Public Information Notice: IMF Executive Board Concludes the 2006 Article IV Consultation with the Philippines

February 7, 2007

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.

Public Information Notice (PIN) No. 07/14
February 7, 2007

On January 19, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the 2006 Article IV Consultation with the Philippines based on the information available through that date.1


Impressive fiscal reforms in an environment of sustained growth and declining inflation have strengthened market confidence in the Philippines. A large reduction in the national government deficit was achieved in 2004 and 2005, primarily through expenditure compression. Full implementation of the VAT reform in early 2006 broadened the national government's adjustment effort to the revenue side, and tax administration has proved sufficient to ensure that collections have risen as programmed.

The economy is expected to have expanded by 5.5 percent in 2006, faster than the 5.0 percent previously projected. Private consumption has continued to be the main driver, underpinned by rapid growth in remittances. Inflation has continued to moderate with headline inflation in December falling within the Bangko Sentral ng Pilipinas (BSP) inflation target of 4-5 percent for 2006.

The national government deficit is projected to have shrunk further in 2006 and to be significantly below the target of 2 percent of GDP. With revenue collection broadly on target, the faster-than-expected pace of adjustment stems from the failure of Congress to pass the 2006 Budget; as a result, the 2005 Budget was re-enacted which constrained spending. A similar fall is expected for the non-financial public sector deficit, reflecting consolidation at the national government level, continued improved performance of the social security institutions, and expenditure savings by the National Power Corporation.

Remittances have continued to grow strongly and the balance of payments received additional support in the second half of 2006 from weaker oil prices. There has also been a pick-up in foreign direct investment and a pronounced acceleration in net portfolio inflows. Against this backdrop, the peso has appreciated against the U.S. dollar, even as the BSP has continued to build reserves. The authorities have also used the greater availability of foreign exchange to prepay external debt, including to the IMF, and are shifting towards reduced reliance on external borrowing.

The key challenge for the Philippine authorities going forward is to sustain the reform momentum, which will help maintain the confidence of markets and insure against market volatility. On current policies, growth is expected to increase to 5.8 percent in 2007, but could be higher over the medium term on the back of additional reforms that put public debt on a more sustainable downward path and boost investor confidence and investment. The main downside risks to the outlook are a renewed surge in oil prices, a slowdown in the global economy, and a sudden reversal in global risk appetite.

Executive Board Assessment

Executive Directors commended the Philippine authorities for the substantial further strengthening of macroeconomic performance in 2006. Growth rebounded, inflation slowed markedly, and significant progress with fiscal consolidation boosted market confidence, reflected in higher capital inflows and a buildup in foreign reserves. Given this progress, Directors welcomed the early repayment by the Philippines of its outstanding obligations to the IMF, which triggered the exit from Post-Program Monitoring (PPM) at end-2006.

Directors underscored the need to sustain the reform momentum. Although the economy's resilience has improved, there are still vulnerabilities. Public debt remains sensitive to rollover and exchange rate risks and external commercial borrowing requirements, while declining, are still significant. As recognized by the authorities, a sudden rise in global risk aversion could also affect the Philippines, unless confidence is sustained through further reforms. Continued reforms are also necessary to boost investment and growth and accelerate progress in reducing poverty.

Directors congratulated the authorities on their strong and disciplined fiscal performance, and supported their commitment to sustain consolidation. They welcomed the marked increase in tax collections in 2006 due to the VAT reform, but regretted that the non-passage of the 2006 budget had constrained spending. Directors regarded continued expenditure compression as neither desirable nor sustainable given the country's sizeable social and infrastructure needs. Looking ahead, they considered that balancing the budget, while increasing priority spending, will require accelerating the implementation of tax administration reforms, as well as new tax measures, such as a rationalization of tax incentives. Directors also saw careful monitoring of other ongoing public sector reforms as essential to support fiscal consolidation.

Directors pointed to the recent agreement on a long-term supply contract between the National Power Corporation and the largest power distributor as providing a welcome opportunity to accelerate privatization in the power sector. They saw an efficient energy sector, together with decisive improvements in governance as set forth in the Medium-Term Philippine Development Plan, as key elements of a better business and investment climate.

Directors considered the current policy mix to deal with upward pressure on the exchange rate to be broadly appropriate. Going forward, they urged continued exchange rate flexibility, even though some further reserve accumulation might be justified, given that the exchange rate does not appear to be misaligned and capital inflows could quickly reverse. In addition, Directors supported the authorities' efforts to shift towards domestic financing and to prepay external debt.

Directors welcomed the authorities' success in containing inflation, which had created room for some monetary policy easing, and noted their continued vigilant monitoring of inflationary pressures. In this regard, many Directors cautioned that while tiering was introduced as a targeted and temporary approach to encourage credit growth, its re-introduction created uncertainties about the monetary policy stance and corresponded to a significant effective easing that could render the inflation outlook less favorable. These Directors encouraged the authorities to remove tiering, in particular should the currently benign inflation outlook deteriorate. Some Directors, however, saw tiering as an appropriate instrument to help address the low level of bank lending.

Directors called for further steps to strengthen the banking sector. While encouraging progress has been made in disposing of non-performing assets (NPAs), Directors observed that the stock of repossessed real estate assets remains large and that solving this problem will be key to allowing the banking sector to contribute to the investment recovery. They urged the authorities to tighten regulatory requirements on NPAs further if disposals do not accelerate. Directors welcomed the recent consolidation in the banking sector and efforts by banks to raise new capital, but encouraged the BSP to maintain pressures on banks to raise new capital, while ensuring that any regulatory relief is applied within the new framework. Directors urged the authorities to continue to press for the passage of the long-delayed changes to the BSP Charter to strengthen legal protection for supervisors and increase their leverage over problem-banks as necessary conditions for a fully effective regulatory framework.

Directors commended the authorities for promoting the development of domestic capital markets through their public debt management. They observed that legislative initiatives, including bills to create credit information bureaus and promote retirement saving vehicles, would usefully complement this effort.

Philippines: Selected Economic Indicators, 2002-2007

  2002 2003 2004 2005 2006   2007
Staff proj. 1/

Growth and prices (in percent change)


GDP growth

4.4 4.9 6.2 5.0 5.5   5.8

CPI inflation (average)

3.0 3.5 6.0 7.6 6.2   4.0

Public finances (in percent of GDP)


National government balance (authorities' definition)

-5.3 -4.6 -3.8 -2.7 -1.5   -1.0

National government balance 2/

-5.6 -4.9 -4.2 -3.0 -1.9   -1.3

Nonfinancial public sector balance 3/

-5.7 -5.6 -5.0 -2.1 -0.9   -0.7

Revenue and grants 4/

20.9 20.9 20.5 22.1 23.2   23.2

Expenditure 5/

26.6 26.4 25.5 24.2 24.1   23.9

Money and credit (in percent change)


Broad money (M3) 6/

9.5 3.3 9.2 9.0 14.3



Interest rate (91-day Treasury bill, secondary market, end period, in percent)

5.9 6.5 8.4 6.4 5.1



Credit to the private sector (net)

1.2 1.8 4.6 -1.5 -2.2



Balance of payments (in percent of GDP)


Trade balance

-7.2 -7.3 -6.6 -7.9 -7.7   -7.6

Current account balance

-0.4 0.4 1.9 2.0 2.9   2.1

Gross international reserves


In billions of U.S. dollars

16.4 17.1 16.2 18.5 23.0



Adjusted, in billions of U.S. dollars 9/

14.5 14.9 15.2 18.0 23.0



Adjusted, in percent of short-term liabilities 10/

126.1 124.2 125.8 120.1 166.8   ...

Sources: The Philippine authorities; IMF staff estimates and projections.

1/ Projections as of January 5, 2007; based on currently identified measures.

2/ IMF definition. Excludes privatization receipts of the national government, and includes net deficit from restructuring the central bank.

3/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.

4/ The sum of all nonfinancial public sector revenue net of intra-public sector payments. It is assumed that 80 percent of Bureau of Treasury revenue represents interest and dividends from other parts of the nonfinancial public sector. Privatization receipts are excluded.

5/ Defined as difference between nonfinancial public sector revenue and balance.

6/ Based on the regular monetary survey data.

7/ As of September 2006.

8/ Actual.

9/ In addition to monitoring the level of gross international reserves (GIR), the IMF also monitors Adjusted Reserves, which are calculated by subtracting from GIR the value of the BSP's foreign assets that have been pledged as collateral for short-term liabilities. These pledged assets (gold and other securities) remain foreign reserve assets of the BSP and so are considered part of GIR. However, they are not as readily usable as other components of GIR since pledged assets must be set aside while the short-term liabilities they secure remain outstanding.

10/ Short-term liabilities include medium- and long-term debt due in the following year, and exclude loans backed by gold and securities pledged as collateral.

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.


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