Press Release No. 23/148

IMF Staff Concludes Visit to the Philippines

May 12, 2023

• The Philippine economy achieved one of the highest growth rates in emerging economies in 2022. GDP growth is set to moderate to 6 percent in 2023 in a challenging external environment.
• The Bangko Sentral ng Pilipinas (BSP) has hiked the policy rate to 6.25 percent, helping anchor inflation expectations. Still, elevated core inflation calls for tighter for longer.
• Fiscal consolidation is underway, supporting monetary policy and contributing to debt sustainability. Medium term fiscal consolidation efforts should be pursued while enhancing targeted social spending, promoting infrastructure investment, and facilitating climate transition objectives.
• Global banking turmoil has had a limited impact on the Philippines, but tightening conditions warrant close monitoring of the financial system.

Washington, DC: An International Monetary Fund team led by Mr. Shanaka Jay Peiris held meetings in Manila during May 8-12, 2023, to discuss recent economic and financial developments and the outlook for the Philippine economy. At the end of the visit, Mr. Peiris issued the following statement:

“The Philippine economy has achieved one of the strongest recoveries in emerging markets following the pandemic-related deep economic downturn. GDP growth in 2022 recorded 7.6 percent mainly reflecting pent-up domestic demand, and Q1 2023 growth at 6.4 percent was in line with the full-year forecast of 6 percent. The main downside risks to the outlook continue to be persistently high core inflation, depreciation pressures amid tighter global conditions, geoeconomic fragmentation, and balance sheet impacts related to higher borrowing costs. On the other hand, larger positive spillovers from China’s reopening and a stronger than expected recovery in investment could contribute to higher growth than currently envisaged.

“The BSP has hiked the policy rate by a cumulative 425 basis points to 6.25 percent, more than other emerging market Asian central banks. After peaking in January 2023, headline inflation has gradually slowed in recent months, but core inflation has remained elevated, calling for tighter-for-longer rates. Timely imports of cheaper food items and buffer stock releases as envisaged by the Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO) are expected to reduce still high food prices. The regional tripartite wage setting system has served the country well and should continue to link wage increases to productivity gains. Risks to inflation remain on the upside, and a continued tightening bias may be appropriate until inflation falls decisively within the 2-4 percent target range. The current account deficit is expected to narrow to 2.5 percent of GDP in 2023 from 4.4 percent in 2022 mainly due to declining commodity prices.

“Fiscal consolidation is underway and complements monetary policy in the tightening of the overall macroeconomic policy stance. The 2023 budget targets a fiscal consolidation through overall spending discipline, while focusing on education, infrastructure, food security, healthcare, and clean energy. The authorities’ Medium-Term Fiscal Framework (MTFF) sets a clear fiscal anchor to maintain debt sustainability. Continued efforts to enhance revenue mobilization through tax policy and tax administration should underpin medium-term fiscal consolidation, while securing resources for development plans. The proposed Military and Uniformed Personnel pension reform will be important to create fiscal space for economic and social priorities.

“The banking system has sufficient liquidity and capital buffers, and spillovers from the global banking turmoil have been limited. However, amid tighter financial conditions, the corporate sector will warrant close monitoring. Financial regulators should strengthen the resolution framework for financial institutions and the insolvency regime for corporates. With credit growth projected to remain healthy, regulatory forbearance measures should be allowed to lapse as scheduled. Enhanced Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) effectiveness and completion of the Philippines’ Action Plan with the Financial Action task Force (FATF) are critical to improve the business environment and encourage foreign direct investment.

“Scarring from the pandemic and downward revisions to global growth projections emphasize the importance of structural reforms to raise productivity by reducing infrastructure and education gaps, deepening financial markets, and harnessing the digital economy. The recent opening up of the economy to greater foreign investment and ratification of the Regional Comprehensive Economic Partnership (RCEP) will help reap the benefits of the demographic dividend and should be complemented by strengthening existing social protection schemes and enhancing labor market flexibility to facilitate resource reallocation. Addressing climate change adaptation and mitigation through a green growth strategy could also help develop new growth engines for the economy.

“The IMF team would like to thank officials in the government, the central bank, other public agencies, the Speaker of the House of Representatives, members of the Senate, and representatives of the private sector for their constructive and open engagement. We look forward to continuing the dialogue in the coming months in the context of the 2023 Article IV Consultation.”