IMF Executive Board Concludes 2007 Article IV Consultation with the Philippines

Public Information Notice (PIN) No. 08/35
March 16, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 12, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines.1


Economic performance has improved markedly over the past few years. Founded on impressive fiscal consolidation, investor confidence has revived, and sovereign spreads have tightened. A substantial improvement in banking supervision has gone in hand with a marked improvement in banks' balance sheets.

GDP growth accelerated to 7.3 percent (annual average) in 2007 in a low inflation environment. Private consumption firmed as remittances remained strong, part of which financed home purchases. Fiscal impetus from government spending, including on infrastructure, provided an added push to growth. Private investment remained low by regional standards, but there are tentative signs of a revival. Headline inflation was only 2.8 percent (annual average) in 2007, primarily from higher food and oil prices.

These developments and favorable global conditions led to a surge in foreign exchange inflows and the external value of the peso. The current account surplus reached 5.7 percent of GDP in the first half of 2007 on high levels of transfers from overseas workers. Heightened investor interest in Philippine securities helped to turn the financial account into a small surplus. Intervention helped smooth fluctuations in the foreign exchange market and scale up buffers for increased capital flows. Despite a large buildup of reserves, the currency appreciated 19 percent against the U.S. dollar during 2007.

The momentum in stepped-up collection from the 2006 VAT reform slowed. The government deficit (excluding privatization receipts) widened to about 1½ percent of GDP as expected improvements in tax administration did not materialize. Yet there was a welcomed pickup in public investment. While the deficit is likely to be mitigated by privatization receipts, the debt-to-revenue ratio remained high relative to other countries. Privatization has attracted large interest from investors. Around 40 percent of power generating capacity has been sold to date.

Inflation remained low because of an appreciating peso and prudent monetary policy. The Bangko Sentral ng Pilipinas (BSP) successfully sterilized the jump in liquidity from foreign exchange intervention, including through broader access to the Special Deposit Account facility. At the same time, the benign inflation outlook permitted the BSP to cut interest rates in the second half of 2007 and in the process moderate inflows and support growth. Outflows were also encouraged through prepayment of external debt and foreign exchange liberalization.

The health of the financial sector has improved substantially. Non-performing assets of banks were reduced without government support; risk management facilities were upgraded as Basel II was phased in. Corporations also found alternative sources of funding, as equity and bond placements helped to supplement bank lending in 2007.

Executive Board Assessment

Executive Directors commended the authorities for the economy's impressive performance—strong growth, low inflation, sustained fiscal consolidation, and improved investor confidence. Directors also welcomed the improvement in the health of the banking system and the strengthening of bank supervision. Against this background, they encouraged the authorities to address the remaining challenges and vulnerabilities, including infrastructure bottlenecks, social needs, and further strengthening of the financial sector, which would help the Philippines weather the ongoing global financial turmoil.

Directors praised the authorities for their strong efforts in fiscal adjustment. They welcomed the 2005 and 2006 tax reforms, and commended the authorities' efforts to control spending. Better performance of non-financial public enterprises has slashed the public sector deficit and further improved the Philippines' debt dynamics. Directors viewed the government's plan to attain a balanced budget in 2008 within a firm medium-term framework as an important demonstration of fiscal prudence.

Directors encouraged the authorities to strengthen the tax effort and place priority spending on a sustainable footing. In addition to administrative reforms, they considered that legislation is needed to restore the tax base by rationalizing fiscal incentives and adjusting excise taxes. Directors noted that Public-Private Partnerships can be useful but require close monitoring, particularly of projects that extend guarantees to private investors. They also congratulated the authorities for a sustained effort at privatizing power sector assets, which has generated more income than expected and helped to support the government's plan to ensure that growth is not impeded by power shortages.

Directors commended the authorities for managing foreign exchange inflows well, while maintaining price stability. They highlighted, in particular, the successful smoothing of peso fluctuations while taking a strategic opportunity to build reserves. Directors noted that wider access to the Special Deposit Account, together with operations through the Reverse Repurchase facility and greater use of swaps, have successfully sterilized the reserves buildup and reduced liquidity growth. Well-anchored inflation expectations and an appreciating peso have helped counter the effects of sharply higher commodity prices in 2007. Directors were reassured by the authorities' commitment to remain vigilant, given the recent increase in inflation provoked by higher global food and oil prices.

Noting that the underlying current account balance is only slightly higher than its long-run average, Directors considered the exchange rate to be broadly in equilibrium. They recommended continuation of the current policy of limiting intervention to smooth erratic movements of the currency in the context of the flexible exchange rate regime. They also welcomed the recent two-step liberalization of the foreign exchange regulatory regime, which should help moderate net capital inflows. The government's decision to tilt its borrowing mix more heavily toward domestic sources should further reduce vulnerabilities and potentially ease pressure on the peso.

Directors welcomed the improvement in the health of the financial system. They also encouraged the authorities to further strengthen the financial sector, particularly in light of slow domestic credit growth and the possible effects of a serious turn in the credit cycle. While welcoming the progress in disposing of non-performing assets and in implementing international accounting standards and Basel II, Directors pointed to the need to reduce the remaining large stock of non-performing assets. They also noted that banks hold a significant amount of government debt that is sensitive to changes in sovereign spreads. Directors acknowledged that bank monitoring had improved, but encouraged the authorities to work for the passage of the BSP Charter Amendment, which is essential to lift the threat of legal action against supervisors, facilitate the operation of monetary policy, and improve economic surveillance of the non-bank sector. Directors also called for the adoption of legislation such as the Corporate Recovery Act and the Credit Information Systems Act, to help improve bank profitability and lending.

Philippines: Selected Economic Indicators, 2003-2008
  2003 2004 2005 2006 2007   2008

Staff Est.

  Staff Proj. 1/

Growth and prices (in percent change)


GDP growth

4.9 6.4 4.9 5.4 7.3   6.0

CPI inflation (average)

3.5 6.0 7.7 6.2 2.8   4.4

Public finances (in percent of GDP)


National government balance (authorities' definition)

-4.6 -3.8 -2.7 -0.9 -0.1   0.0

National government balance 2/

-4.9 -4.2 -3.0 -1.2 -1.6   -0.7

Nonfinancial public sector balance 3/

-5.6 -5.0 -2.1 0.2 -0.1   0.6

Revenue and grants 4/

20.8 20.5 22.1 23.2 23.1   23.0

Expenditure 5/

26.4 25.5 24.2 22.9 23.2   22.4

Money and credit (in percent change)


Broad money (M3) 6/

4.2 10.2 10.3 22.7 9.1



Interest rate (91-day Treasury bill, secondary market,

6.5 8.4 6.4 5.1 4.2   ...

end period, in percent)


Credit to the private sector (net)

1.9 4.6 -1.5 6.0 6.8



Balance of payments (in percent of GDP)


Trade balance

-7.3 -6.5 -7.9 -5.8 -5.2   -6.5

Current account balance

0.4 1.9 2.0 5.0 5.2   2.7

Gross international reserves


In billions of U.S. dollars

17.1 16.2 18.5 23.0 33.8   ...

Adjusted, in billions of U.S. dollars 9/

14.9 15.2 18.0 23.0 33.8   ...

Adjusted, in percent of short-term liabilities 10/

124.2 125.8 120.1 166.6 222.5   ...

Sources: The Philippine authorities; IMF staff estimates and projections.
1/ Projections are based on baseline scenario.
2/ IMF definition. Excludes privatization receipts of the national government, and includes net deficit from restructuring the central bank.
3/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.
4/ The sum of all nonfinancial public sector revenue net of intra-public sector payments. It is assumed that 80 percent of Bureau of Treasury revenue represents interest and dividends from other parts of the nonfinancial public sector. Privatization receipts are excluded.
5/ Defined as difference between nonfinancial public sector revenue and balance.
6/ Based on the regular monetary survey data.
7/ As of November 2007.
8/ As of September 2007.
9/ In addition to monitoring the level of gross international reserves (GIR), the IMF also monitors Adjusted Reserves, which are calculated by subtracting from GIR the value of the BSP's foreign assets that have been pledged as collateral for short-term liabilities. These pledged assets (gold and other securities) remain foreign reserve assets of the BSP and so are considered part of GIR. However, they are not as readily usable as other components of GIR since pledged assets must be set aside while the short-term liabilities they secure remain outstanding.

10/ Short-term liabilities include medium- and long-term debt due in the following year, and exclude loans backed by gold and securities pledged as collateral.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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