IMF Executive Board Concludes 2018 Article IV Consultation with the Philippines

September 27, 2018

On September 17, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Philippines.

Real GDP grew by 6.7 percent in 2017 and by 6.3 percent in the first half of 2018 (y/y) led by strong public investment. Inflation rose to 6.4 percent (y/y) in August 2018, averaging 4.8 percent year to date and above the inflation target band of 2−4 percent, led by adjustments in excise taxes, the rise in global oil prices, the weaker peso, and above-trend growth. Investment-led growth and sustained supply pressures have likely raised employment with renewed wage demand pressures. Following surpluses before 2016, the current account deficit widened to 0.8 percent of GDP in 2017, driven mainly by imports of capital goods, oil, and raw materials, reflecting strong investment growth.

The economy continues to perform well but is facing new challenges. Real GDP growth is projected to grow strongly in 2018 and 2019, supported by domestic demand. However, poverty and inequality challenges remain, inflation has risen, and external uncertainty has increased. The medium-term economic outlook remains favorable, but short-term risks have risen. Real GDP growth is projected at just under 7 percent over the medium term. Inflation is projected at above the 4 percent upper target bound in 2018 and stay in the upper half of the target band (3−4 percent) during 2019–2020. The current account deficit is projected to remain manageable, financed largely by foreign direct investment. Downside risks stem mainly from rising inflation, continued rapid credit growth, higher U.S. interest rates and U.S. dollar, volatile capital flows, and trade tensions.

Executive Board Assessment[2]

Executive Directors commended the authorities for the strong economic performance owing to sound macroeconomic management and continued reforms to promote inclusive growth. Directors noted that short-term risks have increased from rising inflation and a less favorable external environment, and underscored the need to adjust the policy mix to address these risks.

Nonetheless, the medium-term economic outlook remains favorable, placing the Philippines in a good position to tackle still-elevated poverty and inequality.

Directors broadly urged the authorities to consider adjusting the fiscal stance over 2018-2019 to continue to support pro-growth infrastructure investment and social

spending while containing nonpriority spending, in order to avoid overburdening monetary policy. They stressed the importance of careful selection and management of infrastructure projects to maximize their impact on growth.

Directors supported the authorities’ reforms to make tax incentives more effective in achieving national policy goals and improve economy-wide productivity. Enhancing the VAT refund system and strengthening the international taxation framework will also be steps in the right direction. Directors suggested complementing these reforms with enhanced social protection.

Directors welcomed recent decisions of the Bangko Sentral ng Pilipinas (BSP) to increase the policy rate and its announced readiness to take further actions to safeguard price stability. In this context, they recommended carefully monitoring both supply-and

demand-side pressures. They also welcomed the BSP’s decision to delay the bank reserve requirement cuts until inflation expectations are more firmly anchored. Directors supported the authorities’ policy of allowing the exchange rate to move freely in line with market forces, while limiting foreign exchange intervention to address disorderly market conditions. They welcomed the recent launch of national retail payment systems and the progress made with domestic capital market and FX liberalization reforms.

Directors noted that the financial system appears sound. They welcomed the BSP’s recent macroprudential measures to safeguard financial stability against systemic risks and noted the need for continued vigilance. While the pace of credit growth has slowed recently, the credit-to-GDP gap has widened. In this regard, Directors supported the BSP’s plan to introduce a countercyclical buffer for banks and underscored the need to close data gaps on nonbank financial institutions and conglomerates. Directors encouraged the approval of the amendments to the BSP charter.

Directors welcomed the progress made by the authorities on structural reforms and encouraged them to deepen the reform efforts in seeking broader economic benefits. They supported the authorities’ plan to replace the rice import quota system with one based on tariffs, while emphasizing the need to support small farmers affected by the reform. Directors noted the need to promote competition by opening new sectors of the economy to foreign investment, improve the business environment through better infrastructure, create more and better jobs through investment in human capital and labor market reforms, and modernize the bank secrecy legal framework.