IMF Staff Concludes Visit to the Philippines

IMF News, June 10, 2024

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The Philippine economy performed strongly in 2023 despite a challenging external environment.
GDP growth moderated in 2023 to 5.5 percent, and is expected to rebound to 6.0 percent in 2024 and 6.2 percent in 2025.
Inflation peaked at 6.0 percent in 2023 and is expected to decline to 3.4 percent in 2024.
The Bangko Sentral ng Pilipinas (BSP) has held the policy rate at 6.5 percent after a cumulative 450 basis points hike since May 2022.
The current account deficit is expected to narrow from 2.6 percent of GDP in 2023 to 2.1 percent in 2024.
Reserves remain robust at US$102.7 billion in April 2024.
Fiscal consolidation is underway but at a slower pace than initially envisaged; the fiscal deficit is projected to decline from 6.2 percent of GDP in 2023 to 3.7 percent of GDP in 2028.

Growth drivers:
- Stronger consumption demand.
- Higher public and private investment.
- Recovery in exports and tourism.
Downside risks:
- Geoeconomic fragmentation.
- High interest rates.
- Climate-related shocks.
Upside potential:
- Efforts to attract foreign direct investment, promote business-friendly reforms, and enhance competitiveness could raise long-term growth potential.

Recent trajectory:
- Inflation peaked at 6.0 percent in 2023 and has since declined to within the BSP’s target band.
- Inflation is projected to decline towards the target of 3.0 percent in the second half of the year.
Policy stance:
- BSP policy rate held at 6.5 percent after a cumulative 450 basis points hike since May 2022.
- Recommendation: Monetary policy stance should remain sufficiently restrictive to firmly anchor inflation expectations.
Measures to mitigate food-price pressures:
- Reduction in tariffs on rice imports from 35 to 15 percent in the second half of the year.
- Streamlining administrative procedures and removing non-tariff barriers in the importation of agricultural products.

Medium-Term Fiscal Program:
- Presents a more pro-growth fiscal stance anchored around higher capital spending and a more gradual increase in revenues over the medium term.
- Revised consolidation plan implies a reduction in the fiscal deficit from 6.2 percent of GDP in 2023 to 3.7 percent of GDP in 2028.
Policy priorities:
- Ensure social protection programs, universal health care coverage, and higher education outlays are appropriately enhanced.
- Revenue mobilization is critical to sustain credible medium-term fiscal consolidation, rebuild buffers, and create space for poverty reduction efforts.
- Tax administration improvements should be supplemented with tax policy changes, notably to improve the efficiency of value-added tax and broaden the tax base.

Current account:
- Expected to narrow from 2.6 percent of GDP in 2023 to 2.1 percent in 2024, mainly due to a rise in goods exports and tourism.
Reserves:
- US$102.7 billion as of April 2024.

Banking sector:
- Financial stability risks appear contained.
- Credit growth remains healthy despite higher lending rates.
- The banking system has strong capital and liquidity buffers.
Risks to monitor:
- Banks’ exposures to commercial real estate and leveraged corporates in a high interest rate environment.
Policy recommendations:
- Continue monitoring sectoral exposures.
- Continue progress on improving Anti-Money Laundering and 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.

Recent reforms:
- Measures to attract foreign investment and create a business-friendly environment, including the recently passed Public-Private Partnership Code.
- A recent measure to facilitate foreign ownership in the renewable energy sector.
Implementation priorities:
- Careful selection of projects to reduce infrastructure gaps.
- Upskilling the labor force.
- Enhancing the capacity of local government units.
- Promoting green finance and supporting climate change adaptation and mitigation targets.

The IMF team held meetings in Manila during June 4-10, 2024.
The statement represents preliminary findings of IMF staff and does not necessarily represent the views of the IMF’s Executive Board; the mission will not result in a Board discussion.
The IMF team looks forward to continuing the dialogue in the coming months in the context of the 2024 Article IV Consultation.

IMF Staff Concludes Visit to the Philippines — Press Release No. 24/211, June 10, 2024.