Press Release No. 16/337

IMF Staff Completes 2016 Article IV Mission to Philippines

July 13, 2016

An International Monetary Fund (IMF) mission led by Chikahisa Sumi visited Davao and Manila from June 28 to July 12. The mission met with the Governor of the Bangko Sentral ng Pilipinas (BSP), the Secretaries of the economic cluster, senior national and local government officials, private sector representatives, and the financial community. At the conclusion of the visit, Mr. Sumi issued the following statement:

“The Philippine economy has performed well, but there is scope to do even better. Real GDP regained strength from a slowdown in mid¬2015 to record a robust 6.9 percent in the first quarter of 2016, in line with our 6 percent (y/y) growth forecast for 2016 as a whole. Both consumption and investment have grown rapidly, while net exports have been held back by weak external demand. Amid strong economic activity, inflation fell below the government’s target band (3±1 percent) in 2015 and the first half of 2016 due to lower food and fuel prices, but is expected to return to within the target range later this year and in 2017 as commodity prices stabilize. The external current account remains in surplus driven by robust remittances and business process outsourcing receipts, while international reserves are stable and comfortable.

The strong macro fundamentals provide a solid foundation to meet the remaining challenges. Notwithstanding strong economic growth and improved governance, there is a need to ensure that the benefits reach the broader population. Infrastructure quality and social indicators are still below those of peers. The unemployment rate has fallen to a decade’s low of 5.3 percent, but significant under-employment and poverty remains.

The continued solid growth in 2016, despite the external headwinds, is due in part to fiscal stimulus and supportive monetary conditions . The national government budget deficit reached 1.4 percent of GDP in 2015, and has been below the 2 percent target over the last few years because of slow budget execution and public financial management weaknesses. Nevertheless, budget execution has improved since mid-2015 reflecting enhanced public finance and procurement management, making the 2 percent deficit target attainable in 2016. Monetary policy remains supportive of growth and the introduction of the interest rate corridor (IRC) system will help improve monetary policy transmission. The current monetary stance is appropriate and should remain vigilant to the impact of additional fiscal stimulus on inflation. The flexible exchange rate regime and strong external position should help cushion the economy from external shocks. The risks to the short-term 2016 outlook are balanced, with upside risks related to a better-than-anticipated execution of the 2016 budget and downside risks emanating from the external environment including Brexit.

President Duterte’s 10-point reform agenda will anchor policy formulation and structural transformation over the medium-term . Given the large infrastructure and social needs and ample fiscal space, we support raising the national government budget deficit to 3 percent of GDP over the medium term, consistent with a broadly stable debt-to-GDP ratio. We would moreover encourage a comprehensive and equitable tax reform package that raises substantial additional revenue to finance higher productive spending that would crowd in private investment. A higher revenue and productive spending scenario of about 3 percent of GDP with the expeditious implementation of the 10-point reform agenda would raise the IMF staff’s baseline growth outlook of about 6-7 percent to a 7-8 percent range over the medium term. This additional effort scenario would make the Philippines one of the fastest growing (if not the fastest) economies in the world and help reduce poverty towards the government’s ambitious target. Key elements of this medium term strategy could include:

• A comprehensive tax reform package that simplifies the personal income tax (PIT) rate structure, indexes tax brackets for inflation, and eliminates the exemptions could be progressive while raising the relatively low revenue ratio through offsetting higher excises on fuel, rationalization of VAT exemptions, and excises on sweetened beverages. The package could also include simplifying and reducing the corporate income tax (CIT) rate structure while at the same time rationalizing tax incentives;
• Enhanced infrastructure investment, including in areas that have not benefited from such investment in the past, should help create jobs and make growth more inclusive.
• Structural reforms such as liberalizing foreign investment and land use will help catalyze the effects of higher government spending; and
• Enhanced competition in the crucial transport, logistics, and telecoms sectors should be achieved through steadfast implementation of the competition law and avoiding regulation that unduly discourages new entrants.

The authorities’ initiatives to strengthen systemic risk monitoring in the financial sector are welcome . The BSP’s micro and macro prudential policies as well as enhanced monitoring of real estate and credit conditions including the introduction of the residential real estate price index (RREPI) have helped maintain financial stability in a challenging global financial environment. We also welcome the regulatory agencies’ concerted efforts to maintain financial stability through the Financial Stability Coordination Council (FSCC), including addressing data and regulatory gaps related to real estate developers and concentration risks posed by conglomerate structures and rising corporate leverage. Capital market development is crucial for growth and infrastructure investment including PPPs while mitigating concentration risks in the banking system. The recent incident involving the unauthorized transfer of US$81 million from Bangladesh’s international reserves to entities in the Philippines highlights the need to tighten anti-money laundering legislation and procedures as well as easing bank secrecy in line with international practice, including making tax evasion a predicate crime.

The mission recommends resubmitting amendments to the BSP charter to support the BSP’s efforts to maintain monetary and financial stability.

The Philippines favorable medium-term outlook is subject to downside risks mainly emanating from the global environment . On the downside, lower growth in China and the region, tighter global financial conditions, and a surge in global financial volatility could lead to capital outflows and tightening of domestic financial conditions. Should risks materialize, the authorities are well equipped to respond, particularly given the Philippines’ strong fundamentals and ample policy space.”

The mission offers its sincere gratitude to the BSP and the Vice Mayor of Davao Paolo Duterte for their kind hospitality.