IMF Survey: Confidence High as Philippines Emerges from Downturn

March 1, 2011

  • After reaching 34-year high, economic growth of 5 percent expected in medium term
  • Recovery helped by supportive macroeconomic policies and strong private demand
  • Stronger growth will hinge on managing exit from stimulus policies, structural reforms

After slowing sharply in 2009, the Philippine economy recovered strongly last year from the global downturn and is poised to post GDP growth of 5 percent for 2011 and the medium term, according to the IMF.

Confidence High as Philippines Emerges from Downturn

A young graduate in the Philippines. Upping the tax effort will enable increased social spending, including on education (photo: Dennis Sabangan/Corbis)


In their annual report on the Philippine economy—known as the Article IV consultation—IMF economists say the Philippine economy is poised at a key moment. The recovery from the global downturn and positive sentiment in the country provide a window of opportunity for moving ahead decisively with reforms to raise inclusive growth, the report says.

Building on recovery

The Philippine economy posted 7.3 percent growth—the highest in 34 years—in 2010. Inflation has remained moderate, averaging 3.8 percent for the year, while burgeoning external inflows have contributed to a sizable balance of payments surplus.

“In 2010, the Philippines recovered from the global financial crisis, helped by supportive macroeconomic policies and strong private demand,” said IMF’s mission chief for the Philippines, Vivek Arora. “The growth outlook in 2011 and the medium term is now more in line with the Philippines’ neighbors. The biggest challenge ahead for the Philippines will be to consolidate that recovery and set the stage for faster and more inclusive growth.”

In their assessment, the report’s authors backed the authorities’ response to the downturn.  Stimulus policies have bolstered confidence and fostered the recovery. With the recovery now under way, the central bank—Bangko Sentral ng Pilipinas (BSP)—appropriately started to unwind its liquidity support measures from early 2010. The government has also announced a fiscal consolidation plan for the medium term, starting in 2011.

Managing the exit

“Preserving macroeconomic stability and enhancing medium-term growth prospects will require carefully managing the exit from stimulus policies in a challenging external environment while moving ahead with long-awaited structural reforms to enhance investment, jobs, and productivity,” the report notes.

While inflation has remained moderate, pressures could build during this year, the report suggests. Going forward, BSP will need to stay ready to respond to price pressures, in order to head off liquidity and inflation risks.

External inflow pressures are complicating the task of normalizing the country’s monetary and fiscal policies. The IMF economists support the BSP’s policy of allowing the exchange rate to adjust to market pressures and limiting exchange market intervention to smoothing operations. But with the peso exchange rate close to its equilibrium level and reserves at comfortable levels, greater exchange rate flexibility should be considered, the report says.

“Exchange rate appreciation also offers an important buffer that would help to tighten monetary conditions in a way that lessens speculative inflow pressures,” the IMF economists say.

Strengthening public finances

The report welcomed the authorities’ intention to reduce the national government deficit to 2 percent by 2013, which would further improve investor confidence and boost the government’s ability to respond to shocks.

“In order to achieve fiscal consolidation and scale up social spending and public investment, it will be essential to raise the tax effort further,” the report said. Actions such as reforming excise taxes, rationalizing fiscal incentives, and addressing distortions in value added tax will be important for supporting the Philippines’ plans to increase much-needed spending on health, education, and infrastructure, it points out.

Meanwhile, the Philippine financial sector withstood the global crisis well, and asset bubbles have not been a concern so far. Nonperforming loan ratios have remained low and banks’ capital adequacy ratios and profitability have improved. Moving ahead, the report says, it is critical to further strengthen the banking supervisory and regulatory framework.

Faster and more inclusive growth

Stock market prices have risen sharply since early 2010 and the Philippine stock market was among the strongest performing in Asia. “Further financial market development could be helpful for channeling the external inflows toward productive investment, such as infrastructure,” the report suggests. 

IMF economists see low investment as a long-standing constraint to higher growth in the country. In addition, unemployment and underemployment remain high, particularly among younger people.

Raising government revenue will help provide needed fiscal space, the report concludes. “Ultimately, however, the more sustainable expansion in investment will have to come from private investment, which would be facilitated by improvements in the business climate, infrastructure, and power supply as well as deeper capital markets.”

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