Statement of an IMF Staff Mission at the Conclusion of the 2007 Article IV Discussions with the Philippines

Press Release No. 07/283
December 11, 2007

The following statement was issued today in Manila after the conclusion of an International Monetary Fund (IMF) staff mission to the Philippines for the 2007 Article IV Consultation:

"An IMF mission visited Manila during November 29-December 11, 2007 to hold the 2007 Article IV Consultation discussions with the authorities. The findings will be relayed to the IMF's Executive Board in early 2008 but a preliminary assessment is as follows.

"The Philippines has continued to reap the benefits of economic reforms. Fiscal indicators have improved markedly over the past few years while growth has been robust and inflation contained. Going forward, the key challenge is to achieve a virtuous and sustainable cycle of investment and overall growth in a stable macroeconomic environment. This would help reduce poverty and strengthen the economy against possible future turbulence in the global economy.

"In the first three quarters of 2007, the economy expanded a robust 7.1 percent (year-on-year), above the ASEAN 5 average growth of about 6 percent. Growth was helped by the increased infrastructure spending by the government. Based on the momentum through the year, the mission has raised its growth forecast to 6.7 percent for 2007 (from 6.3 percent previously) and to 6 percent for 2008 (from 5.8 percent previously). Raising the investment rate is a key challenge to sustaining a high medium-term growth rate.

"The National Government is expected to comfortably meet its deficit target for the year. The mission welcomes the increase in capital spending achieved this year. On the revenue side, strong interest in the government's privatization program has helped to reduce the deficit ahead of schedule. To provide a sustainable basis for reducing the deficit while providing the resources for needed priority spending, it is important to reverse the weaknesses experienced in tax collections this year. In this regard, making decisive progress on the ongoing tax administration reform program and legislative support for revenue enhancement measures will be needed. Two important areas of reform would be to rationalize fiscal incentives—and in particular phase out income tax holidays while ensuring effective tax rates remain unchanged or are reduced—and adjust the excise rate on tobacco and alcohol products and index it to inflation.

"The positive investor sentiment has brought about strong external inflows and presented new challenges for the economic managers. On the back of such inflows as well as workers' remittances the peso has risen strongly. To deal with these inflows the authorities have used an appropriate set of policy tools which include maintaining a commitment to exchange rate flexibility, seeking opportunity to build reserves, prepaying external debt, and liberalizing the foreign exchange regulatory framework. The mission believes that there is further scope to prepay external debt and reduce foreign borrowing. This would reduce the economy's exposure to exchange rate risk in case of intensified risk aversion.

"Inflation has been low on the back of well-anchored inflation expectations and an appreciating peso which helped counter the effects of sharply higher commodity prices. The benign outlook for inflation also provided an appropriate basis for the Bangko Sentral ng Pilipinas (BSP) to lower policy rates recently. Going forward, inflation is expected to remain within the BSP's target range. However, rising food prices in the region and higher international oil prices pose upside risks that warrant careful monitoring.

"Good progress has been made in strengthening the financial system. This includes an improvement in asset quality indicators, sales of non-performing assets through the Special Purpose Vehicle (SPV) framework, the introduction of Basel II, new capital raised by banks, and industry consolidation. The mission welcomes the authorities' commitment to sustaining the reform momentum and to further strengthen bank balance sheets. We consider passage of financial legislation including the BSP charter amendments, the credit information systems act and the corporate recovery act to be critical."



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