Press Release No. 17/321

IMF Staff Completes 2017 Article IV Mission to Philippines

August 8, 2017

• The economic performance of the Philippines continues to be very strong, featuring robust growth combined with low inflation.
• Growth is projected to remain close to potential at 6.6 percent in 2017 and 6.8 percent in the medium term.
• IMF staff team supports the authorities’ plans to raise infrastructure and social spending while avoiding overheating and preserving investor confidence.

An International Monetary Fund (IMF) staff team led by Luis E. Breuer visited Manila from July 26−August 9th 2017. At the conclusion of the visit, Mr. Breuer issued the following statement:

“The economic performance of the Philippines continues to be very strong, featuring robust growth combined with low inflation. Growth reached 6.9 percent in 2016, led by strong domestic demand that more than offset the drag from net exports, and the unemployment rate fell from 6.3 percent in 2015 to 5.5 percent in 2016. Consumption, and particularly investment, grew rapidly. Growth slowed to 6.4 percent in the first quarter of 2017, but this was partly due to a temporary deceleration in public spending and strong base effects following the election last year. Headline inflation has moved to within the target band since September 2016, as commodity prices have recovered. The current account surplus fell to near zero in 2016, due to a rise in imports of capital goods for investment and slower growth of exports and remittances. Capital outflows also slowed, and foreign reserves remained stable at a robust level of US$81 billion or 8.7 months of projected imports of goods and services. The real exchange rate has remained broadly stable over the last few years.

“The medium-term macroeconomic outlook remains favorable. Growth is projected to remain close to potential at 6.6 percent in 2017 and 6.8 percent in the medium term, supported by robust domestic demand and recovery in exports. Inflation is projected at the center of the target band in 2017-18 reflecting stable commodity prices and a near zero output gap. The current account balance is projected to turn negative from 2017 and gradually widen due to higher imports driven by investment, but the external sector remains strong and international reserves ample.

“Risks are tilted to the downside and stem mainly from external sources. External risks include spillovers from lower growth in China, U.S. monetary policy tightening, and rising concerns about globalization in some advance economies. The combination of rapid credit growth, buoyant private investment, and fiscal expansion could lead to overheating. Other domestic risks include natural disasters and security-related events in some parts of the country. On the upside, the approval of the first tax reform package could lead to higher infrastructure investment which raises potential growth. The flexible exchange rate regime and strong fundamentals should help continue to cushion the economy from external shocks.

“The team supports the authorities’ plans to raise infrastructure and social spending– to expand the productive capacity of the economy–while anchoring fiscal policy at the deficit cap of 3 percent of GDP over the medium term. The fiscal stance was expansionary in 2016, with the national government overall balance widening to 2.4 percent of GDP. The fiscal stance is expected to remain expansionary in 2017 consistent with the authorities’ commitment to higher infrastructure and social spending, resulting in a fiscal deficit of about 3 percent of GDP. The team welcomes the 2018 national government budget submitted to Congress, which implies a return to a broadly neutral fiscal stance and is consistent with the medium-term fiscal framework which targets an overall deficit of 3 percent of GDP and a declining debt ratio. Passing the first package of the comprehensive tax reform proposal is critical to sustain the rise in expenditures while maintaining the strong investor confidence and low borrowing costs. Passage of the budget reform and rightsizing bill will also help further improve spending efficiency and quality, helping to achieve the inclusive growth agenda.

“The current monetary stance remains appropriate, and the BSP should continue to stand ready to adjust to changing market conditions or if inflation pressures build. Monetary policy remains supportive of growth and low inflation while the introduction of the interest rate corridor (IRC) system has improved monetary transmission. As part of the transition towards more market-oriented monetary policy implementation, the planned gradual unwinding of the high reserve requirements on banks should be carefully calibrated and timed over the medium term.

“Financial sector indicators suggest that the banking sector is sound, while credit growth has accelerated. Strengthened micro-prudential supervision including the early introduction of Basel III and allowing the additional single borrower limit on PPPs to lapse is to be commended. Nevertheless, macroprudential policies should address systemic risks to financial stability such as rising leverage in some parts of the corporate sector, and build on the results of the real estate stress tests and enhanced monitoring of exposures.

“There is a critical need to approve the amendment of the BSP law to strengthen the financial stability framework and enhance the monetary transmission. In the interim, enhanced coordination and surveillance among the financial sector regulatory bodies should continue to be strengthened particularly to fill in data gaps. In addition, amending the bank secrecy law and anti-money laundering framework to be more in line with international standards would be important to maintain financial integrity and confidence. The anti-money laundering law has been amended to expand the coverage to include casinos.”

“Structural reforms will be essential to sustaining rapid inclusive growth to significantly lower poverty and maximize the demographic dividend. The authorities are appropriately focusing on investment in infrastructure and human capital, sound urban development and addressing regional disparities, and access to finance including capital market development. Regulatory reforms to reduce the costs of doing business should promote competition and openness to foreign investment, including revision of the foreign investment negative list and in public services. Structural reforms such as eliminating quantitative restrictions in rice imports while supporting affected farmers, would help reduce consumer prices and poverty.”

The team met with the Governor of the Bangko Sentral ng Pilipinas (BSP), the Secretaries of the economic cluster, senior government and local government officials, private sector representatives, and the financial community. The team offers its sincere gratitude to the authorities for their hospitality.