IMF Executive Board Concludes 2022 Article IV Consultation with the Philippines
IMF News, November 28, 2022
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- Published: November 28, 2022
Economic performance and outlook
- 2021 growth rebounded by 5.7 percent after a sharp contraction in 2020.
- Growth accelerated to 7.8 percent in the first half of 2022, driven by strong domestic demand and private investment.
- Real GDP is expected to slow from 6.5 percent in 2022 to 5 percent in 2023.
- Medium-term economic growth is forecast at about 6.3 percent.
- The current account swung from a surplus to a deficit in 2021 and widened in the first half of 2022 amid higher commodity prices and demand recovery.
- The economic outlook faces significant downside risks from unsettled conditions in major advanced economies; policy tradeoffs between supporting output and reducing inflation/safeguarding the external position would become more acute under adverse scenarios.
Inflation and monetary policy
- Headline inflation increased in 2022 to 6.9 percent (year-on-year) in September; core inflation rose to 5.0 percent (year-on-year) in September.
- The government’s inflation target range is 2-4 percent; inflation surpassed the upper band.
- Inflation is expected to rise to 5.3 percent in 2022, then decline modestly in 2023 and converge to the mid‑point of the band in 2024 as tighter monetary policy anchors expectations.
- Executive Directors note the BSP’s prompt action to fight inflation is welcome; further monetary tightening may be needed to keep inflation expectations well anchored.
- Current policy stance described as accommodative; BSP should aim at bringing the policy rate close to the neutral real rate.
- If inflation pressures persist, BSP should respond with tighter policy; if inflation proves less persistent or significant downside risks materialize, tightening should be recalibrated.
- Clear communication about inflation and the BSP’s policy intentions is recommended to reduce uncertainty and improve policy transmission.
External sector and exchange rate policy
- The current account deficit is expected to increase to 5 percent of GDP in 2022 and decline to about 1.7 percent of GDP over the medium term.
- Amid US dollar strength, high commodity prices, and tightening global financial conditions, the external position has weakened.
- Exchange rate flexibility remains important as a shock absorber given a persistent terms of trade shock and a wider current account deficit.
- Under disruptive market conditions and tightening FX liquidity, the use of FXI can mitigate a sharp and disorderly exchange rate depreciation, alleviate inflation, and reduce pressure on monetary policy.
Financial stability and banking sector
- Banking system showed resilience during the pandemic, emerging with sufficient liquidity and capital buffers.
- Credit growth has picked up; the banking system is resilient but faces elevated risks.
- Higher downside risks to growth and rising interest rates warrant close monitoring of financial stability risks.
- Pandemic increased risks in NFCs; rising interest rates could renew challenges for NFCs, amplified through “mixed” conglomerate structures and in sectors with relatively high debt burden.
- Recommendations:
- Strengthen BSP’s capacity to conduct financial stability risk assessments.
- Strengthen the bank resolution framework.
- Allow regulatory forbearance measures to lapse as scheduled.
Anti‑money laundering / Countering financing of terrorism (AML/CFT)
- Enhanced AML/CFT effectiveness is critical for exiting the FATF list.
- Key items under the Philippines AML/CFT Action Plan include risk‑based AML/CFT supervision of high‑risk sectors and access to beneficial ownership information by competent authorities.
- Prioritize amendments to the bank secrecy law to enhance BSP supervisory powers, strengthen AML/CFT effectiveness, and reduce vulnerabilities to corruption.
Fiscal policy and public finances
- Near‑term fiscal stance is appropriate; medium‑term fiscal consolidation should be underpinned by stronger revenue mobilization and cost‑effective spending.
- An accelerated pace of consolidation in the medium‑term would signal intent to put debt on a firmly downward trajectory.
- Ample scope to enhance revenue mobilization to support faster medium‑term consolidation while securing resources for social and development plans.
- Augment medium‑term fiscal program with explicit fiscal anchors and a medium‑term revenue strategy to support fiscal credibility and debt sustainability.
- Coordinated use of fiscal, monetary, and exchange rate policies recommended to manage policy tradeoffs under downside risks.
- If growth falls below the baseline, fiscal policy can slow the pace of consolidation at the cost of higher inflation, interest rates, and a higher debt burden over the medium‑term.
Structural reforms, development, and climate
- Priority reforms to raise productivity, boost competitiveness, and enhance social development: address infrastructure and education gaps exacerbated by the pandemic.
- Recently passed legislation to attract FDI is welcome; effective implementation is key.
- Ratification of the Regional Comprehensive Economic Partnership (RCEP) Agreement would facilitate access to imports and stimulate export diversification.
- Enhance food security and agricultural performance by raising productivity and promoting new investments.
- Advance digitalization to support growth, social objectives, and governance.
- Climate strategy recommendations:
- Integrated approach including a carbon pricing scheme, innovative private sector financing, and support from development partners.
- Introduce carbon pricing and develop policies to address distributional implications.
- Accelerate measures to incentivize green financing.
- Additional financial support from development partners and the private sector is essential to attract foreign investors, increase renewables, and develop climate‑resilient infrastructure.
Key statistics (selected from Table 1)
- Real GDP: 2019 = 6.1; 2020 = -9.5; 2021 = 5.7; 2022 = 6.5 (Proj.); 2023 = 5.0 (Proj.); 2024 = 6.0 (Proj.).
- Growth components: Consumption 2019 = 6.3; 2020 = -5.3; 2021 = 4.7; 2022 = 7.4. Private consumption 2019 = 5.9; 2020 = -8.0; 2021 = 4.2; 2022 = 7.5; 2023 = 6.2. Public consumption 2019 = 9.1; 2020 = 10.5; 2021 = 7.1; 2022 = 6.7; 2023 = 7.8.
- Gross fixed capital formation: 2019 = 3.9; 2020 = -27.3; 2021 = 9.9; 2022 = 17.2; 2023 = 10.3; 2024 = (not shown).
- Net exports (contribution to growth): 2019 = -0.2; 2020 = 4.0; 2021 = -2.4; 2022 = -4.6; 2023 = -3.2; 2024 = -2.5.
- Output gap (percent, +=above potential): 2019 = -0.1; 2020 = -8.5; 2021 = 0.0.
- Unemployment rate (percent of labor force): 2019 = 10.4; 2020 = (not shown); 2021 = 5.4.
- Underemployment rate (percent of employed persons): 2019 = 13.8; 2020 = 16.2; 2021 = 15.9; 2022 = 14.3.
- Employment: 2019 = 1.9; 2020 = -6.1; 2021 = 11.7; 2022 = 4.9; 2023 = 2.4; 2024 = 1.6.
- Consumer prices (period average): 2019 = 5.3; 2020 = 3.1; 2021 = (not shown). Consumer prices (end of period): 2019 = 3.3; 2020 = 5.8; 2021 = 3.0.
- Core consumer prices (period average): 2019 = 3.4.
- 3-month PHIREF rate (benchmark rate for the peso floating leg of a 3-month interest rate swap) 2019 = 1.3; 2020 = 1.5.
- Claims on private sector (in percent of GDP): 2019 = 48.0; 2020 = 52.0; 2021 = 49.9; 2022 = 51.1; 2023 = 52.4.
- Broad money: 2019 = 9.8; 2020 = 8.7; 2021 = 8.0; 2022 = 11.0; 2023 = 9.7.
- National government overall balance (in percent of GDP, IMF definition): 2019 = -3.4; 2020 = -7.6; 2021 = -8.6; 2022 = -5.2.
- Revenue and grants (in percent of GDP): 2019 = 16.1; 2020 = 15.5; 2021 = 15.2; 2022 = 15.4; 2023 = 15.8.
- Total expenditure and net lending (in percent of GDP): 2019 = 19.5; 2020 = 23.5; 2021 = 24.1; 2022 = 22.8; 2023 = 21.6; 2024 = 20.9.
- General government gross debt (in percent of GDP): 2019 = 37.0; 2020 = 51.6; 2021 = 57.0; 2022 = 59.2; 2023 = 60.9; 2024 = 60.8.
- Current account balance (in percent of GDP): 2019 = -0.8; 2020 = 3.2; 2021 = -1.5; 2022 = -5.0; 2023 = -4.1; 2024 = -3.6.
- Total external debt (in percent of GDP): 2019 = 22.2; 2020 = 27.2; 2021 = 27.0; 2022 = 26.6; 2023 = 26.4; 2024 = 25.8.
- Gross reserves (US$ billions): 2019 = 87.8; 2020 = 110.1; 2021 = 108.8; 2022 = 94.1; 2023 = 88.7; 2024 = 83.9.
- Gross reserves (percent of short-term debt, remaining maturity): 2019 = 396.5; 2020 = 524.6; 2021 = 522.8; 2022 = 446.0; 2023 = 402.1; 2024 = 361.8.
- Nominal GDP (US$ billions): 2019 = 376.8; 2020 = 394.1; 2021 = 402.2; 2022 = 426.2; 2023 = 459.9; 2024 = (not shown).
- Nominal GDP per capita (US$): 2019 = 3,512; 2020 = 3,326; 2021 = 3,576; 2022 = 3,602; 2023 = 3,769; 2024 = 4,015.
- GDP (in billions of pesos): 2019 = 19,518; 2020 = 17,952; 2021 = 19,411; 2022 = 21,690; 2023 = 23,597; 2024 = 25,798.
- Real effective exchange rate (2010=100): 2019 = 105.4; 2020 = 111.2; 2021 = 111.1.
- Peso per U.S. dollar (period average): 2019 = 51.8; 2020 = 49.6; 2021 = 49.3; 2022 = (not shown).
Press Release No. 22/409 — IMF Executive Board Concludes 2022 Article IV Consultation with the Philippines