Public Information Notice: IMF Concludes Article IV Consultation with the Philippines

March 13, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 1, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines.1


The period after the last Article IV Consultation in mid-1999 was marked by mixed economic performance. On the positive side, growth firmed in 2000 to just under 4 percent; average inflation was low; and export growth sustained a sizable current account surplus. Progress was also made on some key structural reforms. However, the positive results were undermined by a decline in investor sentiment because of the government's failure to meet budget targets, governance problems, and concerns about security. In October 2000, a political crisis arising from allegations of corruption made against President Estrada further damaged investor confidence, triggering intensified downward pressure on the peso, a 400 basis point hike in policy interest rates, and a significant slowdown of growth.

The economic outlook for 2001 has improved following the peaceful transition of power to President Macapagal-Arroyo in January 2001. Financial markets have calmed, the BSP has lowered policy interest rates to the levels prevailing prior to the recent turmoil, and recent surveys indicate a rebound of business and consumer confidence. As a result, activity is expected to pick up again, although the strength of the rebound is difficult to gauge at this stage. IMF staff project a central scenario with GDP growth of about 3 l/3 percent for 2001; the authorities expect slightly higher growth of 3¾ - 4 l/3 percent, assuming a quicker response of activity to the recovery in confidence. The outlook, however, will depend importantly on progress with fiscal consolidation, the strength of external demand, and the path of world oil prices.

Inflation fell to 3-4 percent (y/y) in the first half of 2000 (partly because of the impact of a good harvest on food prices), but it has since risen (to 6.7 percent in February 2001) due to higher world oil prices, peso depreciation, and rising food prices. It is projected to rise further to about 8 percent by Q2-2001 (reflecting the lagged impact of peso depreciation and higher minimum wages), and then to decline to 5-6 percent by end-2001.

The fiscal deficit widened in 2000. The National Government (NG) budget deficit reached 4.5 percent of GNP (IMF definition), against the target of 2.9 percent, mainly because of a shortfall in revenue. While part of the continued revenue slippage was due to the concentration of growth in the lightly taxed electronics sector, failure to implement planned tax measures and governance problems in the Bureau of Internal Revenue (despite some progress on tax administration reform in 2000) are also responsible. Spending exceeded the target by 0.4 percent of GNP because of higher interest payments and non-interest spending overruns.

The external current account continues to be in surplus and the outlook remains favorable, though capital outflows increased in 2000. Strong demand for electronics boosted export growth early in the year, although growth moderated later in the second half. Imports picked up modestly in late 2000 (due largely to higher oil prices) but the measured current account surplus remained high at about 10 percent of GNP in 2000. The true surplus is likely lower, reflecting statistical problems, which the authorities are addressing. While medium-term loans and direct investment flows were positive in 2000, portfolio and other capital outflows increased sharply. Looking ahead, export growth is expected to moderate given the softening of world demand for electronics, but imports are projected to remain sluggish until investment recovers. As a result, the current account is expected to remain in surplus in 2001.

The Philippine banking system has weathered the Asian crisis relatively well, and the capital position of most banks is reasonably strong. The ratio of nonperforming loans (NPLs) to total loans increased to 15.1 percent by end-2000 (partly reflecting tighter loan classification rules), and the lagged effect of the recent financial market turmoil may put some further moderate upward pressure on NPLs. However, commercial banks' average capital adequacy ratio remains above the statutory norm (10 percent).

Structural reforms regained momentum in early 2000. A General Banking Law, Securities Regulation Code, and a Retail Trade Liberalization Act were enacted. However, power sector reform and a revised BSP Act are still awaiting legislative action, and only partial progress was made in rehabilitating the Philippine National Bank and in strengthening tax administration. The authorities have expressed their intention to push forward with these reforms with renewed vigor in the coming months.

Executive Board Assessment

Directors agreed that the restoration of fiscal discipline should be the cornerstone of the government's economic strategy, and therefore welcomed the authorities' commitment to medium-term fiscal sustainability. While recognizing the constraints on this year's budget, Directors urged an early adoption of a comprehensive and well-designed medium-term fiscal program, to strengthen credibility and start reversing the fiscal deterioration of recent years. Such a program is considered essential to deal with the rising level of public debt before it becomes a serious burden on the economy. While a number of Directors encouraged the authorities to already aim for significant deficit reduction starting in the second half of this year, Directors also noted the importance of setting deficit reduction targets that can realistically be met.

Noting the sharp decline in the tax effort in recent years, Directors agreed that a coherent package of legislative measures to strengthen revenues should soon be submitted to the new Congress. In this connection, they underscored the importance of rationalizing and reducing tax incentives and exemptions. Directors welcomed the plan to comprehensively revamp the tax administration, in the context of a broad-based effort to stamp out corruption and poor governance. Given limitations on implementation capacity, they welcomed the authorities' request for technical assistance from the Fund in support of their tax reform plans. On expenditure management, Directors stressed the need for clearly identified cuts in low-priority spending, in order to make room for growth and poverty-reducing investments. The authorities' commitment to participate in a fiscal transparency module of the Report on the Observance of Standards and Codes later this year was welcomed.

Directors supported the current stance of monetary policy and the intention of the Bangko Sentral ng Pilipinas (BSP) to formally adopt inflation targeting in mid-2001, although some Directors found this timetable ambitious. To achieve the targeted decline of inflation in the second half of the year, Directors advised that the BSP keep the inflation outlook under close review and adjust policy interest rates if necessary. They added that successful inflation targeting would also require support from fiscal consolidation, an independent central bank, and continued exchange rate flexibility. Directors commended the authorities' reaffirmation of support for the independence of the BSP, and noted that the limited use of escape clauses from the inflation target will also be important to the credibility of the monetary framework.

Directors endorsed the authorities' exchange rate policy of floating the peso, while accumulating reserves, if conditions allow, and agreed that the BSP's management of the recent financial turmoil had been judicious. While tighter reporting and compliance rules for capital account transactions should improve monitoring and help close regulatory loopholes, some Directors cautioned that these measures should not signal the start of a tighter regime of controls. In this regard, they took note of the authorities' announcement that these measures were part of their efforts at transparency and combating money laundering. Directors welcomed the recent decision of the BSP henceforth to publish official reserves data fully in line with the Fund's Special Data Dissemination Standard.

Directors noted that, while the banking sector remains relatively healthy, the Philippine National Bank (PNB) continues to be a concern, and the recent problems of another large bank point to the vulnerabilities that arise even for reportedly strong institutions in an environment of weak governance, excessive bank secrecy, and inadequate provisions against money laundering. They underscored the importance of giving bank supervisors the necessary tools, authority, and protection to perform their duties, including the ability to look into bank deposits, and encouraged the authorities to put in place appropriate instruments to resolve failed banks. Recent steps to combat money laundering, including the regulations issued by the BSP and the creation of an inter-agency task force to formulate and fast-track the implementation of enforcement measures, are seen as positive first steps. Following the passage of the new General Banking Law last year, Directors urged speedy completion of the legislative agenda in this area, including amendments to the BSP Act, a new Philippine Deposit Insurance Corporation charter, and comprehensive anti-money laundering legislation. While welcoming the progress made last year in recapitalizing the PNB, Directors urged an early adoption of a comprehensive and transparent recovery plan, with any further public assistance carefully circumscribed. Directors also welcomed the possibility of a modular Financial Sector Assessment Program to be undertaken in the near future.

Directors were encouraged by the authorities' commitment to push forward with other key structural reforms. In particular, they saw early passage of appropriate power sector reform legislation as crucial to the future of the energy sector, fiscal sustainability, and investor confidence more generally. Directors urged the authorities to press ahead with further trade and tariff liberalization, corporate sector reforms, and measures to improve the functioning of the labor market. They stressed that the sustained implementation of these reforms, combined with sound macroeconomic policies, is key to a lasting reduction of the Philippines' high unemployment rate.

Directors noted that weaknesses in the national accounts and balance of payments statistics had come to hamper economic analysis. Directors recognized the authorities' efforts made already to resolve these problems, and welcomed their commitment to address the weaknesses in the data as soon as possible.

Directors looked forward to a continued close policy dialogue with the Philippines under Post-Program Monitoring.

Philippines: Selected Economic Indicators

  1997 1998 1999 2000

Growth and prices (in percent change)        
GNP growth 5.3 0.4 3.7 4.2
GDP growth 5.2 -0.6 3.3 3.9
CPI inflation (average) 5.9 9.7 6.6 4.3
CPI inflation (end period) 7.3 10.3 4.2 6.6
Public finances (in percent of GNP)        
National government balance 1/ -0.7 -2.6 -4.1 -4.4
Total revenues 19.1 16.7 15.4 14.5
Total expenditures and net lending 19.9 19.3 19.6 18.9
Underlying consolidated public sector balance 1/ -1.4 -3.1 -3.3 -4.6
Money and credit (in percent change)        
Broad money 20.9 7.4 19.3 5.0
Bank credit to private sector 28.7 -3.0 -1.2 8.2
Interest rate (91-day Treasury bill, end period, in percent) 18.0 13.4 8.9 12.9
Balance of payments (in percent of GNP)        
Trade balance -13.0 0.0 5.3 7.5
Current account balance -5.1 2.2 9.0 10.2
Gross official reserves        
Adjusted, in months of imports 2/ 3/ 2.1 2.8 3.9 3.7
Adjusted, in percent of short-term liabilities 4/ 51.1 64.9 110.6 99.5

Sources: The Philippine authorities; IMF staff estimates.

1/ IMF definition. Excludes privatization receipts of the National Government, and includes net deficit from restructuring the central bank.
2/ Adjusted for gold and securities pledged as collateral against short-term liabilities.
3/ In months of imports of following year's goods and services.    
4/ Short-term liabilities include medium- and long-term debt due in the following year.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the March 1, 2001 Executive Board discussion based on the staff report.


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