt-to-GDP ratio expected to remain in a declining trend. - Risks: Tilted to the downside; authorities are viewed as well equipped to respond with suitable policies given strong fundamentals and ample policy space. ### Growth and inflation — recent developments and projections - Real GDP growth: - 5.9 percent in 2015. - 6.9 percent in the first half of 2016. - Projected at 6.4 percent in 2016 and 6.7 percent in 2017. - Demand composition: - Both consumption and investment have grown rapidly. - Net exports held back by weak external demand. - Exports expected to recover only modestly; worker remittances and receipts from Business Process Outsourcing expected to cushion weak external environment. - Output gap: - Expected to remain near zero in 2016–17. - Inflation: - Fell below the target band (3±1 percent) in 2015 and the first seven months of 2016 due to lower food and fuel prices. - Expected to return to within the target range later in 2016 and in 2017 as commodity prices stabilize and strong economic activity continues. ### Output gap / model estimates (percent) - 2015: - Production Function: 0.16; HP Filter: -0.01; Multivariate Filter: 0.04; Credit Neutral 2/: 0.22 - 2016: - Production Function: -0.28; HP Filter: -0.12; Multivariate Filter: 0.23; Credit Neutral 2/: 0.24 - 2017: - Production Function: -0.62; HP Filter: -0.07; Multivariate Filter: 0.12; Credit Neutral 2/: 0.36 ### Fiscal developments and assumptions - 2015 national government budget deficit: - Reached 1.4 percent of GDP based on IMF staff definition. - 2016 fiscal stance: - Budget execution improved making the 2 percent deficit target attainable in 2016. - Implies a fiscal stimulus of 0.6 percent of GDP in 2016. - 2017 and medium-term: - New administration plans to increase the deficit target to 3 percent of GDP starting in 2017, implying a fiscal stimulus of 1 percent of GDP in 2017. - Baseline assumptions: - National government budget deficit of 2 percent in 2016, rising to 3 percent in 2017‒21. - National government expenditures: capital and equity expenditure rising from 3.3 percent of GDP in 2015 to 5.3 percent in 2021. - IMF staff’s recommended scenario: - National government budget deficit of 2 percent in 2016, rising to 3 percent in 2017‒21. - Staff’s preferred revenue package yielding 3.0 percentage points of GDP gradually over the 2017‒19 period. - Additional social spending of 1.5 percentage points of GDP and additional infrastructure spending of 1.5 percentage points of GDP relative to the baseline, financed by additional revenue. - Additional structural reforms (easing foreign investor restrictions, land titling reform for agriculture collateral, labor market reforms). ### Macro-financial developments and risks - External inflows and liquidity: - Post-global financial crisis: sizeable inflows from remittances and portfolio investment led to reserve buildup and persistent excess liquidity. - Market interest rates often below the floor of the BSP’s IRC. - Effective borrowing costs at historic lows. - Credit growth: - 20 percent in 2014. - 13.6 percent in 2015 after BSP macroprudential measures. - 17.6 percent in June 2016 (y/y), with credit to construction and real estate growing above 20 percent. - Sectoral credit growth in June 2016: services 18.1 percent, industry 17.5 percent. - Financial depth: - Stock of bank credit at 39 percent of GDP in 2015. - Financial stability concerns: - Rapid credit expansion in real estate and rapid increase in corporate leverage warrant close monitoring by the BSP. - Concentration risks related to conglomerate structure. ### External sector and reserves - Current account: - Surplus fell to 2.9 percent of GDP in 2015. - Projected to fall further in 2016–17 due to higher commodity prices and infrastructure-related imports. - Exchange rate and reserves: - Peso depreciated vis-à-vis the U.S. dollar in 2015 but by less than other regional currencies; stable in 2016. - International reserves remained broadly unchanged since 2012 at around US$80 billion (or 231 percent of the Fund’s reserve adequacy metric). - External debt declined to 27 percent of GDP in 2015. - External sector assessment: - External sector balance remains moderately stronger than warranted by fundamentals and desirable policies, primarily due to structural impediments to investment and precautionary savings for natural disaster risk. - Staff assesses the peso to be broadly in line with fundamentals and desired policies. - Level of international reserves above Fund’s Reserve Adequacy metric but broadly justified by vulnerability to natural disasters and capital flow volatility. - Staff supports BSP view that exchange rate should act as buffer and be allowed to move freely, with intervention limited to smoothing excess volatility. ### Outlook, scenarios, and growth implications - Staff baseline: - Real GDP growth in the 6−7 percent range. - Baseline assumes authorities implement fiscal and structural policies already committed, including central government budget deficit of 3 percent of GDP in the medium term. - Baseline does not include new tax policy measures; revenue-to-GDP likely to remain broadly unchanged at around 15½ percent of GDP. - Public investment assumed at about 5 percent of GDP. - Staff-recommended scenario: - Annual growth would be about 1 percentage point higher owing to higher investment and bolder structural reforms that increase TFP growth gradually over the medium term. - Well-targeted higher social spending would help reduce poverty; enhanced infrastructure investment would create jobs and make growth more inclusive. ### Fiscal framework recommendation - Two-pillar fiscal framework: - Public debt-to-GDP ratio as the fiscal anchor, complemented by central government overall deficit as an operational target. - Recommended targets and effects: - Fiscal anchor should target a broadly stable debt-to-GDP ratio at the current level of 36 percent of GDP. - Deficit target should be raised to 3 percent of GDP to allow for priority expenditures and retain some margin. - A rise in the deficit target from 2 percent of GDP to 3 percent from 2017 would reduce the debt-to-GDP ratio to under 31 percent by 2021, providing a margin of 5 percent of GDP to respond to fiscal risks. - Flexibility and contingencies: - Recommend flexible implementation to avoid procyclical fiscal management. - Consider escape clauses for emergencies (e.g., natural disasters) and clear guidelines for returning to a stable debt path. - Fiscal risks and contingent liabilities: - PPPs expanded from ₱1.1 trillion in 2013 to ₱1.4 trillion in June 2016. - Typhoon Yolanda in 2013 caused damages by 4 percent of GDP. - A one-standard deviation shock to GDP growth for two years (with growth falling to 4.5 percent in 2017 and 2018) would increase the debt-to-GDP ratio by 3 percentage points by 2021. ### Tax system and administration reform (policy recommendations) - Reform objectives: collect more revenue for additional infrastructure and social spending; make the system more equitable and efficient. - Key problems: - Low tax collections due to low compliance and extensive exemptions. - Personal income tax (PIT) brackets have crept upwards due to inflation. - Corporate income tax (CIT) base erosion through myriad investment incentives and long tax holidays; strict banking secrecy law limiting tax enforcement. - Recommended comprehensive tax reform package (net revenue positive, equitable, and efficient): - PIT reform to simplify rate structure, index tax brackets for inflation, and eliminate exemptions such as minimum wage exemption and the 13th month salary exemption. - Offset potential PIT revenue losses with: - Higher excises on fuel (including diesel, currently not subject to an excise tax). - Rationalization of VAT exemptions (senior citizens, disabled people, electricity transmission, social housing, and cooperatives). - Excises on sweetened beverages. - Higher motor vehicles taxes or registration fees. - Simplify CIT rate structure and rationalize tax incentives; consider reducing CIT headline rate only once incentive rationalization has started. - Harmonize financial sector taxes as part of ASEAN financial integration. - Amend bank secrecy law to allow Bureau of Internal Revenue access to individual bank account information and make tax evasion a predicate crime for money laundering. - Strengthen tax administration; substantial revenue gains expected mainly in the longer term. - Social mitigation: - Removal of exemptions for senior citizens, disabled people, and social housing could be accompanied by well-targeted transfers. ### Public infrastructure planning and contingent liabilities - Authorities’ target: increase public infrastructure spending to at least 5 percent of GDP over the medium term. - Staff would favor higher infrastructure spending if done efficiently and if additional revenues are available. - Prioritization guidance: - Focus on telecoms, logistics, ports, healthcare and schools, particularly in rural areas and smaller cities. - Institutional support and reforms: - IMF and ADB stand ready to help review investment guidelines and PPPs through a Public Investment Management Assessment (PIMA). - Right of Way Act welcomed for speeding implementation. - Support for proposed PPP Act to strengthen planning and implementation framework for PPPs. - Contingent liabilities: - Reconsider temporary PPP policy guidelines that fully guarantee the debt of PPP projects. - Need to appropriately weigh budgetary vs PPP spending choices with attention to CLs. ### Macro-financial linkages and systemic financial stability risks - Nonfinancial corporates (NFCs) analysis: - Aggregate NFC debt increased from around 28 percent of GDP in 2009 to just under 42 percent in 2015. - FX exposure limited: aggregate FX exposures remained low at under 28 percent of total debt, or about 12 percent of GDP in 2015. - Firm-level stress tests for 4,083 firms (Orbis database): debt-at-risk is 32 percent of total debt under the most severe scenario. - Vulnerabilities concentrated in real estate and other services. - Policy guidance: - Targeted macroprudential measures (e.g., higher risk weights on real estate loans) when credit growth becomes excessive for some sectors. - Allow additional Single Borrower Limit (SBL) for PPP to lapse in December 2016 as planned to manage concentration risks. - Strengthen BSP’s financial stability function and expand regulatory perimeter to include real estate developers. ### Box 8 — Data gaps and initiatives - Main data gaps: - Balance sheet exposures of Other Financial Corporations (OFCs), Nonfinancial Corporations (NFCs), and Households. - “Other Resident Sectors” not systematically collected; OFCS compilation in process. - Breakdown of external positions of the nonbank and nongovernment sectors not available in IIP and BOP statistics. - Ongoing initiatives and status: - Corporate registry adopts XBRL — progressing; full implementation expected for the reporting year of 2016. - Implementing CFFS — full implementation expected by September 2016. - Collecting Other Financial Corporations Survey (OFCS) — standard report forms expected by 31 August 2016. - Residential real estate price index (RREPI) — maiden results released 6 June 2016; covers Q2:2015 to Q1:2016 with Q1:2014 base. - Uniform reporting template for real estate developers — template forwarded to HLURB; MOA being drafted. - Sectoral balance sheet (SBS) — PSA to start preparatory stages by 2017; consolidation likely not before 2018. - Systemic risks, monitoring, and macroprudential policy: - Systemic risks appear contained but merit continued monitoring. - BSP to consider targeted macroprudential responses; premature to undertake additional real estate measures but to enhance monitoring. - Staff supports explicitly assigning a financial stability mandate to the BSP. ### Financial inclusion, AML, and bank secrecy - Financial inclusion: - Access to formal financial services is low, especially in rural areas. - Cost of remittances increased due to closure of correspondent banking relationships. - Recommendations: study new technologies for international money transfers; develop the insurance market; multiagency committee chaired by BSP to implement the 2015 national financial inclusion strategy. - BSP approved entry of a number of foreign banks to foster competition and better access to underserved areas. - AML and bank secrecy: - Recent theft of US$81 million from Bangladesh laundered through casinos in the Philippines highlights need to tighten AML legislation and procedures. - Staff recommends amendments to include casinos under AML law and make tax evasion a predicate crime; amend bank secrecy law to ease tax enforcement. - BSP and Department of Finance working with Congress on AML amendments. - BSP imposed a record ₱1.0 billion (US$21 million) fine against the domestic bank involved in the Bangladesh cyber heist. - Staff strongly encourages passage of AML amendments that would remove the exemption for casinos, make tax evasion a predicate crime, and ease bank secrecy laws. ### Risk Assessment Matrix — selected risks and recommended responses - Tighter or more volatile global financial conditions: - Likelihood/Time Horizon: High/Short Term - Expected impact: Medium - Recommended policy response: ensure banks have adequate capital buffers; consider countercyclical macroprudential policies; allow exchange rate flexibility; ease monetary or fiscal policy if real economy slows significantly. - Sharp growth slowdown in China and other regional economies: - Likelihood/Time Horizon: Low/Short and Medium Term - Expected impact: High - Recommended policy response: allow exchange rate flexibility; implement structural reforms; consider accelerating public infrastructure spending. - Domestic asset price boom fueled by abundant liquidity: - Likelihood/Time Horizon: Low/Medium Term - Expected impact: Medium - Recommended policy response: enforce macroprudential policies; ensure adequate bank capital; strengthen surveillance on nonbank activities. - Low infrastructure and social spending: - Likelihood/Time Horizon: Medium/Short and Medium Term - Expected impact: High - Recommended policy response: strengthen public expenditure framework; improve PPP scope; broaden tax base and improve tax administration; expand well targeted transfers and universal health care. - Climate change related natural disaster: - Likelihood/Time Horizon: Medium/Medium Term - Expected impact: Medium - Recommended policy response: accelerate resilient infrastructure improvements; explore insurance options. ### Debt sustainability and external vulnerability - Public debt sustainability: - Public debt is sustainable. - Baseline: general government debt-to-GDP ratio falls from 36 percent of GDP in 2015 to below 31 percent in 2021 despite rise in fiscal deficit target to 3 percent in 2017. - Growth-interest rate differential contributes 6.6 percentage points to projected fall in public debt. - Gross financing needs remain comfortable at 4−5 percent of GDP throughout the projection period. - External debt sustainability: - Total external debt is sustainable. - External debt fell to 26.5 percent of GDP in 2015. - Under staff’s baseline, external debt expected to fall to 15.7 percent of GDP in 2021. - A one-time real depreciation of 30 percent in 2016 would raise external debt-to-GDP ratio by about 10 percentage points. ### Authorities’ views and planned measures (authorities’ statement highlights) - Growth and targets: - Real GDP growth of 7.0 percent in Q2 2016. - Authorities target GDP growth of 6.0–7.0 percent in 2016; medium-term target of 7.0 to 8.0 percent. - Poverty incidence target: reduction from 26.3 percent (first semester 2015) to 17 percent by 2022. - Fiscal policy: - Fiscal deficit target increased from 2.0 percent of GDP in 2016 to 3.0 percent of GDP for 2017–2022. - Proposed national budget for 2017: PhP3.35 trillion (11.6 percent higher than 2015); corresponds to 21 percent of GDP. - Total infrastructure spending for 2017: 5.4 percent of GDP (2016: 5.1 percent of GDP). - Proposed budget allocation for social spending increased by 20.1 percent. - Revenue aims: increase total revenue effort to about 17 percent of GDP in 2018 and about 18 percent of GDP by 2022. - Monetary policy: - Inflation target: 2.0–4.0 percent for 2017–2018. - BSP shifted to an interest rate corridor system and implemented reforms in June 2016; main policy rate is overnight RRP rate. - Over time, IRC implementation will allow possible reduction in reserve requirements. - Financial sector: - Banking system remained stable and resilient. - Recent reforms: amendment of PDIC charter; guidelines on operational risk management; adoption of Basel III liquidity coverage ratio; launch of RREPI. - Institutionalized National Financial Inclusion Steering Committee; Credit Surety Fund (CSF) Cooperative Act passed. - Structural reforms: - Priorities: strengthen institutions, reduce cost of doing business, ease restrictions on foreign investments, strengthen agro-industrial linkages, streamline government processes, and pursue constitutional/economic reforms as appropriate. - Long-term planning: AmBisyon Natin 2040 and Philippine Development Plan 2017-2022. ### IMF–World Bank collaboration and TA priorities - Three macro-critical structural reform areas: (1) raising investment, (2) strengthening public finance and social safety nets, (3) financial sector development. - Planned activities (June 2016–June 2017) include tax policy support, public financial management TA, financial sector TA, statistical improvements, and support for PPPs and debt management. - ADB relations: cumulative lending and project support across sectors; CPS and COBP in place for planning. ### Statistical issues and data adequacy (as of mid-2016) - Data provision broadly adequate for surveillance but with shortcomings. - National accounts: rebased and ongoing efforts to implement SNA 2008; planned revisions using 2012 CPBI. - Price statistics: rebased CPI (July 2011); COICOP classification adopted. - External sector statistics: BOP and IIP compiled to BPM6; enhancements to ITRS underway. - Monetary and financial statistics: largely conform to Fund methodology; OFCS compilation ongoing. - Government finance statistics: broadly adequate; need for detailed data beyond national government and transition to GFSM 2001 format. - Table of common indicators shows various frequencies and data quality assessments (selected observations dated through mid-2016). ### Representative medium-term projections (selected, from Tables) - Real GDP (percent change) 2017–21 (Proj.): 2017: 6.7; 2018: 6.8; 2019: 6.9; 2020: 7.0; 2021: 7.0 - CPI (annual average) 2017–21 (Proj.): 2017: 3.4; 2018–21: 3.5, 3.5, 3.5, 3.5 - Gross investment (percent of GDP) 2016–21: 2016: 23.7; 2017: 24.7; 2018: 25.6; 2019: 26.4; 2020: 27.1; 2021: 27.9 - National saving (percent of GDP) 2016–21: 2016: 25.5; 2017: 26.1; 2018: 26.7; 2019: 27.2; 2020: 27.6; 2021: 28.1 - Reserves (US$ billions) 2017–21 (Proj.): 2017: 86.5; 2018: 88.3; 2019: 89.7; 2020: 90.6; 2021: 90.7 *Source: IMF staff report for the 2016 Article IV Consultation (Philippines), Mission dates: June 29–July 12, 2016.* ### 5.9 percent in 2016 and 5.7 percent in 2017. Inflation is expected to return to within the BSP’s ### _cr16309 - 5.9 percent in 2016 and 5.7 percent in 2017. Inflation is expected to return to within the BSP’s ### Executive Board Assessment - Directors commended continued strong macroeconomic management, with "robust growth and low inflation." - Noted that favorable macro performance has not produced corresponding improvements in poverty, inequality, and unemployment. - Encouraged increasing investments in infrastructure and human capital, improving targeting of social spending, enhancing competitiveness and foreign direct investment, and deepening and making the financial system more inclusive. - Supported increase in the fiscal deficit target to 3 percent of GDP from 2017 to anchor fiscal policy to a broadly stable public debt-to-GDP ratio while allowing a boost to infrastructure and social spending. - Highlighted the need for additional revenue to finance infrastructure and social spending and welcomed plans for comprehensive tax reform that would be revenue positive, more equitable, and efficient. - Urged formulation of a medium-term public infrastructure plan with clear project prioritization and appropriate choices between budget and PPP spending, considering contingent liabilities. - Encouraged further efforts to strengthen public financial management and budget execution. - Considered the current monetary policy stance appropriate given low inflation and near zero output gap, but noted the need for vigilance given fiscal stimulus. - Encouraged Bangko Sentral ng Pilipinas (BSP) to stand ready to take measures if signs of overheating or accelerating credit growth emerge. - Commended BSP for smooth implementation of the new interest rate corridor and deposit auctions to improve monetary policy transmission and develop domestic capital markets. - Encouraged passage of the central bank charter to authorize issuance of central bank bills and BSP recapitalization. - Emphasized need for continued exchange rate flexibility. - Noted the financial system remains sound and supported targeted prudential policies to strengthen resilience and limit systemic risks. - Encouraged broadening the central bank’s financial stability mandate. - Supported authorities’ goal to accelerate poverty reduction and structural reform priorities, calling for well-targeted infrastructure and social spending, including education and health in rural areas, and efforts to enhance competition and open the economy to foreign investment. - Welcomed focus on financial deepening and inclusion and emphasized strengthening the AML framework, including making tax evasion a predicate crime. ### Key Issues and Context - Context summary: - Philippine economy has performed well with rising potential growth and strong macro fundamentals. - Growth supported by robust domestic demand and broadly in line with potential. - Outlook for inflation is well within the target band (3±1 percent). - External position is sound and fiscal policy is prudent, with a low and declining debt-to-GDP ratio. - Remaining challenges: - Strong performance has not fully benefited a wide range of the population: poverty and inequality remain high. - Poor infrastructure has constrained private investment and job creation. - Public investment has risen but remains low due to weak implementation capacity. - Progress has been made on fiscal transparency. - Policy priority: Investment in infrastructure and human capital, financed through increased government revenues while allowing a small increase in the deficit, alongside structural reforms to reap the demographic dividend, promote inclusive growth and reduce poverty. - Risks: Tilted to the downside; upside risks include stronger domestic demand from low commodity prices and improved budget execution. Downside risks include lower growth in China, tighter global financial conditions, and a surge in global financial volatility leading to capital outflows. ### Main policy recommendations (as stated) - Fiscal policy: - Focus on medium-term priorities of boosting investment in infrastructure and human capital. - Allow a small increase in the deficit (to 3 percent of GDP) but secure additional revenue and improve expenditure management to safeguard fiscal sustainability and stabilize the debt-to-GDP ratio at its current low level. - Monetary policy: - Current monetary policy stance, underpinned by an improved operational framework, is appropriate for now; there is space to respond to shocks if needed. - Financial stability: - BSP should continue to monitor the financial system and address emerging systemic risks through suitable macroprudential measures, including risks relating to credit growth in the real estate sector and concentration. - Structural reforms: - Priorities include opening up to foreign direct investment and enhancing competition. ### Selected economic indicators and projections (2011–17) - Real GDP (percent change): 2011: 3.7; 2012: 6.7; 2013: 7.1; 2014: 6.2; 2015: 5.9; 2016: 6.4; 2017: 6.7 - CPI (annual average): 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014: 4.2; 2015: 1.4; 2016: 2.0; 2017: 3.4 - CPI (end year): 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014: 2.7; 2015: 1.5; 2016: 2.9; 2017: 3.2 - Gross investment (percent of GDP): 2011: 20.5; 2012: 18.2; 2013: 20.0; 2014: 20.5; 2015: 20.6; 2016: 23.7; 2017: 24.7 - National saving (percent of GDP): 2011: 23.0; 2012: 21.0; 2013: 24.2; 2014: 24.3; 2015: 23.4; 2016: 25.5; 2017: 26.1 - National government balance (authorities' definition, percent of GDP): 2011: -2.0; 2012: -2.3; 2013: -1.4; 2014: -0.6; 2015: -0.9; 2016: -2.0; 2017: -3.0 - National government balance (Fund definition, percent of GDP): 2011: -2.0; 2012: -2.4; 2013: -1.5; 2014: -0.6; 2015: -1.4; 2016: -2.0; 2017: -3.0 - Nonfinancial public sector balance (percent of GDP): 2011: -0.7; 2012: -0.6; 2013: 0.6; 2014: 0.9; 2015: 0.1; 2016: -0.5; 2017: -1.6 - Revenue and grants (percent of GDP): 2011: 18.6; 2012: 19.4; 2013: 20.2; 2014: 19.8; 2015: 19.6; 2016: 19.6; 2017: 19.7 - Expenditure (percent of GDP): 2011: 19.3; 2012: 20.0; 2013: 19.6; 2014: 18.9; 2015: 19.5; 2016: 20.1; 2017: 21.3 - Nonfinancial public sector debt (percent of GDP): 2011: 55.3; 2012: 53.0; 2013: 51.3; 2014: 47.8; 2015: 45.8; 2016: 43.5; 2017: 41.4 - Broad money (M3, percent change, end of period): 2011: 7.1; 2012: 9.4; 2013: 31.8; 2014: 11.2; 2015: 9.4; 2016: 12.4 - Interest rate (91-day treasury bill, end of period, percent): 2011: 1.7; 2012: 0.5; 2013: 0.5; 2014: 2.5; 2015: 2.7; 2016: 1.8 - Credit to the private sector (percent, year-on-year): 2011: 19.3; 2012: 16.2; 2013: 16.4; 2014: 19.9; 2015: 13.6; 2016: 17.6 - Export value (percent change): 2011: 4.1; 2012: 21.2; 2013: -4.0; 2014: 11.9; 2015: -13.1; 2016: -3.4; 2017: 4.1 - Import value (percent change): 2011: 9.5; 2012: 11.3; 2013: -4.8; 2014: 8.0; 2015: -3.2; 2016: 4.0; 2017: 6.0 - Current account (percent of GDP): 2011: 2.5; 2012: 2.8; 2013: 4.2; 2014: 3.8; 2015: 2.9; 2016: 1.8; 2017: 1.4 - Capital account (US$ billions): 2011: 0.2; 2012: 0.1; 2013: 0.1; 2014: 0.1; 2015: 0.1; 2016: 0.1; 2017: 0.1 - Financial account (US$ billions): 2011: -5.3; 2012: -6.8; 2013: 2.2; 2014: 9.6; 2015: 2.5; 2016: 0.4; 2017: 0.5 - Direct investment (net, US$ billions): 2011: 0.3; 2012: 1.0; 2013: -0.1; 2014: 1.0; 2015: -0.1; 2016: -1.0; 2017: -1.1 - Errors and omissions (US$ billions): 2011: 0.3; 2012: -4.6; 2013: -4.2; 2014: -4.1; 2015: -3.3; 2016: -2.5; 2017: -2.3 - Overall balance (US$ billions): 2011: 11.4; 2012: 9.2; 2013: 5.1; 2014: -2.9; 2015: 2.6; 2016: 2.7; 2017: 2.1 - Total external debt (percent of GDP): 2011: 33.7; 2012: 32.0; 2013: 28.9; 2014: 27.3; 2015: 26.5; 2016: 25.1; 2017: 22.7 - Debt service ratio (percent of exports of goods and nonfactor services): 2011: 13.6; 2012: 9.9; 2013: 11.1; 2014: 8.4; 2015: 7.4; 2016: 11.2; 2017: 10.7 - Reserves (US$ billions): 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014: 79.5; 2015: 80.7; 2016: 84.0; 2017: 86.5 - Reserves/short-term liabilities: 2011: 482.5; 2012: 397.9; 2013: 406.2; 2014: 418.9; 2015: 396.9; 2016: 397.5; 2017: 401.7 - Exchange rate (period averages, Pesos per U.S. dollar): 2011: 43.3; 2012: 42.2; 2013: 42.4; 2014: 44.4; 2015: 45.5; 2016: 47.0 - Nominal effective exchange rate (2005 =100): 2011: 99.0; 2012: 102.6; 2013: 105.4; 2014: 102.7; 2015: 108.8; 2016: 106.0 - Real effective exchange rate (2005 =100): 2011: 100.7; 2012: 105.6; 2013: 109.8; 2014: 109.4; 2015: 116.7; 2016: 114.4 ### Outlook highlights - Growth: Real GDP projected at 6.4 percent in 2016 and 6.7 percent in 2017. - Inflation: CPI (annual average) projected at 2.0 percent in 2016 and 3.4 percent in 2017; CPI (end year) projected at 2.9 percent in 2016 and 3.2 percent in 2017. Inflation expected to return to within the BSP’s target range later this year and in 2017 as commodity prices stabilize and strong economic activity continues. - Current account: Surplus expected to decline in 2016−17 due to higher commodity prices and infrastructure-related imports. - Public debt: Public debt-to-GDP ratio expected to remain in a declining trend. - Risks: Tilted to the downside; authorities are viewed as well equipped to respond with suitable policies given strong fundamentals and ample policy space. *Source: IMF staff report for the 2016 Article IV Consultation (Philippines), Mission dates: June 29–July 12, 2016.* ### 4. Growth and inflation. Real GDP regained strength from a slowdown in mid-2015 to record ### _cr16309 - 4. Growth and inflation. Real GDP regained strength from a slowdown in mid-2015 to record ### Growth and inflation: recent developments and projections - Real GDP growth: - 5.9 percent in 2015. - 6.9 percent in the first half of 2016. - Projected at 6.4 percent in 2016 and 6.7 percent in 2017 on continued robust private domestic demand and higher public spending. - Demand composition: - Both consumption and investment have grown rapidly. - Net exports held back by weak external demand. - Exports expected to recover only modestly; worker remittances and receipts from Business Process Outsourcing expected to cushion weak external environment. - Output gap: - Expected to remain near zero in 2016–17. - Inflation: - Fell below the target band (3±1 percent) in 2015 and the first seven months of 2016 due to lower food and fuel prices. - Expected to return to within the target range later in 2016 and in 2017 as commodity prices stabilize and strong economic activity continues. ### Output gap / model estimates (Philippines: Output Gap Estimates Under Different Models) - 2015: - Production Function: 0.16 (In percent) - HP Filter: -0.01 (In percent) - Multivariate Filter: 0.04 (In percent) - Credit Neutral 2/: 0.22 (In percent) - 2016: - Production Function: -0.28 (In percent) - HP Filter: -0.12 (In percent) - Multivariate Filter: 0.23 (In percent) - Credit Neutral 2/: 0.24 (In percent) - 2017: - Production Function: -0.62 (In percent) - HP Filter: -0.07 (In percent) - Multivariate Filter: 0.12 (In percent) - Credit Neutral 2/: 0.36 (In percent) - Notes: - 1/ Using IMF, WP/15/79 priors for EM countries in Appendix Table B2. - 2/ Using a specification with both real credit growth and real equity price growth with one lag. ### Fiscal developments and assumptions - 2015 national government budget deficit: - Reached 1.4 percent of GDP based on IMF staff definition, below the 2 percent medium-term target because of slow budget execution early in the year. - 2016 fiscal stance: - Budget execution improved making the 2 percent deficit target attainable in 2016. - This implies a fiscal stimulus of 0.6 percent of GDP in 2016. - Upside risks from better-than-anticipated budget execution and a higher deficit this year. - 2017 and medium-term: - New administration plans to increase the deficit target to 3 percent of GDP starting in 2017, to raise infrastructure and social spending, implying a fiscal stimulus of 1 percent of GDP in 2017. - Baseline and staff-recommended scenario assumptions (Box 3): - Baseline: - National government budget deficit of 2 percent in 2016, rising to 3 percent in 2017‒21. - National government revenue projection assumes unchanged tax policies and tax administration. - National government expenditures: capital and equity expenditure rising from 3.3 percent of GDP in 2015 to 5.3 percent in 2021. - Structural reforms reflecting measures already underway and legislation passed (e.g., new competition law, opening financial sector to foreign investment, Right of Way law). - IMF staff’s recommended scenario: - National government budget deficit of 2 percent in 2016, rising to 3 percent in 2017‒21. - Staff’s preferred revenue package yielding 3.0 percentage points of GDP gradually over the 2017‒19 period. - Additional social spending of 1.5 percentage points of GDP and additional infrastructure spending of 1.5 percentage points of GDP relative to the baseline, financed by additional revenue. - Additional structural reforms (easing foreign investor restrictions, land titling reform for agriculture collateral, labor market reforms). ### Macro-financial developments and risks - External inflows and liquidity: - Post-global financial crisis: sizeable inflows from remittances and portfolio investment led to reserve buildup and persistent excess liquidity. - Market interest rates often below the floor of the BSP’s IRC. - Effective borrowing costs at historic lows. - Credit growth: - 20 percent in 2014. - 13.6 percent in 2015 after BSP macroprudential measures. - 17.6 percent in June 2016 (y/y), with credit to construction and real estate growing above 20 percent. - Sectoral credit growth in June 2016: services 18.1 percent, industry 17.5 percent. - Financial depth: - Stock of bank credit at 39 percent of GDP in 2015, lower than in other emerging market economies. - Financial intermediation by nonbank financial institutions small but grown rapidly. - Credit-boom indicators (Box 2): - Mendoza and Terrones (2008) approach: credit growth in line with trend. - Dell’Ariccia and others (2012) approach: no evidence of credit booms; growth differential between credit and GDP below 10 percent cutoff. - IMF GFSR (Sept 2011) approach: increase in credit-to-GDP ratio just below 3 percent threshold for early warning. - Drehmann and others (2010) approach: credit-to-GDP ratio barely exceeds the 10 percent of GDP cutoff in 2016. - BIS approach integrating financial variables: output gap near zero in 2016–17, although slightly positive. - Financial stability concerns: - Rapid credit expansion in real estate and rapid increase in corporate leverage warrant close monitoring by the BSP. - Concentration risks related to conglomerate structure. - Scope for further financial deepening and inclusion given low household access to formal financial institutions. ### External sector and reserves - Current account: - Surplus fell to 2.9 percent of GDP in 2015 despite a large drop in fuel imports (by 1.3 percent of GDP). - Decline due to deceleration in remittances, decline in exports, and large increase in imports of capital and intermediate goods. - Projected to fall further in 2016–17 due to higher commodity prices and infrastructure-related imports. - Exchange rate and reserves: - Peso depreciated vis-à-vis the U.S. dollar in 2015 but by less than other regional currencies; stable in 2016. - International reserves remained broadly unchanged since 2012 at around US$80 billion (or 231 percent of the Fund’s reserve adequacy metric). - External debt declined to 27 percent of GDP in 2015. - External sector assessment (summary): - External sector balance remains moderately stronger than warranted by fundamentals and desirable policies, primarily due to structural impediments to investment and precautionary savings for natural disaster risk. - Staff assesses the peso to be broadly in line with fundamentals and desired policies. - Level of international reserves above Fund’s Reserve Adequacy metric but broadly justified by vulnerability to natural disasters and capital flow volatility. - Staff supports BSP view that exchange rate should act as buffer and be allowed to move freely, with intervention limited to smoothing excess volatility. ### Outlook, scenarios, and growth implications - Staff baseline: - Real GDP growth in the 6−7 percent range. - Private credit growth consistent with a normal pace of financial development, remaining below estimated credit boom thresholds. - Assumes authorities implement fiscal and structural policies already committed, including proposed new fiscal framework with central government budget deficit of 3 percent of GDP in the medium term. - Baseline does not include new tax policy measures; revenue-to-GDP likely to remain broadly unchanged at around 15½ percent of GDP. - Public investment assumed at about 5 percent of GDP. - Staff-recommended scenario: - Includes recommended fiscal and structural reforms to achieve development objectives. - Under this scenario, annual growth would be about 1 percentage point higher owing to higher investment (including private investment crowded in by higher public investment) and bolder structural reforms that increase TFP growth gradually over the medium term. - Well-targeted higher social spending would help reduce poverty; enhanced infrastructure investment would create jobs and make growth more inclusive. ### Risks to the outlook and policy responses - Risk profile: - Overall, risks tilted to the downside. - Upside risks: stronger lift to domestic demand from low commodity prices and additional improvements in budget execution. - Downside risks: slow budget execution, revenue shortages, lower growth in China and the region, tighter global financial conditions, surge in global financial volatility leading to capital outflows and tighter domestic financial conditions. - Financial stability risks: concentration in conglomerates, rapid credit expansion in real estate. - Natural disasters pose an ongoing risk. - Policy space and response options: - Philippines better positioned than many peers to respond due to strong fundamentals and ample policy space. - Possible policy responses to capital flow volatility or reversal: allow exchange rate flexibility (intervene only to smooth excess volatility), ease monetary or fiscal policy if real economy slows significantly. - Scenario analysis implications: - Baseline falls short of achieving authorities’ development objectives. - Staff-recommended scenario requires substantially higher public infrastructure spending financed by additional revenue within a realistic fiscal framework that maintains debt sustainability. - Monetary policy needs to remain vigilant given additional fiscal stimulus until fiscal deficit stabilizes at higher level. ### Fiscal framework recommendation - Two-pillar fiscal framework (Box 4): - Public debt-to-GDP ratio as the fiscal anchor, complemented by central government overall deficit as an operational target. - Rationale: debt ratio sets an upper limit to fiscal slippages and preserves sustainability; deficit target provides operational guidance and links closely to debt dynamics. - Recommended targets and effects: - Fiscal anchor should target a broadly stable debt-to-GDP ratio at the current level of 36 percent of GDP. - Deficit target should be raised to 3 percent of GDP to allow for priority expenditures and retain some margin. - A rise in the deficit target from 2 percent of GDP to 3 percent from 2017 would reduce the debt-to-GDP ratio to under 31 percent by 2021, providing a margin of 5 percent of GDP to respond to fiscal risks. - Flexibility and contingencies: - Recommend flexible implementation to avoid procyclical fiscal management. - Consider escape clauses for emergencies (e.g., natural disasters, exceptionally adverse national economic conditions) and clear guidelines for returning to a stable debt path. - Fiscal risks and contingent liabilities: - PPPs expanded from ₱1.1 trillion in 2013 to ₱1.4 trillion in June 2016, increasing associated contingent liabilities. - Natural disaster example: typhoon Yolanda in 2013 caused damages by 4 percent of GDP. - A one-standard deviation shock to GDP growth for two years (with growth falling to 4.5 percent in 2017 and 2018) would increase the debt-to-GDP ratio by 3 percentage points by 2021. *Source: _cr16309 - 4. Growth and inflation. Real GDP regained strength from a slowdown in mid-2015 to record* ### 14. The fiscal anchor should target a broadly stable consolidated general government ### 14. The fiscal anchor should target a broadly stable consolidated general government ### Fiscal anchor and deficit target - Anchor: target a broadly stable consolidated general government debt-to-GDP ratio at the current level (36 percent of GDP) over the medium term. - National government deficit target: increase to 3 percent of GDP (from 2 percent under the previous administration). - Public debt path: decreased from 44 percent of GDP in 2009 to 36 percent in 2015. - Rationale: - A stable debt-to-GDP ratio balances the need to preserve fiscal credibility and address large infrastructure and social needs. - The 3 percent of GDP deficit target would allow addressing infrastructure and social gaps and is projected to reduce debt-to-GDP to under 31 percent in 2021, providing a margin of 5 percent of GDP to respond to fiscal risks and baseline uncertainty through flexible implementation. ### Tax system and administration reform (policy recommendations) - Reform objectives: collect more revenue for additional infrastructure and social spending; make the system more equitable and efficient. - Key problems identified: - Tax collections are low compared to neighboring countries due to low compliance and extensive exemptions. - Personal income tax (PIT) brackets have crept upwards due to inflation. - Corporate income tax (CIT) base erosion through myriad investment incentives and long tax holidays; strict banking secrecy law limiting tax enforcement. - Recommended comprehensive tax reform package (net revenue positive, equitable, and efficient): - PIT reform to simplify rate structure, index tax brackets for inflation, and eliminate exemptions such as minimum wage exemption and the 13th month salary exemption. - Note: The exemption for minimum wage earners effectively exempts a large share of the labor force and creates vertical inequity; the 13th month salary exemption is highly regressive. - Offset potential PIT revenue losses with: - Higher excises on fuel (including diesel, currently not subject to an excise tax). - Rationalization of VAT exemptions (senior citizens, disabled people, electricity transmission, social housing, and cooperatives). - Excises on sweetened beverages. - Higher motor vehicles taxes or registration fees. - Simplify CIT rate structure and rationalize tax incentives; consider reducing CIT headline rate only once incentive rationalization has started. - Harmonize financial sector taxes as part of ASEAN financial integration to reduce transaction costs and promote financial intermediation. - Amend bank secrecy law to allow Bureau of Internal Revenue access to individual bank account information and make tax evasion a predicate crime for money laundering. - Strengthen tax administration; substantial revenue gains expected mainly in the longer term. - Social mitigation: removal of exemptions for senior citizens, disabled people, and social housing could be accompanied by well-targeted transfers. ### Public infrastructure planning and contingent liabilities - Authorities’ target: increase public infrastructure spending to at least 5 percent of GDP over the medium term. - Staff would favor higher infrastructure spending if done efficiently and if additional revenues are available. - 5 percent of GDP would still be below the average level in the rest of the region. - Prioritization guidance: - Focus investments on telecoms, logistics, ports, healthcare and schools, particularly in rural areas and smaller cities. - Aim to create high quality jobs, boost human capital, alleviate supply bottlenecks, and support geographically balanced development. - Institutional support and reforms: - IMF and ADB stand ready to help review investment guidelines and PPPs through a Public Investment Management Assessment (PIMA). - Right of Way Act welcomed for speeding implementation. - Support for proposed PPP Act to strengthen planning and implementation framework for PPPs. - Contingent liabilities: - Reconsider temporary PPP policy guidelines that fully guarantee the debt of PPP projects. - Need to appropriately weigh budgetary vs PPP spending choices with attention to CLs. ### Authorities’ views on fiscal strategy - Authorities appreciated the debt sustainability analysis and broadly agreed with the proposed fiscal anchor. - Plan to target a 3 percent of GDP fiscal deficit starting in 2017 while making revenue projections more realistic. - Confident that capacity, including at the level of line ministries, has improved sufficiently to achieve necessary spending levels. - A PIMA focused on practical recommendations would be useful. - Infrastructure priorities: inter-island connectivity, logistics, farm-to-market roads, tourism sites, congestion relief in Metro Manila and other urban areas, and social spending. - To expedite projects, administration requested emergency powers from congress for a limited period to authorize alternative procurement methods (limited source bidding, direct contracting, single source procurement, repeat order, shopping, negotiated procurement). - Tax reform timeline: government plans to submit a tax reform plan to congress by mid-September. - Plan would be net revenue positive and include a higher income tax threshold, lowering of PIT tax rates coupled with expansion of VAT base by limiting VAT exemptions, hikes in fuel excise taxes, and introduction of excise tax on sweetened beverages. - Agreed that any reduction in CIT rates should be accompanied by rationalization of tax incentives. ### Monetary policy (overview and recommendations) - Regime: flexible inflation targeting has served the Philippines well; BSP enhanced capacity for liquidity and inflation forecasting. - Inflation: headline inflation has generally fallen within the target band in recent years. - Excess liquidity issue: - Much liquidity from reserve buildup was passively sterilized by the Special Deposit Account (SDA) Facility due to BSP’s limited ability to issue its own debt securities for monetary operations, leading to excess liquidity and lower money market interest rates that impede transmission. - Excess liquidity has declined slightly since mid-2013 but remains substantial. - Liquidity currently absorbed by Overnight Deposit Facility (previously SDA), Overnight RRP Facility, Term Deposit Facility (TDF), and banks’ required reserves. - Interest Rate Corridor (IRC) reform: - Staff supports reform to the IRC and resubmission of amendments to the BSP charter to allow issuance of BSP securities, recapitalization of the BSP, and money market development plans. - On June 3, 2016, BSP shifted to an IRC system structured as a mid-corridor: Overnight Lending Facility (OLF) and Overnight Deposit Facility (ODF) forming upper and lower bounds, with overnight RRP at the middle; introduced TDF as main liquidity absorption tool. - Initial TDF auctions small but oversubscribed; market rates remained at the floor of the IRC; BSP expected to increase deposit auction volumes to promote convergence of TDF and market rates toward the policy (RRP) rate. - Once liquidity is absorbed and market rates anchored, BSP plans to reduce the relatively high required reserve ratio gradually to minimize risks of financial disintermediation. - Current stance and conditionality: - Current monetary policy stance is appropriate. - Inflation projected at the bottom of the BSP’s target range this year, and to rise to the center of the band next year as one-off effects of lower commodity prices dissipate and domestic demand remains strong. - Baseline incorporates implementation of new IRC, with gradual convergence of market rates to policy rate as deposit auctions scale up. - Significantly faster-than-projected credit growth with inflationary pressures, or a stronger-than-expected impact of fiscal expansion on inflation, would warrant a monetary policy tightening relative to the baseline. - There is space to loosen policy if downside risks or liquidity shortages materialize, including by reducing banks’ required reserve ratio (among the highest in the region). ### Macro-financial linkages and systemic financial stability risks - Main risks: concentration risks from conglomerate structure and rapid credit growth to real estate. - Staff work: - Updated estimates of credit cycles, deeper analysis of bank-corporate linkages, updated corporate stress tests, and advised authorities to fill data gaps using the Fund’s Balance Sheet Approach. - Initiatives underway to fill data gaps include SEC efforts to enhance corporate sector balance sheet data and efforts covering shadow banking by real estate developers. - Nonfinancial corporates (NFCs) analysis (key findings): - Aggregate NFC debt increased from around 28 percent of GDP in 2009 to just under 42 percent in 2015, driven by corporate bonds and domestic bank loans in local currency. - FX exposure limited: aggregate FX exposures remained low at under 28 percent of total debt, or about 12 percent of GDP in 2015. - Firm-level stress tests for 4,083 firms (Orbis database): debt-at-risk (debt of firms with an interest coverage ratio below 1.5) is relatively modest at 32 percent of total debt under the most severe scenario—similar to other EMEs in 2013—though vulnerabilities concentrated in real estate and other services. - Concentration risks from conglomerates and rapid expansion of real estate developers (including shadow banking) warrant continued close monitoring; systemic risk has declined since the GFC but has ticked up recently with real estate developers becoming more systemically important. *Source: _cr16309 - 14. The fiscal anchor should target a broadly stable consolidated general government* ### Box 8. Philippines: Addressing the Remaining Data Gaps Continues to be a Priority ### Box 8. Philippines: Addressing the Remaining Data Gaps Continues to be a Priority ### Data gaps and analytical approach - Staff used the Fund’s Balance Sheet Approach (BSA) to identify data gaps. The BSA is an analytical representation of the balance sheet of institutional sectors including their cross-holdings. It is typically used to assess the exposure of individual sectors to shocks as well as to study how shocks get transmitted across sectors. - Significant data gaps exist on balance sheet exposures of: - Other financial corporations (OFCs) - Nonfinancial corporations (NFCs) - Households - Main gaps: - “Other Resident Sectors” not systematically collected; compilation of the Other Financial Corporations Survey (OFCS) is still in process. - Breakdown of external positions of the nonbank and nongovernment sectors not available in the International Investment Position (IIP) and balance of payments (BOP) statistics. - Philippine Government Financial Statistics (GFS) only contain information on liabilities, and does not disaggregate “Other Resident Sectors.” ### Ongoing initiatives to fill gaps (main initiatives, agencies, and status/progress) - Corporate registry adopts extensible business reporting language (XBRL) - Description: XBRL’s goal is to migrate all corporate reporting to an electronic format. - Agencies Responsible: Securities and Exchange Commission (SEC) - Status/Progress: Progressing with Japan International Cooperation Agency (JICA) support. Still unclear if all firms will be covered. Full implementation expected for the reporting year of 2016. - Implementing data collection through comprehensive form of financial statements (CFFS) - Description: The CFFS is an enhanced version of the existing General Form of Financial Statements (GFFS). - Agencies Responsible: Securities and Exchange Commission (SEC) - Status/Progress: The Steering Committee of the Financial Stability Coordinating Council (FSCC) already endorsed the CFFS designed by the BSP. BSP will conduct a series of information sessions and workshops with SEC-supervised entities, which are tentatively scheduled for end-July to August 2016. Still unclear which corporates will need to comply. Full implementation expected by September 2016. - Collecting Other Financial Corporations Survey (OFCS) - Description: The OFCS is an analytical survey that provides a comprehensive measure of the claims (or assets) and liabilities of the other financial corporations (OFCs) in the Philippines. The compilation of OFCS is in adherence to the Special Data Dissemination Standard (SDDS) Plus which the Philippines target to complete by 2019. - Agencies Responsible: Bangko Sentral Pilipinas (BSP); Governance Commission on Government Owned-or-Controlled Corporations (GCG); Insurance Commission (IC); Securities and Exchange Commission (SEC) - Status/Progress: The BSP is already collecting information on OFCs under its supervision. Joint BSP-GCG-supervised OFCs info sessions held November 2015 and February 2016. Standard report forms (covering period 2012-2015) expected to be submitted to the BSP by 31 August 2016. Joint BSP-IC-supervised OFCs workshops set to be conducted by September 2016. Data collection through GFFS (see above). - Improving balance of payments (BOP) and international investment position (IIP) statistics - Description: Disaggregate Other Resident sectors into Households, OFCs and nonfinancial corporations (NFCs) in the BOP and IIP statistics as per the sixth edition of IMF’s balance of payments and international investment position manual (BPM6). - Agencies Responsible: BSP - Status/Progress: The BSP's International Transactions Reporting System (ITRS) is currently being enhanced to improve BOP data capture. Full implementation of CFFS and OFCS (see above) needed for IIP data disaggregation. - Residential real estate price index (RREPI) - Description: The Residential Real Estate Price Index (RREPI) measures the change in the prices of residential properties in the Philippines. - Agencies Responsible: BSP - Status/Progress: The maiden results of the RREPI were released by the BSP last 6 June 2016. This covers the period Q2:2015 to Q1:2016 with Q1:2014 as base period. The RREPI will be generated by the BSP on a quarterly basis. - Uniform reporting template covering real estate developers - Description: Form to collect standardized information from real estate developers on particular aspects of their financial statements like trade receivables that reflect shadow banking activities. - Agencies Responsible: BSP, FSCC Shadow Banking Real Estate Working Group (SBREWG) / Housing and Land Use Regulatory Board (HLURB) - Status/Progress: The BSP has forwarded the template to the HLURB for implementation. MOA between HLURB and SBREWG member agencies is being drafted. - Sectoral balance sheet (SBS) - Description: The SBS reports the disaggregation of financial assets and liabilities by economic sectors, including the non-financial, financial, general government, household and rest of the world sectors. - Agencies Responsible: Philippine Statistics Authority (PSA) - Status/Progress: While the compilation of the financial sector balance sheet will be generated by the BSP, the consolidation of the whole SBS will be spearheaded by the Philippine Statistics Authority (PSA). The PSA intends to start the preparatory stages on the SBS by 2017 (at least with those sectors where data are readily available). Ultimately, the PSA will consolidate the data into a sectoral balance sheet (SBS), although likely not before 2018. ### Systemic risks, monitoring, and macroprudential policy - Findings on systemic risks and credit: - Systemic risks appear contained but merit continued monitoring. - Most indicators suggest that credit growth remains below typical cutoffs for credit booms, but mixed signals and the composition of credit growth across sectors warrant careful monitoring. - Firm-level stress tests show that overall debt-at-risk is still low in nonfinancial corporates but there are pockets of vulnerability, where leverage has increased and is concentrated. - Nonfinancial corporate debt in the Philippines is now comparable to peers although foreign exchange exposure is limited. - A part of real estate financing, while likely still small, is provided by real estate developers to household borrowers who cannot yet borrow from banks; data gaps hinder further assessment. - Concentration risks arising from the conglomerate structure and rapid expansion of real estate developers warrant continued monitoring. - Policy intentions and recommendations: - When credit growth becomes excessive for some sectors, the BSP would consider targeted macroprudential policy responses. Such measures could include higher risk weights on real estate loans and lending to real estate developers. - Allow the additional Single Borrower Limit (SBL) for PPP to lapse in December 2016 as planned to manage concentration risks. - Banks’ ability to absorb mark-to-market losses from higher market interest rates and corporate vulnerabilities relating to exchange rate shocks should be further assessed with enhanced balance sheet data. - Authorities’ approaches: - BSP decided to strengthen its financial stability function to mainstream macro-financial surveillance and a prudential framework, drawing on recent Fund TA. - Continue to expand the regulatory perimeter, particularly to include real estate developers and the nexus of conglomerates and banks. - Staff supports explicitly assigning a financial stability mandate to the BSP through amendments to its charter. - Financial Stability Coordination Council (FSCC) efforts to maintain financial stability are welcomed. - Macroprudential policy stance and actions: - Macroprudential policies will continue to be applied. BSP regularly conducts real estate stress tests and requires remedial actions, including curtailing lending or raising capital. - The BSP considers it premature to undertake additional macroprudential measures particularly targeting the real estate sector at the current juncture, while enhancing monitoring of risks and moving proactively to limit them in a targeted manner. - Example: setting sector-specific capital charges for nondeliverable forwards in response to systemic risks from foreign exchange exposures. - BSP intends to allow the additional SBL limit for PPPs, adopted six years ago, to lapse at the time of its sunset at end-2016. The SBL exemption was put in place without compromising the overall prudential regulation framework; additional prudential measures were implemented, including strengthened capital requirements and risk management. BSP recently rationalized limits on PPP project loans to related parties by excluding properly ring-fenced project finances. ### Structural and capital market implications linked to data and financial stability - Poverty and social spending targets (key statistics): - The Philippines’ high poverty rate fell from 28.8 percent in 2006 to 26.3 percent in 2015 (national definition), a decline of 0.3 percentage points per year. - The new authorities target a reduction in the poverty rate of 1.25 to 1.5 percentage points per year during their term, with a cumulative decline of 7.5 percent to 9 percent in six years. - Staff assessed the staff recommended scenario and estimated poverty would fall only by 0.6 percentage points per year, less than half the government’s target, through the increase in the level of expenditure per se. - Policy implication: To achieve the government target, scaling up social and infrastructure spending must be well targeted to the most vulnerable, particularly in rural areas, and accompanied by strong structural policies. - Capital market development priorities: - Capital market development is crucial for growth, infrastructure investment, and mitigation of concentration risks in the banking system. - Current challenges: segmented government securities market, low liquidity even at benchmark maturities, excessive number of issuances, pricing convention issues, absence of a formal primary dealer (PD) system or well-functioning market maker mechanism. - Policy priorities: build a reliable benchmark yield curve, concentrate issuance and trading activity at benchmark maturities, develop instruments for PPP financing (nonrecourse infrastructure bonds, asset backed securities), address impediments to securitization, support regionally accepted ratings, develop an institutional investor base (including implementation of the Personal Equity & Retirement Account (PERA) Law), and foster Real Estate Investment Trusts (REITs). - Rationale: Market-based financing can refinance or securitize initial bank loans for brownfield projects once operational cash flows stabilize, offloading illiquid assets and freeing banks for greenfield investments. *Source: Bangko Sentral ng Pilipinas (BSP), Department of Economic Statistics; and discussion during the 2016 Article IV consultation.* ### 32. Promoting financial inclusion is another priority. Access to formal financial services is low ### _cr16309 - 32. Promoting financial inclusion is another priority. Access to formal financial services is low ### Financial inclusion and access to finance - Access to formal financial services is low, especially in rural areas. - Cost of remittances has increased due to closure of correspondent banking relationships in the context of de-risking of banks globally. - Recommendations and initiatives: - Study and encourage additional new technologies for international money transfers, while monitoring their introduction to mitigate risk. - Develop the insurance market to help promote inclusive growth and poverty reduction. - Creation of a multiagency committee chaired by the BSP to provide strategic direction and oversight of the implementation of the 2015 national financial inclusion strategy is welcomed by staff. - BSP approved entry of a number of foreign banks to foster competition in the banking sector and provide better access and options to underserved areas. - Promote development of alternative forms of financing and hedging, and development of corporate bond and equity markets to support infrastructure investment. ### Anti-money laundering (AML), bank secrecy, and recent incidents - Recent theft of US$81 million from Bangladesh’s official international reserves laundered through casinos in the Philippines highlights need to tighten AML legislation and procedures. - Staff view and recommended legal changes: - AML law needs to be strengthened, along with amendment of the bank secrecy law. - Amendments should include coverage of casinos under the AML law and making tax evasion a predicate crime. - Staff ready to provide further technical support to help formulate these amendments if desired. - Actions and enforcement: - BSP and Department of Finance are already working with Congress on amendments to the AML laws. - BSP relaxed foreign exchange regulations in August 2016 including documentary requirements for banks to migrate transactions in the informal market to the banking system. - As part of supervisory enforcement, BSP imposed a record ₱1.0 billion (US$21 million) fine against the domestic bank involved in the Bangladesh cyber heist. - Staff strongly encourages passage of AML amendments that would remove the exemption for casinos, make tax evasion a predicate crime, and ease bank secrecy laws. ### Authorities’ stated priorities and planned measures - Making growth more inclusive is a key priority for the new administration; poverty reduction to be accelerated with well targeted social and infrastructure spending, particularly in the provinces. - Authorities recognize need to develop and deepen capital markets and promote financial inclusion. - Planned and ongoing measures: - Bureau of the Treasury, together with the BSP and SEC, plan to introduce a new repo instrument and PD system. - Finalizing work on introduction of an overnight index swap facility and a pricing benchmark framework. - Resubmitted draft amendments to the AML law and the bank secrecy law to Congress. - Authorities’ 10-point policy agenda to increase social spending and promote rural development and agriculture. ### Macroeconomic assessment and policy recommendations - Recent macro developments and risks: - Philippine economy shows strong economic growth coupled with low inflation; strong growth in the first half of 2016 reflects strength of domestic demand. - Inflation is expected to move within the target range. - Credit growth has picked up, but most indicators suggest credit growth remains below typical cutoffs for credit booms; need to monitor macro-financial risks given recent rapid credit growth. - Favorable macro performance has not led to corresponding improvements in social indicators; income inequality and poverty persist and unemployment has come down only slowly. - Fiscal policy: - Staff supports government plan to raise infrastructure and social spending and increase its medium-term fiscal deficit target to 3 percent of GDP, anchored to a stable debt-to-GDP ratio. - Support target to increase public infrastructure spending to at least 5 percent of GDP over the medium term. - Urged measures in tax reform: - Pass comprehensive tax reform package. - Eliminate the 13 th month salary exemption from the PIT. - Raise taxes and fees on motor vehicles. - Rationalize tax incentives when CIT rates are lowered to avoid revenue loss and increase efficiency. - Give tax authorities access to individual bank account information and make tax evasion a predicate crime to strengthen tax collection. - Monetary and macroprudential policy: - Monetary policy settings currently appropriate; BSP should be ready to tighten if signs of overheating or accelerating credit growth with inflationary pressures appear. - Adoption of new interest rate corridor is commendable; continue efforts to absorb additional liquidity through stepping up the size of deposit auctions to allow lowering banks’ required reserve ratio over time. - Passage of a new BSP charter authorizing issuance of central bank bills and increasing BSP’s capital would help support monetary policy effectiveness. - With official international reserves more than adequate, allow exchange rate to move freely in line with market forces while smoothing excessive volatility in both directions. - Macroprudential policies should guard against systemic risks, including those from conglomerate structures and real estate; targeted prudential policies to tame financial excesses and strengthen resilience are supported. - Broadening BSP’s financial stability mandate and allowing better access to information on conglomerates’ finances remain priorities. - Structural reforms: - Support efforts to raise infrastructure investment and competition, open the economy to foreign investment, address low agricultural productivity, and remove labor market imperfections and skills mismatch to benefit from the demographic dividend. - Scaling up social and infrastructure spending should be well targeted to the most vulnerable, particularly in rural areas, and accompanied by strong structural policies. *PHILIPPINES INTERNATIONAL MONETARY FUND STAFF APPRAISAL* ### 47. It is recommended that the next Article IV consultation take place on the standard 12-month ### _cr16309 - 47. It is recommended that the next Article IV consultation take place on the standard 12-month ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector: growth, inflation, wages, credit - Domestic demand is supporting strong growth, led by services and manufacturing. - Real GDP (percent change): 2011: 3.7; 2012: 6.7; 2013: 7.1; 2014: 6.2; 2015: 5.9; 2016: 6.4; 2017 (Proj.): 6.7. - Inflation (CPI, annual average): 2011: 4.7; 2012: 3.2; 2013: 2.9; 2014: 4.2; 2015: 1.4; 2016: 2.0; 2017 (Proj.): 3.4. - CPI (end year): 2011: 4.2; 2012: 3.0; 2013: 4.1; 2014: 2.7; 2015: 1.5; 2016: 2.9; 2017 (Proj.): 3.2. - Wage growth has picked up slightly. - Credit growth remains high and has picked up recently, including for construction and real estate. - Gross fixed investment (percent change): 2013: 11.8; 2014: 6.2; 2015: 15.2; 2016: 24.1; 2017–21 (Proj.): 13.5, 9.9, 9.8, 9.6, 9.6. ### Monetary and financial conditions - Monetary policy has remained on hold since 2014; the gap between T-bill rates and policy rates has narrowed. - Reserve money growth has slowed. - Government bond yields have declined in 2016; liquidity in the system has stabilized, with about half of it being absorbed by the banks’ required reserves. - Monetary conditions have eased somewhat in 2016 after tightening autonomously in 2015; stock market valuations have recovered after the selloff in the second half of 2015. - Interest rate (91-day treasury bill, end of period, in percent): latest observation in July 2016 reported as 1.8 (series shows 2011: 1.7; 2012: 0.5; 2013: 0.5; 2014: 2.5; 2015: 2.7; 2016: 1.8; ...). - Broad money (M3) percent change (latest observation June 2016): series shows 2011: 7.1; 2012: 9.4; 2013: 31.8; 2014: 11.2; 2015: 9.4; 2016: 12.4; ... ### Cross-country financial market comparisons - Foreign reserves have been broadly stable; nominal exchange rate has been broadly stable. - Long-term government bond yields have declined in line with neighboring countries and remain comparable to some other countries in the region. - Negative returns to carry trade have persisted in some EMEs; these have been smaller in the Philippines. ### External sector: current account, reserves, REER - Overall balance of payments was in modest surplus; financial account outflows have slowed. - Following rapid reserve accumulation up to 2012, reserves have leveled off and are well above the Fund’s reserve adequacy metric. - BSP has built FX reserves during periods of balance of payments surpluses. - Real effective exchange rate (REER) has depreciated since early 2015, although less than in Malaysia and Thailand. - Current account balance (US$ billions): 2011: 5.6; 2012: 6.9; 2013: 11.4; 2014: 10.8; 2015: 8.4; 2016: 5.5; 2017 (Proj.): 4.9. - Reserves (US$ billions): 2011: 75.3; 2012: 83.8; 2013: 83.2; 2014: 79.5; 2015: 80.7; 2016: 84.0; 2017 (Proj.): 86.5. - Reserves/short-term liabilities (percent): 2011: 482.5; 2012: 397.9; 2013: 406.2; 2014: 418.9; 2015: 396.9; 2016: 397.5; 2017 (Proj.): 401.7. ### Banking sector and financial soundness - Loan/deposit rate spreads have remained high; interest spreads for banks are high relative to funding costs. - Loan/deposit ratios have remained low. - Universal banks have the largest share of banking system assets. - The Philippine banking system is well capitalized with low and declining NPL ratios. ### Social conditions and income distribution - Poverty in the Philippines has fallen but remains high; income inequality remains high. - Unemployment rate has fallen but is high relative to ASEAN peers. - Per capita GDP is among the lowest in emerging market economies; per capita GNI is somewhat higher due to sizable remittances. - Unemployment rate (2015): 6.3 percent. - Poverty headcount ratio at $1.25 a day at PPP (2012): 19 percent. ### Key national statistics (selected) - Nominal GDP (2015): P 13,307 billion ($292 billion) - Population (2015): 102 million - GDP per capita (2015): $2,863 - IMF quota: SDR 2,042.9 million - Main products and exports: electronics, agriculture products, and business process outsourcing - Total external debt (percent of GDP): 2011: 33.7; 2012: 32.0; 2013: 28.9; 2014: 27.3; 2015: 26.5; 2016: 25.1; 2017 (Proj.): 22.7 - Total external debt (in billions): 2011: 75.6; 2012: 79.9; 2013: 78.5; 2014: 77.7; 2015: 77.5; 2016: 78.1; 2017 (Proj.): 79.1 ### Public finances and fiscal accounts - National government cash accounts (selected levels, in billions of pesos): - Revenue and grants: 2011: 1,359; 2012: 1,527; 2013: 1,713; 2014: 1,906; 2015: 2,047; 2016 (Budget): 2,697; 2016 (Proj.): 2,223; 2017 (Proj.): 2,461. - Tax revenue: 2011: 1,202; 2012: 1,361; 2013: 1,536; 2014: 1,719; 2015: 1,815; 2016 (Budget): 2,543; 2016 (Proj.): 1,976; 2017 (Proj.): 2,185. - Expenditure and net lending: 2011: 1,553; 2012: 1,781; 2013: 1,881; 2014: 1,984; 2015: 2,233; 2016 (Budget): 2,995; 2016 (Proj.): 2,511; 2017 (Proj.): 2,938. - Balance (cash): 2011: -193; 2012: -254; 2013: -168; 2014: -78; 2015: -187; 2016 (Budget): -299; 2016 (Proj.): -288; 2017 (Proj.): -477. - National government (percent of GDP, selected): - Revenue and grants: 2011: 14.0; 2012: 14.5; 2013: 14.8; 2014: 15.1; 2015: 15.4; 2016 (Budget): 18.1; 2016 (StaffProj.): 15.4; 2017 (Proj.): 15.4. - Expenditure and net lending: 2011: 16.0; 2012: 16.9; 2013: 16.3; 2014: 15.7; 2015: 16.8; 2016 (Budget): 20.1; 2016 (StaffProj.): 17.4; 2017 (Proj.): 18.4. - Balance: 2011: -2.0; 2012: -2.4; 2013: -1.5; 2014: -0.6; 2015: -1.4; 2016: -2.0; 2017 (Proj.): -3.0. - General government (percent of GDP, Table 4): - Revenue: 2011: 17.6; 2012: 18.6; 2013: 18.9; 2014: 18.9; 2015: 19.3; 2016 (Proj.): 19.3; 2017 (Proj.): 19.4. - Total expenditure: 2011: 17.9; 2012: 18.9; 2013: 18.7; 2014: 18.1; 2015: 19.1; 2016 (Proj.): 19.7; 2017 (Proj.): 20.9. - Consolidated general government debt: 2011: 41.4; 2012: 40.6; 2013: 39.3; 2014: 36.4; 2015: 36.3; 2016 (Proj.): 34.8; 2017 (Proj.): 33.8. ### Depository corporation and monetary aggregates (Table 5) - Broad Money (levels, end period, in billions of pesos): 2011: 5,821.454; 2012: 6,227.664; 2013: 8,054.206; 2014: 9,055.947; 2015: 9,884.958; 2016 (Proj.): 10,792.192; 2017 (Proj.): 12,104.620. - Broad Money (percent change, memorandum): 2011: 5.3; 2012: 7.0; 2013: 29.3; 2014: 12.4; 2015: 9.2; 2016 (Proj.): 12.2. - Claims on private sector (levels, end period, in billions of pesos): 2011: 3,093.882; 2012: 3,528.922; 2013: 4,137.658; 2014: 4,949.747; 2015: 5,562.223; 2016 (Proj.): 6,396.556; 2017 (Proj.): 7,356.040. - Claims on private sector (percent change, memorandum): 2011: 16.2; 2012: 14.1; 2013: 17.2; 2014: 19.6; 2015: 12.4; 2016 (Proj.): 15.0; 2017 (Proj.): 15.0. ### Balance of payments (Table 6, selected) - Current account balance (US$ billions): 2011: 5.6; 2012: 6.9; 2013: 11.4; 2014: 10.8; 2015: 8.4; 2016 (Proj.): 5.5; 2017 (Proj.): 4.9. - Trade balance of goods and services (US$ billions): 2011: -13.9; 2012: -12.7; 2013: -10.6; 2014: -12.8; 2015: -17.5; 2016 (Proj.): -20.7; 2017 (Proj.): -22.2. - Exports, f.o.b. (US$ billions): 2011: 38.3; 2012: 46.4; 2013: 44.5; 2014: 49.8; 2015: 43.3; 2016 (Proj.): 41.8; 2017 (Proj.): 43.5. - Imports, f.o.b. (US$ billions): 2011: 58.7; 2012: 65.3; 2013: 62.2; 2014: 67.2; 2015: 65.0; 2016 (Proj.): 67.6; 2017 (Proj.): 71.6. - Secondary income, net (US$ billions): 2011: 18.6; 2012: 19.5; 2013: 21.1; 2014: 22.8; 2015: 23.5; 2016 (Proj.): 24.2; 2017 (Proj.): 25.1. - Nonresident workers remittances (US$ billions): 2011: 17.1; 2012: 18.0; 2013: 19.3; 2014: 20.8; 2015: 21.7; 2016 (Proj.): 22.3; 2017 (Proj.): 23.2. - Financial account (US$ billions): 2011: -5.3; 2012: -6.8; 2013: 2.2; 2014: 9.6; 2015: 2.5; 2016 (Proj.): 0.4; 2017 (Proj.): 0.5. - Overall balance (US$ billions): 2011: 11.4; 2012: 9.2; 2013: 5.1; 2014: -2.9; 2015: 2.6; 2016 (Proj.): 2.7; 2017 (Proj.): 2.1. ### Medium-term outlook (Table 7) - Real GDP (percent change) 2017–21 (Proj.): 2017: 6.7; 2018: 6.8; 2019: 6.9; 2020: 7.0; 2021: 7.0. - CPI (percent change, annual average) 2017–21 (Proj.): 2017: 3.4; 2018–21: 3.5, 3.5, 3.5, 3.5. - Gross investment (percent of GDP) 2013–21: 2013: 20.0; 2014: 20.5; 2015: 20.6; 2016: 23.7; 2017: 24.7; 2018: 25.6; 2019: 26.4; 2020: 27.1; 2021: 27.9. - National saving (percent of GDP) 2013–21: 2013: 24.2; 2014: 24.3; 2015: 23.4; 2016: 25.5; 2017: 26.1; 2018: 26.7; 2019: 27.2; 2020: 27.6; 2021: 28.1. - Nonfinancial public sector balance (percent of GDP): 2013: 0.6; 2014: 0.9; 2015: 0.1; 2016: -0.5; 2017 (Proj.): -1.6; 2018 (Proj.): -1.8; 2019 (Proj.): -1.9; 2020 (Proj.): -2.0; 2021 (Proj.): -2.1. - Nonfinancial public sector debt (percent of GDP): 2013: 51.3; 2014: 47.8; 2015: 47.3; 2016: 44.9; 2017 (Proj.): 42.9; 2018–21 (Proj.): 41.0, 39.2, 37.6, 36.2. - Reserves (US$ billions) 2017–21 (Proj.): 2017: 86.5; 2018: 88.3; 2019: 89.7; 2020: 90.6; 2021: 90.7. ### Baseline and Staff's Preferred Scenarios (Table 8) — fiscal and macro outcomes - Baseline scenario (percent of GDP, selected): - Revenue and grants: 2015: 15.4; 2016: 15.4; 2017: 15.4; 2018–21: 15.5, 15.5, 15.5, 15.5. - Expenditure and net lending: 2015: 16.8; 2016: 17.4; 2017: 18.4; 2018–21: 18.5, 18.6, 18.6, 18.5. - Balance: 2015: -1.4; 2016: -2.0; 2017: -3.0; 2018–21: -3.0, -3.0, -3.0, -3.0. - Real GDP growth (percent): 2015: 5.9; 2016: 6.4; 2017: 6.7; 2018–21: 6.8, 6.9, 7.0, 7.0. - Unemployment rate (percent): 2015: 6.3; 2016: 5.9; 2017: 5.7; 2018–21: 5.6, 5.5, 5.5, 5.5. - Poverty rate (percent): 2015: 26.5; 2016: 25.8; 2017: 25.1; 2018–21: 24.4, 23.7, 23.0, 22.3. - Staff's recommended scenario (percent of GDP, selected): - Staff's recommended scenario includes a tax reform that raises 3 percent of GDP in extra revenue over time, in increments of 1 percentage point per year starting in 2017. The extra revenue is used to finance additional social and capital expenditure by equal amounts. - Revenue and grants: 2015: 15.4; 2016: 15.4; 2017: 16.4; 2018–21: 17.5, 18.5, 18.5, 18.5. - Tax revenue: 2015: 13.6; 2016: 13.7; 2017: 14.7; 2018–21: 15.8, 16.8, 16.8, 16.7. - Expenditure and net lending: 2015: 16.8; 2016: 17.4; 2017: 19.4; 2018–21: 20.5, 21.5, 21.6, 21.5. - Balance: 2015: -1.4; 2016: -2.0; 2017: -3.0; 2018–21: -3.0, -3.0, -3.0, -3.0. - Real GDP growth (percent): 2015: 5.9; 2016: 6.4; 2017: 6.4; 2018–21 (Proj.): 7.2, 7.4, 7.6, 7.8, 8.0 (staff scenario shows higher growth relative to baseline in later years). - The staff notes: "The larger fiscal multipliers of investment and social expenditure than that of taxes lead to an increase in real GDP growth of 0.5 percent relative to the baseline scenario in 2017-19, with growth increasing by another 0.1 percent in 2018" (text truncated in source). *Italic: Source — PHILIPPINES, INTERNATIONAL MONETARY FUND (excerpts from the provided content unit).* ### 0.2 percent in 2019 due to crowding in of private investment and enhanced public investment efficiency. Over the medium ### _cr16309 - 0.2 percent in 2019 due to crowding in of private investment and enhanced public investment efficiency. Over the medium ### Growth outlook and macroeconomic effects - Growth: - Growth rises to 8 percent in 2020-21 due to higher public and private investment, gains in productivity associated to the liberalization of FDI and reform of land titles, and faster employment growth due to labor market reforms. - 0.2 percent in 2019 due to crowding in of private investment and enhanced public investment efficiency. - Inflation and monetary policy: - Inflation raises somewhat reflecting the demand stimulus partly offset by a tightening of monetary policy and higher potential growth. - External sector: - The current account surplus declines because of higher investment and lower saving. ### Banking sector indicators (2011−15) — key ratios (In percent) - Capital adequacy: - Total capital to total assets: 2011: 12.6, 2012: 13.1, 2013: 11.3, 2014: 12.2, 2015: 11.6 - Capital adequacy ratio (Solo) 1/: 2011: 16.7, 2012: 17.3, 2013: 16.5, 2014: 15.4, 2015: 15.1 - Asset quality: - NPL ratio 2/: 2011: 3.9, 2012: 3.5, 2013: 2.9, 2014: 2.4, 2015: 2.2 - NPA ratio 3/: 2011: 3.8, 2012: 3.3, 2013: 2.6, 2014: 2.3, 2015: 2.0 - Distressed asset ratio 4/: 2011: 7.9, 2012: 6.8, 2013: 5.6, 2014: 4.6, 2015: 4.0 - NPL coverage ratio 5/: 2011: 102.7, 2012: 109.6, 2013: 118.7, 2014: 119.7, 2015: 118.0 - NPA coverage ratio 6/: 2011: 62.4, 2012: 68.1, 2013: 73.0, 2014: 77.0, 2015: 77.1 - Profitability: - Return on assets: 2011: 1.5, 2012: 1.6, 2013: 1.6, 2014: 1.3, 2015: 1.1 - Return on equity: 2011: 12.1, 2012: 12.4, 2013: 13.3, 2014: 10.8, 2015: 9.6 - Cost-to-income ratio: 2011: 65.0, 2012: 63.5, 2013: 60.3, 2014: 62.3, 2015: 64.3 - Liquidity and lending: - Liquid assets to deposits: 2011: 56.5, 2012: 57.5, 2013: 59.5, 2014: 55.6, 2015: 53.5 - Loans (gross) to deposits: 2011: 70.0, 2012: 73.5, 2013: 64.4, 2014: 68.4, 2015: 70.7 - Notes: - 1/ Solo refers to the head office and branches. - 2/ Nonperforming loans over total loan portfolio excluding interbank loans. - 3/ (Nonperforming loans + real and other property aquired (ROPA)) over total gross assets, where ROPA is a measure of the stock of foreclosed properties held by a bank. - 4/ Ratio of (NPLs + Gross ROPA + current restructured loans) to (Gross total loan portfolio + Gross ROPA). - 5/ Ratio of loan loss reserves to NPLs. - 6/ Ratio of valuation reserves (for loans and ROPA) to NPAs. ### Indicators of external vulnerability (2010−15) — selected statistics (levels or percent of GDP as noted) - External indicators (including external liquidity): - Gross international reserves (in billions U.S. dollars): 2010: 62.4, 2011: 75.3, 2012: 83.8, 2013: 83.2, 2014: 79.5, 2015: 80.7 - Maturing short-term debt (in billions U.S. dollars): 2010: 10.5, 2011: 12.1, 2012: 16.5, 2013: 16.9, 2014: 16.2, 2015: 15.1 - Amortization of medium and long-term debt (in billions U.S. dollars): 2010: 4.8, 2011: 5.0, 2012: 3.6, 2013: 4.6, 2014: 3.6, 2015: 2.7 - Net FDI inflows (in billions of U.S. dollars) 1/: 2010: 1.6, 2011: 0.3, 2012: 1.0, 2013: -0.1, 2014: 1.0, 2015: -0.1 - FX deposits residents (in billions of U.S. dollars): 2010: 25.1, 2011: 24.3, 2012: 25.3, 2013: 26.1, 2014: 32.1, 2015: 32.7 - Total gross external debt (percent of GDP): 2010: 36.9, 2011: 33.7, 2012: 32.0, 2013: 28.9, 2014: 27.3, 2015: 26.5 - Nonfinancial public sector indicators: - Overall balance (percent of GDP): 2010: -3.3, 2011: -0.8, 2012: -0.6, 2013: 0.6, 2014: 0.9, 2015: 0.1 - Primary balance (percent of GDP): 2010: 0.4, 2011: 2.4, 2012: 2.7, 2013: 3.7, 2014: 3.7, 2015: 2.6 - Debt (percent of GDP): 2010: 54.8, 2011: 55.3, 2012: 53.0, 2013: 51.4, 2014: 47.8, 2015: 45.8 - Debt denominated in FX or linked to the exchange rate (in percent of total): 2010: 53.2, 2011: 47.0, 2012: 36.0, 2013: 33.5, 2014: 31.9, 2015: 33.8 - Short-term general government debt (original maturity, in percent of total): 2010: 11.2, 2011: 6.0, 2012: 5.1, 2013: 5.6, 2014: 4.9, 2015: 4.4 - Average effective interest rate of government debt (in percent): 2010: 7.1, 2011: 6.3, 2012: 6.4, 2013: 6.3, 2014: 6.0, 2015: 5.6 - Amortization of total debt (percent of GDP): 2010: 10.7, 2011: 8.2, 2012: 6.7, 2013: 5.0, 2014: 4.0, 2015: 3.8 - Sources: Philippine authorities; and IMF staff estimates. - 1/ In BPM6. ### Risk Assessment Matrix — main risks, likelihood, expected impact, and recommended policy responses - Tighter or more volatile global financial conditions - Likelihood/Time Horizon: High/Short Term - Transmission channels: - Sharp asset price decline and decompression of credit spreads; surge in the U.S. dollar. - Volatility amplified by low market liquidity. - Sharp capital outflows, leading to a peso depreciation. - Yields on domestic government securities may rise suddenly. - Conglomerate structure could amplify transmission. - Expected impact: Medium - Asset prices fall, negative wealth effects. - Rising credit cost slows real estate and construction. - Banks’ NPLs may increase from very low levels; effect on capital likely manageable. - Some leveraged corporates may face debt service difficulties. - Banks may suffer mark-to-market losses on government securities. - Impact expected to be limited due to strong macro fundamentals; effective depreciation would cushion 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: - Reduced regional exports and GDP growth. - Territorial disputes could trigger trade disruptions. - Weaker investor sentiment toward the region. - Expected impact: High - Direct exports to China 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 activity accelerates; credit exposure to real estate grows. - Conglomerate structure could amplify transmission. - Expected impact: Medium - Rapid real estate price growth, vulnerability builds, potential asset price correction weakens growth through 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 demand pressures. - Expected impact: Medium - 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. - Low infrastructure and social spending - Likelihood/Time Horizon: Medium/Short and Medium Term - Transmission channels: - Weak budget execution and weak tax administration limit social and infrastructure spending; technical factors limit PPP deployment. - Expected impact: High - Fails to crowd in private investment; limits potential output growth; limits opportunities for growing working age population; poverty remains high with risk of social fragmentation. - 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 well targeted transfers and universal health care. - Climate change related natural disaster - Likelihood/Time Horizon: Medium/Medium Term - Transmission channels: - Natural disaster destroys physical and human capital, causes population displacement and business closures, increases uncertainty and discourages investment. - Expected impact: Medium - Loss of output, 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 to make it more resilient to natural disasters. - Explore private and public sector options for insurance. - Note on the RAM: - 1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. “Low” indicates a probability below 10 percent, “medium” between 10 and 30 percent, and “high” 30 percent or more. “Short term” and “medium term” indicate risks could materialize within 1 year and 3 years, respectively. ### Debt Sustainability Analysis — public and external debt - Public debt sustainability: - Public debt in the Philippines is sustainable. - Baseline: general government debt-to-GDP ratio falls from 36 percent of GDP in 2015 to below 31 percent in 2021 despite the rise in the fiscal deficit target to 3 percent in 2017. - Growth-interest rate differential contributes 6.6 percentage points to the projected fall in public debt as real GDP growth increases to 7 percent toward the end of the projection period. - Primary surpluses contribute 2.5 percentage points to the reduction in public debt. - Gross financing needs remain comfortable at 4−5 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 public debt scenarios: - Historical scenario (real GDP growth, real interest rates, and primary balances equal to 2006‒2015 averages) leads to faster reduction in debt and gross financing needs than staff’s baseline. - Scenario with a constant primary surplus at the projected 2016 level of 1.9 percent of GDP also leads to lower debt-to-GDP ratios and gross financing needs than staff’s baseline. - External debt sustainability: - Total external debt is sustainable. - External debt fell from a peak of 76.4 percent of GDP in 2001 to 26.5 percent in 2015 due to sustained current account surpluses, strong output growth, and currency appreciation. - Under staff’s baseline, external debt expected to fall to 15.7 percent of GDP in 2021. - Alternative scenarios: historical scenario leads to a faster reduction in external debt than staff’s baseline. - Resilience: one-half standard deviation shocks to interest rates, growth, and the current account lead to only modest increases in external debt ratios over the medium term. - Vulnerability: a one-time real depreciation of 30 percent in 2016 would raise the external debt-to-GDP ratio by about 10 percentage points. ### External sector assessment — baseline findings - Overall assessment: - The Philippines’ external sector remains moderately stronger than warranted by fundamentals and desirable policies despite the recent decline in the current account surplus. - The current account approach of the Fund’s External Balance Assessment (EBA) model, adjusted by Philippines-specific factors, shows a current account balance slightly above the level implied by fundamentals and desired policies. - Staff assess the peso to be broadly in line with fundamentals and desired policies, although subject to a high degree of uncertainty. - Structural drivers: - The apparent dichotomy (current account surplus stronger than fundamentals while the exchange rate is broadly in line) is because the Philippines’ current account surplus is determined by structural factors such as inadequate infrastructure, a weak business environment, and risks of natural disasters, which constrain private investment and lead to higher precautionary savings. - The current account gap should decline once infrastructure is upgraded in line with the authorities’ plans. - Current account: - The EBA model places the gap between the actual and the current account balance that is consistent with fundamentals and desired policies—the so called CAB norm—at (text cut off in source). *Source: _cr16309 - 0.2 percent in 2019 due to crowding in of private investment and enhanced public investment efficiency. Over the medium (IMF staff report content provided).* ### 4.9 percent of GDP in 2015 (3 percentage points lower than in 2014). Deviations of policies from ### _cr16309 - 4.9 percent of GDP in 2015 (3 percentage points lower than in 2014). Deviations of policies from ### Current account assessment and gaps - Cyclically adjusted current account balance (CAB) (A): 3.0 (percent of GDP) - EBA's CAB norm (B): -1.9 (percent of GDP) - EBA's CAB gap (A-B): 4.9 (percent of GDP) - Desk Adjustments (C): 2.0-3.0 (percent of GDP) - Revised CAB gap (A-B-C): 1.9-2.9 (percent of GDP) - Policy gaps (D): 1.3 (percent of GDP) - Deviations of policies from their desired levels explain 1.3 percent, with 0.4 percent due to a strong domestic fiscal stance and 0.9 percent to fiscal policy gaps in other countries. - Unexplained residual (A-B-C-D): 0.6-1.6 (percent of GDP) - Philippine-specific factors: - Natural disaster risks and worker remittances could explain between 23 percent (percent of GDP), suggesting a current account balance modestly above its norm. - Staff conclusion: After desk adjustments and policy-gap accounting, the current account gap is revised to 1.9-2.9 (percent of GDP) and remains slightly below last year’s gap without changing the bottom-line assessment. ### Real effective exchange rate (REER) - EBA REER approaches (index and level) point to an overvaluation of the peso. - Elasticity-based assessment indicates an undervaluation of about 8 percent when applying the estimated elasticity to the assessed current account gap range. - Two key factors likely not well captured by elasticity calculations: - Remittances. - The need for a substantial ramp-up of capital goods imports to sustain the increase in investment that started in 2015. - Staff assessment: Given conflicting evidence and high uncertainty, the REER is assessed to be broadly in line with fundamentals and desired policies. - REER gap values from Table 1 (REER gap (percent) 2/3/ E): - Regression Approach: -7.7 (percent) - REER Index Approach: 6.1 (percent) - REER Levels Approach: 24.5 (percent) - Contribution of identified policy gaps (F): - Regression Approach: -4.2 (percent) - REER Index Approach: -1.0 (percent) - REER Levels Approach: -1.4 (percent) - Unexplained residual (E-F): - Regression Approach: -3.5 (percent) - REER Index Approach: 7.1 (percent) - REER Levels Approach: 25.9 (percent) ### Reserves and capital flows - International reserves: stood at 229 percent of the Fund’s reserve adequacy metric in 2015. - Interpretation: Level of reserves is above the RA metric and is broadly justified by vulnerability to natural disasters and capital flow volatility. - Policy on exchange rate: Staff agrees with the BSP that the exchange rate should continue to be allowed to move freely in line with market forces with intervention limited to smoothing excessive volatility in both directions. - Size and importance of capital flows: - Post-global financial crisis years saw sizeable foreign exchange inflows from remittances and portfolio investment, resulting in a build-up of reserves. - Going forward, steady portfolio outflows are expected to continue, and gross reserves are projected to increase modestly over the medium term. - Opening up the economy may see a rise in foreign direct investment but be accompanied by higher imports of capital goods, particularly in the staff’s recommended scenario. ### Addressing imbalances and policy recommendations - Main diagnostic: The Philippines’ current account surplus reflects a low level of investment compared with other emerging market economies (EMEs). - Policy recommendations: - Raise investment and boost potential growth by improving the business environment and infrastructure. - Increasing investment would help reduce external imbalances going forward without necessarily adjusting the exchange rate. *Source: IMF staff estimates.* ### introduction of the standardized report form (SRF) for other financial corporations (OFCs). The ### _cr16309 - introduction of the standardized report form (SRF) for other financial corporations (OFCs) ### Introduction of SRF for Other Financial Corporations (OFCs) - The authorities have submitted test SRF-data for several types of OFCs, which have been reviewed by STA. - It is expected that the SRF will be introduced by end-2016. ### Resident Representative - A Resident Representative has been stationed in Manila since January 1984. - Mr. Shanaka Jayanath Peiris has been the Resident Representative for the Philippines since September 2012. ### IMF–World Bank Collaboration: Strategic assessment and macro-critical reforms (As of June 30, 2016) - Shared macroeconomic challenge: navigate the uncertain global environment to maintain macroeconomic stability, create policy space to meet future potential shocks, and build foundations for faster and more inclusive growth. - Three structural reform areas identified as macro-critical: - (1) raising investment, including public sector capital spending; - (2) strengthening public finance and social safety nets; - (3) financial sector development. - Division of labor and planned activities for June 2016˗June 2017 documented; Table 1 lists specific activities, expected deliverables, and division of labor. Key joint program areas and focus - Strengthening Public Finance: - Mobilizing fiscal revenue to fund spending for sustained and inclusive growth, while strengthening resilience to shocks. - Close coordination in tax policy reform including fiscal incentives rationalization and monitoring of sin tax implementation. - Management of fiscal risks and reporting; debt management strategy. - Assist Department of Budget and Management in improving public financial management and support for Bureau of Treasury’s lead role in implementation of a Single Treasury Account (TSA) and cash management. - Financial Sector: - Joint FSAPs: 2002 initial, 2009 follow-up. - Fund focus: technical assistance in bank supervision and resolution. - Bank lead: nonbank financial sector and crisis simulations. - Joint interests: banking sector soundness and resolution, financial inclusion and capital market development. Requests for information and collaboration - Fund team requests: be kept informed of World Bank’s discussions with government on financing of infrastructure, PPPs, and implementation of the development policy loan; review and sharing of analytical work including Philippine Development Report (PDR) series; follow up from the 2010 FSAP; work related to reform of social safety nets, public expenditure reviews, and public financial management. - Bank team requests: be kept informed of Fund’s assessments of macroeconomic policies and prospects; coordinate closely on technical assistance, especially budget reform, tax policy and administration, financial sector development and soundness, public expenditure analysis and management. ### Bank and Fund Planned and Ongoing Activities in Macro-Critical Structural Reform Areas (June 2016–June 2017) Bank Work Program (selected items and delivery status) - Mindanao jobs report — Ongoing - Philippine Economic Update — Semi-annually - Programmatic policy analysis and implementation support for inclusive growth — Ongoing - Tax policy notes — Completed in June 2016 - Technical support for discussions on TIMTA — Ongoing - Programmatic support on improving statistics, including support to the new Philippine Statistics Authority and the Securities and Exchange Commission — Ongoing - Implementation of policy reforms to enhance quality and quantity of public infrastructure spending particularly tracking of expenditures through use of Unified Account Code Structure (UACS) — Ongoing - Transition notes — Ongoing - Game changers for inclusive growth: an agenda for action — Ongoing - Report on the Observance of Standards and Codes, Accounting and Auditing (A&A ROSC) — Completed in July 2016 - Programmatic Public Sector Governance Program, including program spending assessments, a report on open government and program performance tracking and a report on Open Roads and an Open Roads platform — Ongoing - Supporting the development of a National Competition Policy — Ongoing - Local governance and accountability technical assistance — Ongoing - PFM project based on PEFA assessment — Ongoing - Financial development and inclusion — Ongoing - Development Policy Lending Series - DPL 4 and new series — Ongoing Fund Work Program (selected items and delivery status) - Article IV consultation with a focus on the medium term challenges of supporting a well managed rise in investment and a more inclusive growth. - Article IV staff report — August 2016 - Consultation — June/July 2016 - Public financial management (cash management, transparency and budget execution) TA — Ongoing - Tax policy TA — Ongoing - Banking supervision and bank resolution TA — Ongoing - Liquidity management and forecasting TA — Ongoing - Implementation of an interest rate corridor TA — Ongoing - Financial stability framework TA — Ongoing - Statistical data compilation and dissemination TA — Ongoing Joint Work Program (selected items) - Joint tax policy note for the new administration — August 2016 - Management of Fiscal Risk and GOCC/PPPs — Ongoing - DoF-BTr Debt Management Strategy — Ongoing - Implementation of PFM reforms related to Fiscal Transparency Evaluation of Fund and PEFA assessment update led by Bank — Ongoing - Review of tax policy notes by the Bank and update of recommendations by the Fund focused on financial sector taxes and related to ASEAN Economic Community 2016 — Ongoing - Macro-fiscal simulations of scaling up public investment and public investment management (PIM) institution reforms — Ongoing ### IMF–World Bank Collaboration Matrix: Macro-Critical Structural Issues (selected entries) - Raising potential growth: - Investment incentives; Energy sector taxation; Oil deregulation law; Corporate sector performance and vulnerabilities (IMF/WB); Investment environment (Regulatory framework (WB), Corruption/rule of law (WB), Investment incentives (IMF)). - Public finance: - BIR reform (IMF/WB); Cash management (IMF); Expenditure efficiency/capital spending; Revenue administration; IFMIS/fiscal reporting (IMF); Budget preparation (IMF/WB); Budget execution (IMF/WB); Tax Policy (IMF/WB); Social safety net (WB). - Financial sector: - Bank supervision and Financial Stability Framework (IMF); Banking sector soundness and resolution (IMF/WB); PDIC (WB); Contingency Framework (IMF/WB); Capital market development (IMF/WB); International coordination to limit regulatory arbitrage (IMF); Financial Inclusion (IMF/WB). Notes on matrix: - 1/ Issues directly relevant for IMF work; (IMF) means work done in-house, (IMF/WB) implies in-house work in parallel or collaboration with the WB; and no specific reference means input required from other institutions. - 2/ Noncritical, but useful input to IMF analysis. ### Relations with Asian Development Bank (As of June 30, 2016) - Since joining ADB in 1966, the Philippines has received 237 sovereign loans and grants financed by ADB Special Funds for a total of $15,911.12 million including nonsovereign financing amounting to $995.37 million. - Agriculture and natural resources, public sector management, energy, and finance sector account for the largest proportion of ADB lending (combined 60 percent of the total). - As of 30 June 2016, cumulative direct value˗added cofinancing for the Philippines amounted to $1.4 billion and $90.21 million for TA projects. Table 2 — Cumulative Sovereign and Nonsovereign ADB Lending to Philippines (As of June 30, 2016) — selected rows - Energy: No. of Loans 33; Amount of Loans (US$ millions) 2,136.7; Percent (by amount) 12.6 - Public sector management: No. of Loans 13; Amount of Loans (US$ millions) 2,802.0; Percent (by amount) 16.5 - Agriculture and natural resources: No. of Loans 60; Amount of Loans (US$ millions) 3,128.1; Percent (by amount) 18.4 - Transport and ICT: No. of Loans 31; Amount of Loans (US$ millions) 1,584.7; Percent (by amount) 9.3 - Finance: No. of Loans 35; Amount of Loans (US$ millions) 1,993.9; Percent (by amount) 11.7 - Multisector: No. of Loans 8; Amount of Loans (US$ millions) 916.6; Percent (by amount) 5.4 - Water and other municipal infrastructure and services: No. of Loans 29; Amount of Loans (US$ millions) 1,685.6; Percent (by amount) 9.9 - Health and social protection: No. of Loans 7; Amount of Loans (US$ millions) 648.7; Percent (by amount) 3.8 - Education: No. of Loans 11; Amount of Loans (US$ millions) 1,320.5; Percent (by amount) 7.8 - Industry and trade: No. of Loans 12; Amount of Loans (US$ millions) 792.2; Percent (by amount) 4.7 - Total: No. of Loans 239; Amount of Loans (US$ millions) 17,009.9; Percent (by amount) 100.0 ADB private sector operations (selected data) - As of June 30, 2016, cumulative approvals in 30 projects amounted to $1,109 million. - Examples of approvals: - December 2014: $75 million (₱3.375 billion) loan for expansion and renovation of the Mactan Cebu Airport terminal. - 2015: $20 million to support the 150-Megawatt Burgos Wind Farm Project. - 2015: $221.807 million to support the Tiwi and Makban Geothermal Power Green Bonds project. CPS and COBP - Country Partnership Strategy (CPS) 2011−2016 endorsed October 26, 2011. - CPS Final Review completed in June 2016 and sent for validation to Independent Evaluation Department; results will inform CPS 2017−2022. - Country Operations Business Plan (COBP) 2016–2018 approved in December 2015. - Next COBP 2017-2019 expected for ADB Management approval by September 2016. ### Statistical Issues (As of August 2, 2016) I. Assessment of Data Adequacy for Surveillance - 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 working to improve: - (i) accuracy of the 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, funded by the Government of Japan (three-year technical assistance project). - National accounts expected to be revised in the near future based on the recently released 2012 Census of Philippine Business and Industry (CPBI). 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. - 2008 Commodity and Outlet Survey used to augment provincial market baskets. - Adopted COICOP classification for all items. - Assistance will be provided to improve quality of price statistics in Philippines. External sector statistics - BSP completed final-stage implementation of BOP compilation to BPM6 framework in March 2014. - Compilation of IIP data based on BPM6 framework completed in September 2014. - New data sources introduced: Cross Border Transactions Survey and administrative-based reporting systems. - Foreign Currency Deposit Units (FCDUs), which account for about 70−75 percent of foreign exchange settlements, are exempt from reporting requirements because of strict banking secrecy rules. Monetary and financial statistics - Compilation largely conforms to Fund methodology. - Joint effort between Insurance Commission, SEC, GOCs, BSP to gather data and publish the Other Financial Corporation’s Survey is ongoing. Government finance statistics - Provision of fiscal data is broadly adequate for surveillance. - Major areas for improvement: detailed data for levels of the public sector beyond the national government and transition of fiscal data reporting to the GFSM 2001 format. - Fiscal Transparency ROSCs conducted in 2002 and 2004. II. Data Standards and Quality - Philippines subscribed to the Special Data Dissemination Standards (SDDS) in August 1996. - A data ROSC was published in August 2004. ### Philippines: Table of Common Indicators Required for Surveillance (As of July 25, 2016) — selected entries - Exchange rates: Date of Latest Observation 7/25/2016; Date Received 7/25/2016; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D; Memo Items—Data Quality—Methodological Soundness O; Data Quality—Accuracy and Reliability O - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 6/2016; Date Received 7/2016; Frequency M; Memo Items—Methodological Soundness LO; Accuracy and Reliability LO - Reserve/base money: Date of Latest Observation 6/11/2016; Date Received 7/11/2016; Frequency D; Frequency of Reporting W; Frequency of Publication W; Memo Items—Methodological Soundness O, LO, LO, LNO; Accuracy and Reliability LO, O, O, O, LO - Broad money: Date of Latest Observation 5/2016; Date Received 7/2016; Frequency M; Memo Items—Methodological Soundness LO; Accuracy and Reliability LO - Central bank balance sheet: Date of Latest Observation 3/2016; Date Received 7/2016; Frequency M; Memo Items—Methodological Soundness (blank); Accuracy and Reliability (blank) - Consolidated balance sheet of the banking system: Date of Latest Observation 5/2016; Date Received 7/2016; Frequency M; Memo Items (blank) - Interest rates: Date of Latest Observation 6/30/2016; Date Received 6/30/2016; Frequency D; Memo Items—Methodological Soundness O; Accuracy and Reliability O - Consumer price index: Date of Latest Observation 6/2016; Date Received 7/2016; Frequency M; Memo Items—Methodological Soundness O, O, O, O; Accuracy and Reliability O, LO, O, LO, LO - Revenue, expenditure, balance and composition of financing—general government: Date of Latest Observation 2015; Date Received 7/2016; Frequency Q; Memo Items—Methodological Soundness LO, LO, O, O; Accuracy and Reliability LO, LO, LO, LO, LO - Revenue, expenditure, balance and composition of financing—central government: Date of Latest Observation 4/2016; Date Received 7/2016; Frequency M - Stocks of central government and central government-guaranteed debt: Date of Latest Observation 4/2016; Date Received 7/2016; Frequency M; Memo Items—Methodological Soundness LNO; Accuracy and Reliability LNO - External current account balance: Date of Latest Observation 3/2016; Date Received 6/2016; Frequency M; Memo Items—Methodological Soundness O, LO, LO, LO; Accuracy and Reliability LNO, LO, O, LO, LO - Exports and imports of goods and services: Date of Latest Observation 3/2016; Date Received 6/2016; Frequency M - GDP/GNP: Date of Latest Observation Q1:2016; Date Received 6/2016; Frequency Q; Memo Items—Methodological Soundness LO, LO, O, LO; Accuracy and Reliability LNO, LNO, O, LO, O - Gross external debt: Date of Latest Observation Q1:2016; Date Received 6/2016; Frequency Q; Memo Items—Methodological Soundness O; Accuracy and Reliability O - International investment position: Date of Latest Observation Q1:2016; Date Received 6/2016; Frequency Q; Memo Items—Methodological Soundness O; Accuracy and Reliability O Footnotes and frequency codes (as presented) - 1 Any reserve assets that are pledged of otherwise encumbered should be specified separately... - 7 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA). - 8 Reflects the assessment provided in the data ROSC or the Substantive Update (published on August 25, 2004...) — assessment codes: O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed). - 9 Same as footnote 8, except referring to accuracy and reliability dimensions. *Statement by Mr. Marzunisham Omar, Executive Director and Mr. Thomas Benjamin Marcelo, Senior Advisor to the Executive Director — September 14, 2016* *Source: _cr16309 - introduction of the standardized report form (SRF) for other financial corporations (OFCs).* ### 1. The Philippine authorities appreciate the constructive policy dialogue and useful insights ### 1. The Philippine authorities appreciate the constructive policy dialogue and useful insights ### Recent Economic Developments and Outlook - Real GDP growth of 7.0 percent in the second quarter of 2016. - Authorities target a GDP growth of 6.0–7.0 percent in 2016. - Medium-term growth target of 7.0 to 8.0 percent to enable a durable reduction in poverty. - Poverty incidence target: reduction from 26.3 percent in the first semester of 2015 to 17 percent by 2022. - Growth drivers and headwinds: - Supported by continued robust private demand, strong investment, and increased government spending, particularly for infrastructure development. - Agriculture sector contracted due to the lingering effects of El Niño. - External demand remained weak as exports of goods and services continued to slow down, despite the double digit growth of services exports. - Inflation and macro stability: - Inflation environment has remained relatively benign in the context of low global commodity prices and favorable domestic food supply conditions. - Sound and stable banking system and robust external sector dynamics continue to provide solid support to the economy. - Key risks to the outlook (authorities’ view): - (a) divergence in monetary policies in the advanced economies, which may raise near term financial market volatility; - (b) lower oil prices, which may lead oil exporters to cut back on spending and capital expenditures with the impact on remittances; and - (c) weather-related disruptions. - Authorities’ stance: view that the Philippines is well-equipped to deal with these challenges given the country’s strong fundamentals and ample policy space. ### Fiscal Policy - Fiscal stance and targets: - Annual fiscal deficit target increased from 2.0 percent of GDP in 2016 to 3.0 percent of GDP for 2017 until 2022 to allow for higher spending on infrastructure, agriculture and rural development, and social services with due regard to preserving debt sustainability. - Proposed national budget for 2017: PhP3.35 trillion (11.6 percent higher than the budget for 2015) and corresponds to 21 percent of GDP (2016: 19.5 percent of GDP). - Total infrastructure spending for 2017: 5.4 percent of GDP (2016: 5.1 percent of GDP). - Proposed budget allocation for infrastructure spending increased by 13.8 percent to fund transport infrastructure construction and rehabilitation of school buildings, and establishment of flood control systems. - Proposed budget allocation for social spending increased by 20.1 percent to support education and skills development programs, health care, socialized housing and resettlement, as well as the conditional cash transfer program. - Revenue and tax reform objectives: - Department of Finance will propose lowering personal and corporate income taxes and simplifying tax processes. - Revenue erosion from lowering income tax rates would be offset by: broadening the tax base and collection, reviewing fiscal incentives, adjusting the fuel excise tax rates, imposing taxes on unhealthy food items, and eliminating some VAT exemptions. - Authorities aim to increase total revenue effort to about 17 percent of GDP in 2018 (2015: 15.9 percent of GDP) and about 18 percent of GDP by 2022. - Debt dynamics and financing: - Aim to reduce national government’s outstanding debt to 40.9 percent of GDP in 2017 (2016: 42.7 percent of GDP) and place the debt-to-GDP ratio on a downward trajectory in the medium term. - Continue to maintain a bias for domestic borrowings while optimizing available concessional loans from development partners. - Infrastructure strategy and public investment management: - Overall strategy: increase infrastructure spending to 6.0 to 7.0 percent of GDP during the period 2017–2022 to attain higher growth potential in the medium term. - Reforms initiated in investment programming and budgeting: reinstituted a three-year rolling infrastructure program starting 2017, online submission/updating of priority programs and projects, speeding up appraisal and approval for major capital projects while ensuring quality. - Supporting amendments to the procurement law to simplify and streamline the process, delineate delivery responsibilities between national and local projects, and improve absorptive capacity through better planning and project execution. - Revitalized public-private partnership (PPP) program to accelerate rollout of infrastructure projects; open to unsolicited private sector proposals. - Recent fiscal structural reforms and legislative changes: - Passage of laws on tax incentives management and transparency and customs modernization. - Amendment to facilitate acquisition of right-of-way site for national government infrastructure projects. - Support for passage of laws on government streamlining, budget reform, and amendments to the law on build-operate-transfer schemes. ### Monetary Policy - Inflation target and outlook: - Monetary policy will remain focused on achieving the inflation target of 2.0–4.0 percent for 2017–2018. - Latest forecasts indicate average inflation is likely to settle slightly below the 3.0 percent ± 1.0 percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018. - Inflation expectations remain well-anchored within the inflation target band over 2017–2018; risks to future inflation appear broadly balanced. - Monetary operations reforms: - BSP shifted to an interest rate corridor system and implemented key reforms in June 2016 to improve transmission of monetary policy: - (a) modification of the RRP facility into an overnight facility; - (b) introduction of the auction-based term deposit facility; - (c) conversion of standing facilities (repurchase and special deposit account windows) to overnight liquidity facilities. - BSP’s main policy rate will continue to be the overnight RRP rate. - Over time, the interest rate corridor implementation will allow for possible reduction in reserve requirements in line with international norms. - Exchange rate and FX liberalization: - Maintain a market-based exchange rate policy with scope for occasional presence to maintain orderly conditions. - BSP continuing to further liberalize the foreign exchange regulatory framework to keep regulations appropriate for changing needs and greater openness. ### Financial Sector Policy - Banking system and stability: - Financial system remained stable and resilient despite external volatility. - Banking system underpinned by continued increase in assets, lending, and deposits, with capital adequacy ratios comfortably above BSP’s prescribed levels and international norms. - Recent supervisory and regulatory measures: - Amendment of the Philippine Deposit Insurance Corporation charter to enhance liquidation and resolution framework for banks. - Issuance of guidelines on operational risk management. - Adoption of Basel III liquidity coverage ratio requirements. - Launching of new residential real estate price indices to assess real estate and credit market conditions. - Prioritizing amendments to the BSP charter, Deposit Secrecy Law and Anti-Money Laundering Act; supporting passage of the Payments Systems Act and an expanded Islamic banking law. - Financial sector development and inclusion: - Phased lifting of restrictions on establishment of new banks approved. - New guidelines on the creation of the personal management trust for estate planning/asset management of trust entities. - Capital market reforms to provide flexibility in raising foreign capital and encourage more foreign investors. - Amendments approved to rationalize lending rules to regulated parties to support financing of priority investments. - Agricultural value chain financing framework issued to address credit risks in agriculture and fisheries. - Institutionalized National Financial Inclusion Steering Committee by executive order to govern implementation of the National Strategy for Financial Inclusion. - Credit Surety Fund (CSF) Cooperative Act passed to institutionalize CSF program for micro, small and medium enterprises. - Law passed recognizing and regulating non-government organizations engaged in microfinance. ### Structural Reforms - Major objectives: - Make strong economic growth more sustainable and inclusive. - Medium-term growth target of 7.0 to 8.0 percent and poverty reduction to 17 percent by 2022. - Reform priorities: - Strengthening institutions, reducing cost of doing business, easing restrictions on foreign investments, and strengthening agro-industrial linkages. - Review government processes to cut red tape; place a dozen government agencies under single leadership to streamline anti-poverty programs. - Executive order on freedom of information to promote greater transparency in the Executive Branch. - Launched a one-stop shop service for overseas Filipino workers for more accessible frontline services. - Requested Congress to grant the President emergency powers to address traffic and congestion in Metro Manila and other parts of the country. - Support for constitutional amendments to lift restrictive economic provisions to encourage greater foreign investments and to adopt a federal form of government to promote decentralization and regional development. - Recent legislative achievements (2015–2016): - Passage of competition law and amendments to the cabotage law. - New laws on job search assistance, overseas worker welfare administration, and labor dispute settlement. - Laws on Halal products, anti-smuggling of agricultural products, and funding support for agriculture competitiveness. - Education-related laws on entrepreneurship and financial education for youth; college scholarships, grants-in-aid, and low-cost educational loans to poor students. - Laws establishing branches of the Regional Trial Court to speed case resolution. - Law establishing the Department of Information and Communications Technology (DICT). - Law providing funding support to modernize the national weather agency for disaster risk reduction and climate change adaptation. - Ongoing legislative priorities for 2016 and 2017: - (a) law on freedom of information to mandate disclosure of public documents; - (b) law on pension reform for uniformed personnel; - (c) amendments to the bank secrecy law to strengthen efforts to curb tax evasion; - (d) amendments to the law on anti-money laundering to include casino operators and make tax evasion a predicate crime. - Long-term planning: - Developed AmBisyon Natin 2040 as a long-term vision to anchor development planning across administrations. - Groundwork initiated for the Philippine Development Plan 2017-2022 aligned with the new administration’s socio-economic agenda and long-term vision. ### Final Remarks and IMF Engagement - Commitment to continue sound macroeconomic policies and wide-ranging structural reforms to support strong and sustained growth and enable durable reduction in unemployment and poverty. - Appreciation of the Fund’s support through training and technical assistance, particularly in fiscal and monetary policies, public financial management, financial stability, and macroeconomic and financial statistics. - Authorities continue to count on the Fund’s support through policy advice and capacity building tailored to the Philippines’ specific needs and conditions. *Source: Philippine authorities’ statement for the 2016 Article IV Consultation.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16309.pdf_