IMF Staff Concludes Visit to the Philippines

IMF News, May 12, 2023

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The mission covered meetings in Manila during May 8-12, 2023.
The Philippine economy achieved one of the strongest recoveries in emerging markets following the pandemic-related downturn.
GDP growth in 2022 recorded 7.6 percent, reflecting pent-up domestic demand.
Q1 2023 growth was 6.4 percent and was in line with the full-year forecast of 6 percent.
Main downside risks to the outlook:
- Persistently high core inflation.
- Depreciation pressures amid tighter global conditions.
- Geoeconomic fragmentation.
- Balance sheet impacts related to higher borrowing costs.
Upside scenarios:
- Larger positive spillovers from China’s reopening.
- A stronger than expected recovery in investment.

The Bangko Sentral ng Pilipinas (BSP) has hiked the policy rate by a cumulative 425 basis points to 6.25 percent.
Headline inflation peaked in January 2023 and has gradually slowed in recent months, but core inflation remains elevated.
Policy guidance:
- Elevated core inflation calls for tighter-for-longer rates.
- A continued tightening bias may be appropriate until inflation falls decisively within the 2-4 percent target range.
Measures to address food inflation:
- Timely imports of cheaper food items.
- Buffer stock releases as envisaged by the Inter-Agency Committee on Inflation and Market Outlook (IAC-IMO).
Current account projection:
- 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 tightening.
The 2023 budget targets 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.
Policy recommendations:
- Continue medium-term fiscal consolidation while enhancing targeted social spending.
- Enhance revenue mobilization through tax policy and tax administration to underpin medium-term consolidation.
- Secure resources for development plans.
- Implement the proposed Military and Uniformed Personnel pension reform to create fiscal space for economic and social priorities.

The banking system has sufficient liquidity and capital buffers.
Spillovers from global banking turmoil have been limited, but tightening financial conditions warrant close monitoring of the corporate sector.
Recommendations for financial stability:
- Strengthen the resolution framework for financial institutions.
- Strengthen the insolvency regime for corporates.
- Allow regulatory forbearance measures to lapse as scheduled if credit growth remains healthy.
- Enhance Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) effectiveness and complete the Philippines’ Action Plan with the Financial Action Task Force (FATF) to improve the business environment and encourage foreign direct investment.

Scarring from the pandemic and downward revisions to global growth projections highlight the need for structural reforms to raise productivity.
Priorities include:
- Reducing infrastructure and education gaps.
- Deepening financial markets.
- Harnessing the digital economy.
Trade and investment policy notes:
- Recent opening up to greater foreign investment and ratification of the Regional Comprehensive Economic Partnership (RCEP) will help reap demographic dividends.
- These should be complemented by strengthening social protection schemes and enhancing labor market flexibility to facilitate resource reallocation.
Climate policy:
- Address climate change adaptation and mitigation through a green growth strategy to develop new growth engines.

The IMF team thanked government, central bank, other public agencies, the Speaker of the House of Representatives, members of the Senate, and private sector representatives for constructive engagement.
The mission looks forward to continuing the dialogue in the coming months in the context of the 2023 Article IV Consultation.

Source: IMF staff end-of-mission statement (May 12, 2023).