IMF Staff Completes 2023 Article IV Mission to the Philippines

IMF News, October 3, 2023

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An International Monetary Fund team led by Mr. S. Jayanath Peiris conducted discussions on the Philippine economy for the 2023 Article IV Consultation from September 21-October 3, 2023.
End-of-Mission press releases convey preliminary findings after a visit to a country; the views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Press Release No. 23/331.

Growth moderated from 7.6 percent in 2022 to 4.3 percent in the second quarter of 2023, largely due to a weak global economy and tightened policy settings.
Having bottomed out at the end of the second quarter, growth is projected to bounce back to 5.3 percent in 2023 and reach 6.0 percent in 2024.
Growth support factors cited: an acceleration in public spending and improved external demand for Philippines exports.

Decisive monetary tightening and moderate minimum wage hikes helped mitigate inflationary pressures.
Headline inflation is now expected to return to the BSP’s target band by the first quarter of 2024.
Core inflation remains elevated and inflation risks are tilted to the upside, including higher commodity prices that could lead to second-round effects.
Policy recommendation: a higher-for-longer policy rate path is warranted until inflation firmly falls within the target range alongside a tightening bias to anchor inflation expectations.

The current account deficit is expected to narrow to 3.0 percent of GDP in 2023 and 2.6 percent in 2024 from 4.5 percent in 2022.
Factors supporting narrowing: lower commodity prices, a pick-up of electronic exports, and an acceleration in service exports.

Fiscal consolidation as envisaged under the Medium-Term Fiscal Framework is on track, reflecting a strong revenue performance and lower current spending, while maintaining infrastructure outlays at or above 5 percent of GDP.
The pace of consolidation is appropriate to bring the national government debt-to-GDP ratio to less than 60 percent over the medium term.
Policy recommendations and reforms:
- An even more ambitious revenue mobilization strategy could finance more social spending to achieve poverty reduction goals and to respond to natural disasters while keeping the deficit path unchanged.
- Fiscal reforms, including the Military and Uniformed Personnel Pension Bill and the Budget Modernization Bill, are critical and should be complemented by ongoing efforts to strengthen the oversight of government-owned and controlled corporations.
- The renewed emphasis on financing the country’s infrastructure gaps through Public Private Partnerships (PPPs) is well placed and the new PPP Code is welcome.
- The reform of the mining fiscal regime and Mining Act provides an opportunity to enact a progressive and unified tax system, and a competitive investment regime.
- The Maharlika Investment Corporation (MIC) could contribute to closing infrastructure gaps and green investments by following best practices in strategic investment management and accountability frameworks.

The banking sector is well-capitalized and liquid, but pockets of vulnerability remain in the corporate sector.
The higher interest rate environment underscores the importance of:
- Strengthening systemic risk monitoring and financial supervision.
- Expanding the macroprudential toolkit and calibrating it to counter vulnerabilities stemming from sectoral exposures and linkages between financial conglomerates and non-financial corporates.
- Strengthening the bank resolution framework in light of the global refocusing on bank resolution frameworks.
Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT):
- Efforts to be removed from the FATF grey list should be stepped up and would benefit from the publication of a credible timeline to address outstanding AML/CFT issues.

Sustaining growth gains and reaping the demographic dividend depend on further investments to:
- Diversify exports.
- Promote the acquisition of new skills.
- Enhance connectivity across the archipelago to harness the digital economy.
To maximize benefits from recent RCEP ratification and opening-up to foreign investment, reforms should address supply-side issues in the agriculture sector (including by reducing tariffs on essential items at an opportune time), remove non-tariff barriers linked to administrative procedures and regulation, restart responsible mining to meet increasing demand for green minerals, and further improve the ease of doing business.
Structural reforms should remain focused on reducing poverty levels and addressing inequality by creating quality jobs and expanding social protection programs, including the recently piloted Food STAMP Program to complement the 4Ps.

The Philippine economy is highly vulnerable to extreme weather-related events.
Recommended multi-pronged approach: public investment in resilient infrastructure and the introduction of carbon pricing mechanisms.

Main downside risks:
- Persistently high global and domestic inflation that could necessitate a further tightening of monetary policy.
- An abrupt global slowdown putting downward pressure on goods and services exports.
- An intensification in geo-political tensions.
- Depreciation pressures stemming from capital outflows under volatile market conditions.
Upside risks:
- A more resilient US economy.
- A rebound in domestic demand supported by an easing of financial conditions.

IMF Staff Completes 2023 Article IV Mission to the Philippines — End-of-Mission statement by Mr. S. Jayanath Peiris (September 21-October 3, 2023).