IMF Executive Board Concludes 2009 Article IV Consultation with the Philippines

Public Information Notice (PIN) No. 10/26
February 18, 2010

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 January 29, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines.1


Following the adverse impact from the global economic and financial crisis, there are signs of a nascent recovery. The Philippine economy avoided a technical recession as second and third quarter GDP in 2009 rebounded by 1.7 percent and 1.0 percent (quarter-on-quarter), respectively, following the 2.1 percent contraction during the first quarter. Inflation has trended down during the year, reaching 3¼ percent during January–November, in the middle of the Bangko Sentral ng Pilipinas (BSP’s) target range. Following the post-Lehman financial market stress in late 2008, market conditions are normalizing and equity prices have returned to pre-crisis levels. The current account has held up well, with the decline in exports cushioned by waning imports of commodities and resilient remittances. With the return of risk appetite, the exchange rate has appreciated and capital inflows have resumed, although so far primarily into the corporate and government bond market.

Growth is expected at ¾ percent in 2009 and to recover to around 3¼ percent in 2010. The recovery will likely be led by private consumption as confidence strengthens and remittances pick up further. Investments and exports are also expected to benefit from the global recovery. Risks to the near-term outlook are broadly balanced and sensitive to the global growth outturn. On the domestic side, the output losses from the devastation caused by the two recent typhoons could turn out to be larger than currently estimated, and fiscal slippage could raise investor concerns. On the upside, the post-typhoon rebuilding efforts could spur higher investment.

The financial sector has weathered the global financial crisis relatively well and generally remains sound. Bank earnings have improved during the first half of 2009 as global economic and financial conditions have stabilized. The capital adequacy ratio remains high at around 15 percent and nonperforming loans are also generally low (around 4 percent of loans), although they are relatively high for thrift and rural banks. Bank exposures are often concentrated on few large corporate borrowers due to the prevalence of big conglomerates. However, they are reportedly well monitored and financially sound.

Fiscal policy was loosened in response to the crisis, but poor revenue performance will likely lead to a breach of the widened deficit target in 2009. The deficit is now estimated at 4½ percent, overshooting the budget target of 3¾ percent of GDP (IMF definition). This deficit implies a positive fiscal impulse of around 2¼ percent of GDP and an estimated growth impact of around 1 percentage point.

The BSP took proactive steps to lessen the adverse impact of the global financial crisis. Policy rates have been cut by 200 basis points since end–2008, which had a significant impact on lending rates. Moreover, the reserve requirement rate on bank deposits and deposit substitutes was lowered by 2 percentage points (to 19 percent for universal/ commercial banks) in late 2008 and the rediscount window was tripled to pesos 60 billion.

Executive Board Assessment

Executive Directors commended the authorities for their implementation of sound economic policies in recent years. Supportive macroeconomic policies, together with resilient remittances, cushioned the impact in 2009 of the global economic crisis. Recovery is expected in 2010, led by private demand as confidence and remittances improve. A timely return toward a sustainable fiscal path while avoiding a premature exit from a supportive monetary policy will be important, along with continued reforms to ensure sustained growth in the medium-term.

Directors concurred that the fiscal stimulus in 2009 proved to be an effective response to the weak economic environment. Given the limited fiscal space, they supported a measured fiscal withdrawal in 2010. Public debt remains relatively high, and tax collections have weakened beyond cyclical factors. Directors welcomed the authorities’ commitment to fiscal deficit reduction starting this year. They stressed that this will require new revenue measures as well as expenditure restraint focused on non-priority current spending.

To further strengthen public finances, bolster market confidence, and create fiscal space for pro-poor spending and growth-enhancing public investment, Directors encouraged the authorities to introduce a credible medium-term consolidation plan, building on revenue raising measures. They supported the authorities’ request for technical assistance in this area. The introduction of a formalized fiscal framework would further underscore the commitment to fiscal prudence.

Directors welcomed the BSP’s proactive easing steps in response to the crisis. In view of the still negative output gap and the planned tightening of fiscal policy, they concurred that monetary policy should remain accommodative until a sustained economic recovery is assured, while ensuring that inflation expectations remain well-anchored. Directors noted the staff’s assessment that the exchange rate appears aligned with fundamentals. They recommended that foreign exchange interventions remain limited to smoothing operations, while allowing the exchange rate to adjust to market pressures.

Directors commended the authorities’ good progress in implementing the recommendations of the 2002 Financial Sector Assessment Program (FSAP), noting that the financial sector weathered the crisis well, with banks remaining well capitalized and nonperforming loan (NPL) ratios low. While the moderate economic growth expected over the near term could dampen the banks’ earnings and potentially lead to a deterioration in asset quality, stress tests conducted in the context of the FSAP update suggest that banks are quite resilient to adverse shocks. At the same time, concentration risks are more elevated due to the exposure to large conglomerates.

Directors supported additional steps to further strengthen financial sector supervision and the regulatory framework, including through early adoption of the proposed amendments to the New Central Banking Act. The latter would also provide supervisory staff with adequate protection from litigation. Directors suggested that capital requirements could be more risk-based, and welcomed the authorities’ planned introduction in 2011 of the internal capital adequacy assessment process as an important first step. Directors also recommended further steps to strengthen the prompt corrective action and resolution frameworks.

To sustain the recovery and raise growth, Directors encouraged the authorities to make further efforts to strengthen governance and the business environment and improve basic infrastructure. This will be important to raise domestic demand, including through increased investment, and allow businesses to tap into new export markets.

Philippines: Selected Economic Indicators, 2005–10


Growth and prices

2005 2006 2007 2008 2009   2010

Real GDP

5.0 5.3 7.1 3.8 0.8   3.2

CPI (annual average)

7.7 6.2 2.8 9.3 3.1   4.3

Public finances (percent of GDP)


National government balance (authorities’ definition)

-2.7 -1.1 -0.2 -0.9 -3.9   -3.3

National government balance 1/

-3.0 -1.4 -1.7 -1.5 -4.4   -3.6

Nonfinancial public sector balance 2/

-2.1 0.1 0.2 -0.3 -3.9   -3.0

Revenue and grants 3/

22.1 23.0 24.1 22.8 20.5   20.7


24.1 22.9 23.9 23.1 24.4   23.8

Nonfinancial public sector debt

85.9 73.9 61.1 60.9 63.7   62.7

Monetary sector (percent change, end of period)


Broad money (M3)

10.3 22.7 10.6 15.6 11.6 5/  

Interest rate (91-day Treasury bill, end of period, in percent) 4/

6.4 5.1 4.2 5.8 4.1 6/  

Credit to the private sector

-0.3 6.7 8.5 16.8 7.9 5/  

External Sector


Current account (percent of GDP)

2.0 4.5 4.9 2.3 4.6   3.0

Reserves, adjusted (US$ billions) 7/

18.0 23.0 33.8 35.9 44.2   49.8

Reserves/Short-term liabilities, adjusted 8/

130.6 194.4 240.5 280.4 266.1   299.2

Pesos per U.S. dollar

55.1 51.3 46.1 44.5 47.8 9/

Sources: Philippines authorities; and IMF staff projections.

1/ Fund’s definition. Excludes privatization receipts and includes deficit from restructuring of the central bank (Central Bank-Board of Liquidators.
2/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.
3/ Excludes public financial institutions and privatization receipts.
4/ Secondary market rate.
5/ September 2009 (year-on-year).
6/ November 2009.
7/ Adjusted for gold and securities pledged as collateral against short-term liabilities.
8/ Short-term liabilities include medium- and long-term debt due in the following year.
9/ Average for January to October 2009.

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. An explanation of any qualifiers used in summings up can be found here:


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