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Philippines: Staff Report for the 2017 Article IV Consultation

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2017
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Context

1. The Philippine economy has performed well and is in a favorable position to address its socioeconomic challenges. Sound policies during successive administrations have delivered sustained growth, low inflation, financial stability, and strong external and fiscal positions. However, poverty and inequality remain high and the country needs to create jobs for its young and growing population. Accordingly, the authorities are focusing on sustaining rapid growth to reduce poverty and maximize the demographic dividend. To this end, actions are needed to address the constraints to inclusive growth, including the low quality of infrastructure and human capital, while maintaining macrofinancial stability.

2. Fiscal policy is focusing on closing the infrastructure gap and enhancing human capital. The 2016 Article IV consultation called for scaling up infrastructure and social spending financed with additional revenue and some higher borrowing. The authorities raised the national government deficit target to 3 percent of GDP from 2017 and submitted a comprehensive tax reform package to Congress. Extra revenues are to be spent in infrastructure and social areas. In 2016, staff also recommended strengthening domestic competition, easing foreign investment restrictions, and promoting capital market development.

Infrastructure Quality, 2015

(Ranking: 1=best; 144=worst)

Source: World Economic Forum

Recent Developments, Outlook, and Risks

Macroeconomic developments remain favorable, with robust economic growth and low inflation. The banking system appears sound, although high credit growth should be closely monitored. The fiscal and external positions are strong. Risks are tilted to the downside and stem mainly from external sources, with potential overheating being the main domestic risk.

A. Recent Developments

3. Economic performance remains strong, with high growth and low inflation. Growth reached 6.9 percent in 2016, led by strong domestic demand that more than offset the drag from net exports, and the unemployment rate fell from 6.3 percent in 2015 to 5.5 percent in 2016. Consumption and investment grew rapidly. Fiscal policy was accommodative. Although growth slowed to 6.4 percent in H1: 2017, this was partly due to a temporary slowdown in public spending and strong base effects from the pre-election period in H1:2016. Headline and core inflation have stayed within the target band since September 2016, as commodity prices have recovered.

Contributions to Real GDP Growth—Expenditure Side

(In percent, year on year)

Source: National Statistical Coordination Board; and IMF staff calculations.

Consumer Price Inflation: Headline and Core

(In percent, year on year)

Sources: Philippines authorities; and IMF staff estimates.

4. The current account balance (CAB) fell to near zero in 2016, from a surplus of 2.5 percent of GDP in 2015. This reflected a rise in imports of capital goods and slower growth of exports and remittances. Export growth has recovered in H1:2017, while strong import growth has continued. The peso has depreciated by 7 percent vis-à-vis the U.S. dollar since end-2015, more than other currencies in the region. Foreign reserves have remained stable at US$81 billion (8.7 months of imports of goods and services), indicating limited FX intervention.

Current Account Balance (CAB)

(In percent of GDP)

Sources: CEIC Data Co., Ltd.; and IMF, World Economic Outlook.

5. The banking sector remains stable, although high credit growth should be closely monitored. The banking sector appears sound based on financial soundness indicators (FSIs), with ample liquidity, high capital, and low nonperforming loans (NPLs). However, credit growth has accelerated from 13.6 percent in 2015 to 19.7 percent in July 2017, led by consumer credit and real estate loans. Although most indicators show no evidence of a credit boom so far, property prices have stabilized, and lending standards have not deteriorated, some indicators suggest that, under current trends, credit gaps could approach early warning levels of credit booms in 2017–18 (Appendix I). Financial intermediation by nonbank financial institutions (NBFIs), not regulated by the BSP, remains small but is growing fast. The stock of bank credit and credit to households are low compared to peer countries, although both have been rising fast in recent years.

Bank Credit Growth and Credit to GDP

(In percent)

Sources: CEIC Data Company Ltd; and IMF staff estimates.

Philippines: Residential Real Estate Price Index

(In percent year-on-year)

Sources: Bangko Sentral ng Pilipinas (BSP).

B. Outlook and Risks

6. The medium-term macroeconomic outlook remains favorable. Growth is projected to remain close to potential at 6.6 percent in 2017, and 6.8 percent in the medium term, led by robust domestic demand. The baseline scenario assumes no tax reform, with fiscal policy providing a boost to growth in 2017 and remaining broadly neutral in 2018–22. The output gap is estimated to remain near zero. Inflation is expected to stay near the center of the target band due to stable commodity prices and well-anchored inflation expectations. The CAB is projected to remain negative in 2017 due to robust growth of infrastructure-related imports, financed by FDI inflows, with international reserves declining slightly.

7. Risks are tilted to the downside and stem mainly from external sources (Appendix II). External risks include spillovers from lower growth in China and U.S. monetary policy tightening.1 While global growth may surprise on the upside, rising doubts about globalization in some advanced economies could hamper the business process outsourcing industry, remittances, and exports. On the domestic side, the combination of high credit growth, buoyant private investment, and fiscal expansion without tax reform could lead to overheating, which could lower the CAB, lead to peso depreciation, and raise external borrowing costs. Other domestic risks include natural disasters and security-related events. On the upside, the approval of the first tax reform package could lead to a sustainable rise in infrastructure investment and higher potential growth. The Philippines is well equipped to respond should risks materialize given its strong fundamentals and available policy space.

8. Scenario analysis highlights the risk of overheating, especially if higher infrastructure investment is not financed with additional revenue (Table 8):

Table 1.Philippines: Selected Economic Indicators, 2012–18
Nominal GDP (2016): P 14,481 billion ($305 billion)
Population (2016): 103.2 million
GDP per capita (2016): $2,927
Poverty headcount ratio at $1.90 a day at PPP (2012): 13 percent
IMF quota: SDR 2,042.9 million
Main products and exports: electronics, agriculture products, and business process outsourcing
Unemployment rate (2016): 5.5 percent
2012201320142015201620172018
Proj.Proj.
GDP and prices (percent change)
Real GDP6.77.16.16.16.96.66.7
Real GDP per capita4.15.24.34.35.24.54.6
CPI (annual average)3.23.04.11.41.83.13.0
CPI (end year)3.04.12.71.52.62.93.0
Investment and saving (percent of GDP)
Gross investment18.220.020.621.224.325.625.9
National saving21.024.224.323.724.025.525.5
Public finances (percent of GDP)
National government balance (authorities’ definition)−2.3−1.4−0.6−0.9−2.4−3.0−3.0
National government balance 1/−2.4−1.5−0.6−1.4−2.4−3.0−3.0
Nonfinancial public sector balance 2/−0.60.60.90.4−0.3−0.8−0.9
Revenue and grants19.420.219.819.719.419.519.5
Expenditure20.019.618.919.319.720.320.4
Nonfinancial public sector net debt53.051.347.947.244.742.941.2
Monetary sector (percent change, end of period)
Broad money (M3) 3/9.431.811.29.412.813.5
Interest rate (91-day treasury bill, end of period, in percent) 4/0.50.51.41.81.62.2
Credit to the private sector (in percent) 3/16.216.419.913.617.319.7
External sector
Export value (percent change)21.2−4.011.9−13.3−1.19.97.0
Import value (percent change)11.3−4.88.0−1.017.712.08.5
Current account (percent of GDP)2.84.23.82.5−0.3−0.1−0.3
Capital account (US$ billions)0.10.10.10.10.10.10.1
Financial account (US$ billions) 5/−6.72.29.62.3−0.4−0.3−0.7
Direct investment (net) 5/1.0−0.11.0−0.1−5.9−4.5−4.7
Errors and omissions (US$ billions)−4.6−4.2−4.1−2.40.10.00.0
Overall balance (US$ billions)9.25.1−2.92.6−0.40.0−0.4
Total external debt (percent of GDP)32.028.927.326.524.523.020.5
Debt service ratio 6/9.911.18.47.79.710.09.2
Reserves(US$ billions)83.883.279.580.780.780.980.6
Reserves/short-term liabilities 7/397.9406.2413.3409.5408.3399.1396.2
Exchange rate (period averages)
Pesos per U.S. dollar 8/42.242.444.445.547.550.2
Nominal effective exchange rate (2005=100) 8/102.6105.4102.7108.8104.699.9
Real effective exchange rate (2005=100) 8/105.6109.9109.5116.8113.2109.7
Nominal GDP per capita(US$)2,591.52,768.52,849.32,882.82,953.33,023.03,302.3
Output gap (in percent)−0.30.50.3−0.10.10.0−0.1
Sources: Philippine authorities; World Bank; and IMF staff projections.

IMF definition. Excludes privatization receipts and includes deficit from restructuring of the previous Central Bank-Board of Liquidators.

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments.

Universal and commercial banks. The latest observation is July 2017, year-on-year.

Secondary market rate. The latest observation is August 2017.

In BPM6. A rise in either assets or liabilities is always positive and a decrease is always negative. Net investment is assets minus liabilities.

In percent of exports of goods and nonfactor services.

Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year).

Average January-August, 2017.

Sources: Philippine authorities; World Bank; and IMF staff projections.

IMF definition. Excludes privatization receipts and includes deficit from restructuring of the previous Central Bank-Board of Liquidators.

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments.

Universal and commercial banks. The latest observation is July 2017, year-on-year.

Secondary market rate. The latest observation is August 2017.

In BPM6. A rise in either assets or liabilities is always positive and a decrease is always negative. Net investment is assets minus liabilities.

In percent of exports of goods and nonfactor services.

Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year).

Average January-August, 2017.

Table 2.Philippines: National Government Cash Accounts, 2012–18(In billions of pesos, unless otherwise indicated)
2012201320142015201620172018
Proj.Proj.
Revenue and grants1,5351,7161,9092,1092,1962,4192,658
Tax revenue1,3611,5351,7191,8151,9802,1792,396
Net income and profits6437187858469251,0181,120
Excises98146166190205228249
VAT451490558562615676734
Tariffs41355657596785
Other 1/129146154160179190209
Nontax revenue166178187231215241262
Expenditure and net lending1,7781,8801,9822,2312,5492,8973,182
Current expenditures1,3911,5191,6171,7851,9292,1132,327
Personnel services543582604664723802891
Maintenance and operations237283309403439460506
Allotments to local government un219242273312343380416
Subsidies42668078103113124
Tax expenditure38233018161719
Interest313323321309304341371
Capital and equity expenditure359344351436606767836
Capital expenditure338333350435594754822
Equity211121121314
Net lending27171310151718
Balance−251−167−75−184−354−478−524
On the authorities’ presentation 2/−242−164−73−122−353−478−525
Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and noncash collections. Noncash collections are also reflected as tax expenditures under current expenditures.

Includes privatization receipts as revenue and excludes the operations of the Central Bank-Board of Liquidators (CB-BOL).

Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and noncash collections. Noncash collections are also reflected as tax expenditures under current expenditures.

Includes privatization receipts as revenue and excludes the operations of the Central Bank-Board of Liquidators (CB-BOL).

Table 3.Philippines: National Government Cash Accounts, 2012–18(In percent of GDP, unless otherwise indicated)
2012201320142015201620172018
Proj.Proj.
Revenue and grants14.514.915.115.815.215.215.2
Tax revenue12.913.313.613.613.713.713.7
Net income and profits6.16.26.26.46.46.46.4
Excises0.91.31.31.41.41.41.4
VAT4.34.24.44.24.24.34.2
Tariffs0.40.30.40.40.40.40.5
Other 1/1.21.31.21.21.21.21.2
Nontax revenue1.61.51.51.71.51.51.5
Expenditure and net lending16.816.315.716.717.618.318.2
Current expenditures13.213.212.813.313.213.313.3
Personnel services5.15.04.85.05.05.15.1
Maintenance and operations2.22.52.43.03.02.92.9
Allotments to local government units2.12.12.22.32.42.42.4
Subsidies0.40.60.60.60.70.70.7
Tax expenditure0.40.20.20.10.10.10.1
Interest3.02.82.52.32.12.12.1
Capital and equity expenditure3.43.02.83.34.24.84.8
Capital expenditure3.22.92.83.34.14.84.7
Equity0.20.10.00.00.10.10.1
Net lending0.30.10.10.10.10.10.1
Balance−2.4−1.5−0.6−1.4−2.4−3.0−3.0
On the authorities’ presentation 2/−2.3−1.4−0.6−0.9−2.4−3.0−3.0
Memorandum items:
National government
Primary balance0.61.41.90.9−0.3−0.9−0.9
Net debt 3/44.242.839.839.537.737.036.3
(In percent of national government revenues)306.0287.9263.6256.8248.2242.4238.1
Gross financing requirement 4/9.15.94.75.25.96.36.8
Nonfinancial public sector (NFPS) 5/
Balance−0.60.60.90.4−0.3−0.8−0.9
Net debt53.051.347.947.244.742.941.2
(In percent of NFPS revenues)273.1254.7242.2239.7229.7219.7211.2
Consolidated public sector balance 6/2.61.41.12.53.43.93.8
Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and noncash collections. Noncash collections are also reflected as tax expenditures under current expenditures.

Includes privatization receipts as revenue and excludes the operations of the Central Bank-Board of Liquidators (CB-BOL).

Consolidated (net of national government debt held by the sinking fund) and excluding contingent/guaranteed debt.

Defined as the deficit, plus amortization of medium- and long-term debt, plus the stock of short-term debt at the end of

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments. Debt is consolidated (net of intra-nonfinancial public sector holdings of debt). Balance is cash basis.

Includes nonfinancial public sector, government financial institutions, and BSP. Balance is cash basis.

Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and noncash collections. Noncash collections are also reflected as tax expenditures under current expenditures.

Includes privatization receipts as revenue and excludes the operations of the Central Bank-Board of Liquidators (CB-BOL).

Consolidated (net of national government debt held by the sinking fund) and excluding contingent/guaranteed debt.

Defined as the deficit, plus amortization of medium- and long-term debt, plus the stock of short-term debt at the end of

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments. Debt is consolidated (net of intra-nonfinancial public sector holdings of debt). Balance is cash basis.

Includes nonfinancial public sector, government financial institutions, and BSP. Balance is cash basis.

Table 4.Philippines: General Government Operations, 2012–18 1/(In percent of GDP)
2012201320142015201620172018
Proj.Proj.
Revenue18.618.919.019.419.119.219.2
Taxes14.114.514.514.514.614.614.6
Taxes on income, profits, and capital gains6.16.26.26.46.46.46.4
Taxes on goods and services6.26.66.66.66.66.66.6
Taxes on international trade and transactions0.40.30.40.40.40.40.5
Taxes not elsewhere classified1.41.41.21.21.21.11.1
Social contributions2.02.12.22.42.42.42.4
Grants0.00.00.00.00.00.00.0
Other revenue2.52.32.32.52.22.22.2
Total expenditure18.918.718.118.819.520.220.2
Expense15.315.315.015.114.915.015.1
Compensation of employees 2/5.15.04.85.05.05.15.1
Purchases/use of goods and services 2/2.22.52.43.02.92.92.9
Interest 2/2.62.52.32.11.81.91.9
Social benefits1.81.92.12.22.22.32.3
Expense not elsewhere classified3.43.43.42.82.92.92.9
Net acquisition of nonfinancial assets3.63.33.13.74.65.15.1
Net lending/borrowing−0.30.20.90.6−0.4−1.0−1.0
National government−1.9−1.2−0.5−1.3−2.2−2.8−2.8
Local government units0.70.70.71.31.31.31.3
Social security institutions (SSIs)0.90.70.70.60.60.50.4
Net acquisition of financial assets4.62.92.11.11.22.42.4
Net incurrence of liabilities4.92.71.20.61.63.43.4
Memorandum items:
Primary balance2.32.73.12.61.50.90.8
Cyclically adjusted primary balance2.32.62.92.71.40.90.8
General government net debt40.639.336.436.234.633.933.2
Sources: Philippine authorities; and IMF staff projections.

Based on GFSM2001. General government includes the national government, social security institutions, and local governments.

National government only. The expense item related to SSIs and local governments are not separately available and are included in the amount for expense not elsewhere classified.

Sources: Philippine authorities; and IMF staff projections.

Based on GFSM2001. General government includes the national government, social security institutions, and local governments.

National government only. The expense item related to SSIs and local governments are not separately available and are included in the amount for expense not elsewhere classified.

Table 5.Philippines: Depository Corporation Survey, 2012–18 1/(End of period, in millions of pesos, unless otherwise indicated)
2012201320142015201620172018
Proj.Proj.
Total
Net foreign assets3,248,5483,575,0543,752,0953,998,8054,309,1854,345,9674,375,604
Net domestic assets2,979,1164,479,1525,303,8535,889,9136,897,3298,055,8939,499,005
Net claims on nonfinancial public sector1,298,1891,287,6321,470,5981,610,0121,940,8992,052,8962,391,783
Claims on private sector3,528,9224,137,6584,949,7475,564,2466,474,9797,706,6209,046,027
Net claims on other financial corporations−767,601178,728274,276294,392480,267570,939683,215
Capital accounts−1,113,606−1,203,888−1,463,098−1,683,623−2,084,472−2,374,607−2,739,988
Other items (Net)33,21279,02272,329104,88585,657100,045117,967
Broad money6,227,6648,054,2069,055,9489,888,71711,206,51512,401,86013,874,608
National currency5,227,2206,915,9297,698,5128,409,1499,477,96310,488,93211,734,516
Foreign currency1,000,4431,138,2771,357,4361,479,5691,728,5521,912,9282,140,092
Bangko Sentral ng Pilipinas
Net foreign as sets3,382,3823,643,8523,514,3643,762,8663,946,64903,861,9733,776,011
Net domestic assets−1,886,211−1,712,821−1,189,691−1,293,108−1,187,000−787,254−336,385
Claims on private sector1111111
Net claims on financial corporations−1,810,951−1,576,264−1,072,412−1,065,162−998,702−662,369−283,023
Capital accounts−1,760−3,821−5,945−112,830−356,730−236,594−101,094
Other items (net)−13,655−17,763−4,266−5,322−76,3270−50,623−21,631
Base money1,475,6331,926,2022,323,9052,467,0592,757,7723,072,8433,437,749
Currency in circulation692,657797,452929,5021,005,1951,124,1931,252,6301,401,382
Other depository corporations liabilities782,6471,128,3021,386,7451,456,2131,631,64301,818,0552,033,953
Other liquid liabilities20,5384,8297682,6991,8771,8771,877
Other depository corporations
Net foreign as sets−133,834−68,798237,731235,938362,536483,994599,592
Net domestic assets5,781,8497,477,3868,095,6388,852,9999,919,00210,894,41212,130,247
Net claims on nonfinancial public sector1,358,0351,402,6051,577,6681,719,8071,696,1401,890,5542,322,399
Claims on private sector3,528,9214,137,6584,949,7465,564,2466,474,9787,706,6199,046,027
Net claims on financial corporations1,969,7053,045,1472,955,9063,036,2143,323,5343,385,8283,304,378
Capital accounts−1,111,846−1,200,066−1,457,153−1,570,792−1,727,742−2,138,013−2,638,894
Other items (Net)37,03492,04369,471103,524152,09249,42396,336
Liquid liabilities5,648,0157,408,5888,333,3699,088,93710,281,53811,378,40612,729,839
Memorandum items:
Broad money (percent change)7.029.312.49.213.310.711.9
Claims on private sector (percent change)14.117.219.612.416.419.017.4
Broad money (in percent of GDP)59.069.871.774.277.478.179.5
Claims on private sector (percent of GDP)33.435.939.241.844.748.651.8
Nominal GDP10,561,08911,538,41012,634,18713,322,04114,480,72015,871,79717,449,660
Source: IMF, International Financial Statistics, and IMF staff projections.

It includes the Bangko Sentral ng Pilipinas (BSP), the accounts of the Central Government arising from its holdings of transactions with the International Monetary Fund, and Other Depository Corporations such as universal and commercial banks, thrift banks, rural banks, non-stock savings and loan associations and non-banks with quasi-banking functions.

Source: IMF, International Financial Statistics, and IMF staff projections.

It includes the Bangko Sentral ng Pilipinas (BSP), the accounts of the Central Government arising from its holdings of transactions with the International Monetary Fund, and Other Depository Corporations such as universal and commercial banks, thrift banks, rural banks, non-stock savings and loan associations and non-banks with quasi-banking functions.

Table 6.Philippines: Balance of Payments, 2012–2018 1/(In billions of U.S. dollars)
2012201320142015201620172018
Proj.Proj.
Current account balance6.911.410.87.3−1.0−0.3−1.1
Trade balance of goods and services−12.7−10.6−12.8−17.9−28.5−30.1−32.7
Goods−18.9−17.7−17.3−23.3−35.5−39.1−43.1
Exports, f.o.b.46.444.549.843.242.747.751.1
Imports, f.o.b.65.362.267.266.578.386.894.2
Services6.27.04.65.57.09.010.4
Receipts20.423.325.529.131.334.537.6
Payments14.316.320.923.624.225.427.2
Primary income, net0.21.00.71.92.63.33.6
Receipts, of which :8.38.48.89.59.510.010.5
Resident workers abroad6.57.07.47.87.58.08.4
Payments8.17.48.17.67.06.76.9
Interest payments3.12.82.62.52.42.52.5
Secondary income, net19.521.122.823.325.026.528.0
Receipts, of which :20.121.723.424.125.727.228.8
Nonresident workers remittances18.019.320.821.523.224.526.0
Payments0.60.60.70.80.70.70.8
Capital account0.10.10.10.10.10.10.1
Financial account 2/−6.72.29.62.3−0.4−0.3−0.7
Direct investment1.0−0.11.0−0.1−5.9−4.5−4.7
Portfolio investment−3.2−1.02.75.51.41.61.8
Equity−1.70.1−1.01.30.10.00.1
Debt−1.5−1.13.74.21.51.51.7
Financial derivatives0.0−0.10.00.00.00.00.0
Other investment, of which :−4.53.45.9−3.14.12.72.3
Currency and deposits−1.51.43.5−0.70.80.70.6
Loans−2.31.42.0−2.43.62.21.9
Errors and omissions−4.6−4.2−4.1−2.40.10.00.0
Overall balance9.25.1−2.92.6−0.40.0−0.4
Memorandum items:
Current account (in percent of GDP)2.84.23.82.5−0.3−0.1−0.3
Short-term debt (original maturity)16.516.916.215.114.514.514.6
Short-term debt (residual maturity)21.120.519.219.719.820.320.3
Gross reserves83.883.279.580.780.780.980.6
(in percent of st. debt by res. maturity) 3/397.9406.2413.3409.5408.3399.1396.2
External debt (in billions)79.978.577.777.574.873.873.2
(in percent of GDP)32.028.927.326.524.523.020.5
Debt service ratio 4/9.911.18.47.79.710.09.2
Export value (percent change)21.2−4.011.9−13.3−1.19.97.0
Import value (percent change)11.3−4.88.0−1.017.712.08.5
Gross external financing needs 5/8.79.79.712.020.120.621.4
Remittances value (percent change)6.58.67.53.84.96.06.0
Remittances (in percent of GDP)9.39.39.69.79.710.19.6
Sources: Philippine authorities; and Fund staff projections.

In BPM6.

An increase in either assets or liabilities is always positive and a decrease is always negative. Net investment is assets minus liabilities. A negative financial account balance means that the change in liabilities is greater than the change in assets, while a positive financial account balance means that the change in assets is greater than the change in liabilities.

As a percent of short-term debt.

In percent of goods and nonfactor services exports.

Current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at the end of the previous period.

Sources: Philippine authorities; and Fund staff projections.

In BPM6.

An increase in either assets or liabilities is always positive and a decrease is always negative. Net investment is assets minus liabilities. A negative financial account balance means that the change in liabilities is greater than the change in assets, while a positive financial account balance means that the change in assets is greater than the change in liabilities.

As a percent of short-term debt.

In percent of goods and nonfactor services exports.

Current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at the end of the previous period.

Table 7.Philippines: Medium-Term Outlook, 2014–22(In percent of GDP, unless otherwise indicated)
Proj.
201420152016201720182019202020212022
GDP and prices
Real GDP (percent change)6.16.16.96.66.76.86.86.86.8
CPI (percent change, annual average)4.11.41.83.13.03.03.03.03.0
GDP by expenditure
Consumption (percent change)5.36.57.16.66.86.86.86.86.8
Private5.66.37.06.66.86.86.86.86.8
Public3.37.68.47.06.96.86.86.86.8
Gross fixed investment (percent change)7.216.925.211.08.07.07.07.07.0
Net exports (contribution to growth)1.0−3.1−4.5−1.6−1.0−0.7−0.7−0.7−0.7
Investment and saving
Gross investment20.621.224.325.625.925.725.825.825.9
Private17.817.920.220.921.321.021.121.221.3
Public2.73.34.14.64.64.74.64.64.6
National saving24.323.724.525.525.525.225.024.924.8
Private21.220.521.122.122.321.921.821.821.6
Public3.13.23.43.33.33.33.23.23.2
Public finances
Nonfinancial public sector balance 1/0.90.4−0.3−0.8−0.9−1.0−1.0−1.1−1.1
Primary balance3.73.02.01.41.41.21.11.01.0
Revenue and grants19.819.719.419.519.519.519.519.519.5
Expenditure (primary)16.116.717.418.118.118.318.418.518.5
Interest2.82.62.32.32.22.22.22.12.1
Nonfinancial public sector gross financing needs3.43.63.94.24.75.25.65.96.1
Domestic2.62.63.23.54.14.65.05.45.6
Foreign currency0.81.00.70.70.70.60.60.50.5
National government balance (authorities definition)−0.6−0.9−2.4−3.0−3.0−3.0−3.0−3.0−3.0
National government balance−0.6−1.4−2.4−3.0−3.0−3.0−3.0−3.0−3.0
Nonfinancial public sector net debt47.947.244.742.941.239.638.136.835.6
External sector
Export value (percent change)11.9−13.30.69.97.07.07.07.07.0
Import value (percent change)8.0−1.016.612.08.58.48.38.28.1
Trade balance of goods and services−4.5−6.0−8.1−8.5−8.3−7.9−7.6−7.4−7.2
Current account3.82.50.2−0.1−0.3−0.5−0.7−0.9−1.0
Reserves (US$ billions)79.580.781.080.980.680.380.079.779.4
Reserves/short-term liabilities 2/413.3409.7400.4399.1396.2392.7386.6379.5370.5
Total external debt27.326.524.523.020.518.316.515.013.7
Debt service ratio (in percent of exports of goods and services)8.47.79.510.09.28.57.87.36.7
Monetary sector:
Credit to private sector 3/39.241.844.748.651.855.158.461.765.0
Credit to private sector (percent change) 3/19.612.416.419.017.417.016.616.115.4
Sources: Philippine authorities; and IMF staff projections.

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments. Cash basis.

Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year).

Based on the depository corporations survey. Inaddition to universal and commercial banks, it includes thrift banks, rural banks, non-stock savings and loan associations and non-banks with quasi-banking functions.

Sources: Philippine authorities; and IMF staff projections.

Includes the national government, 14 government-owned enterprises, social security institutions, and local governments. Cash basis.

Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year).

Based on the depository corporations survey. Inaddition to universal and commercial banks, it includes thrift banks, rural banks, non-stock savings and loan associations and non-banks with quasi-banking functions.

Table 8.Philippines: Baseline and Alternative Scenarios, 2016–22 1/(In percent of GDP, unless otherwise indicated)
2016201720182019202020212022
Baseline Scenario
National government cash accounts
Revenue and grants15.215.215.215.315.315.315.3
Expenditure and net lending17.618.318.218.218.218.218.2
Interest payments2.12.12.12.12.12.12.0
Capital and equity expenditure4.34.84.84.84.84.74.7
Balance−2.4−3.0−3.0−3.0−3.0−3.0−3.0
National government net debt 1/37.737.036.335.635.034.434.0
General government
Cyclically adjusted primary balance1.40.90.80.70.60.50.5
Memorandum items
Real GDP growth (in percent)6.96.66.76.86.86.86.8
Inflation (annual average, in percent)1.83.13.03.03.03.03.0
Current account balance0.2−0.1−0.3−0.5−0.7−0.9−1.0
National saving24.525.525.525.225.024.924.8
Gross investment24.325.625.925.725.825.825.9
Reform-and-Spend Scenario 2/
National government cash accounts
Revenue and grants15.215.216.216.817.117.117.3
Expenditure and net lending17.618.219.319.820.120.020.2
Interest payments2.12.12.12.12.12.12.0
Capital and equity expenditure4.34.85.56.06.16.26.3
Balance−2.4−3.0−3.0−3.0−3.0−3.0−3.0
National government net debt 1/37.736.936.735.935.234.433.8
General government
Cyclically adjusted primary balance1.40.80.10.50.40.40.4
Memorandum items
Real GDP growth (in percent)6.96.67.07.27.37.47.5
Inflation (annual average, in percent)1.83.13.83.63.03.03.0
Current account balance0.2−0.1−0.4−0.8−1.2−1.5−1.8
National saving24.525.526.126.426.526.626.7
Gross investment24.325.626.426.927.227.527.8
No Reform-and-Spend Scenario 3/
National government cash accounts
Revenue and grants15.215.215.215.215.215.215.2
Expenditure and net lending17.618.219.319.920.220.520.7
Interest payments2.12.12.22.32.42.62.7
Capital and equity expenditure4.34.85.56.06.16.26.2
Balance−2.4−3.0−4.1−4.7−5.0−5.2−5.5
National government net debt 1/37.736.937.437.838.839.941.3
General government
Cyclically adjusted primary balance1.40.8−0.9−1.0−1.2−1.4−1.4
Memorandum items
Real GDP growth (in percent)6.96.66.97.07.06.96.8
Inflation (annual average, in percent)1.83.14.24.13.53.53.4
Current account balance0.2−0.1−0.6−1.0−1.5−2.0−2.5
National saving24.525.525.825.525.325.024.7
Gross investment24.325.626.326.526.827.027.2
Sources: Philippine authorities; and IMF staff calculations.

Net of national government debt held by the sinking fund and excluding contingent/guaranteed debt.

In line with the authorities’ plans, the “Reform-and-Spend” scenario assumes a gradual increase in revenue due to tax and administrative reforms of 2 percent of GDP by 2022, a gradual rise in infrastructure investment of 1.6 percent of GDP, and an increase in social spending of 0.4 percent of GDP. It also assumes the implementation of structural reforms such as easing access to foreign direct investment, enhancing domestic competition, and removing quatitative restriction on rice imports. The increase in infrastructure investment and structural reforms crowd in private investment, which lead to higher real GDP growth. Inflation increases temporarily due to the demand stimulus and tax reform, but returns to the target as productive capacity rises and monetary policy tightens. The current account deficit widens due to higher investment-related imports.

The “No Reform-and -Spend” scenario assumes that the tax reform brings no additional revenue, but infrastructure investment increases by 1.6 percent of GDP by 2022 financed with public debt, and no structural reforms. As a result, the fiscal position deteriorates and growth increases less than in the “Reform-and-Spend” scenario due to higher borrowing costs that constrain private investment. The output gap and inflation increase more due to lower expansion in productive capacity and peso depreciation, requiring a tighter monetary policy stance. The current account deficit widens by more.

Sources: Philippine authorities; and IMF staff calculations.

Net of national government debt held by the sinking fund and excluding contingent/guaranteed debt.

In line with the authorities’ plans, the “Reform-and-Spend” scenario assumes a gradual increase in revenue due to tax and administrative reforms of 2 percent of GDP by 2022, a gradual rise in infrastructure investment of 1.6 percent of GDP, and an increase in social spending of 0.4 percent of GDP. It also assumes the implementation of structural reforms such as easing access to foreign direct investment, enhancing domestic competition, and removing quatitative restriction on rice imports. The increase in infrastructure investment and structural reforms crowd in private investment, which lead to higher real GDP growth. Inflation increases temporarily due to the demand stimulus and tax reform, but returns to the target as productive capacity rises and monetary policy tightens. The current account deficit widens due to higher investment-related imports.

The “No Reform-and -Spend” scenario assumes that the tax reform brings no additional revenue, but infrastructure investment increases by 1.6 percent of GDP by 2022 financed with public debt, and no structural reforms. As a result, the fiscal position deteriorates and growth increases less than in the “Reform-and-Spend” scenario due to higher borrowing costs that constrain private investment. The output gap and inflation increase more due to lower expansion in productive capacity and peso depreciation, requiring a tighter monetary policy stance. The current account deficit widens by more.

  • In line with the authorities’ plans, the “reform-and-spend” scenario assumes a gradual increase in revenue from tax and administrative reforms and in infrastructure spending of 2 percent of GDP and 1.6 percent by 2022; a rise in social spending by 0.4 percent of GDP; and structural reforms in capital and labor markets and the removal of quantitative restrictions in rice imports. Potential growth rises to 7.5 percent by 2022 due to a higher investment and gains in productivity and employment. Inflation rises temporarily due to the demand impulse and tax reform, but returns to the target as productive capacity increases and monetary policy tightens. Higher growth and social spending would lead to faster poverty reduction than in the baseline scenario. The impact could be larger with well-targeted social policies, including to rural areas.

  • The “no reform-and-spend” scenario assumes that the tax reform brings no additional revenue, but infrastructure spending rises as in the first scenario financed with public debt, and no structural reforms. In this context, the national government deficit widens to 5.5 percent of GDP by 2022 and the debt-to-GDP ratio increases by 7 percent. Potential growth rises less than in the previous scenario, to 7 percent, as higher borrowing costs constrain private investment. The output gap turns positive, and the CAB falls, leading to peso depreciation and higher inflation, which in turn result in tighter monetary policy. Poverty would fall by less than in the previous scenario as growth is lower and fiscal space to expand social protection is more limited.

C. External Sector Assessment

9. The external sector has moved closer to equilibrium, and external debt is sustainable. The CAB has fallen, but remains moderately stronger than warranted by fundamentals and desirable policies. The CAB gap is estimated at 1.7 percent of GDP in 2016 (3.2 percentage points less than in 2015), with 1 percent due to policy gaps mainly from abroad and the remainder primarily due to inadequate infrastructure (Appendix III). The latter should close over time as infrastructure is upgraded. Regarding the real effective exchange rate (REER), the IMF External Balance Assessment (EBA) models to assess the REER gap produce counterintuitive results, with a wide range of estimates and large unexplained residuals.2 Staff gives more weight to the estimates of the CAB gap, and assess the REER gap at between zero and 4 percent considering the estimated CAB gap and inadequate infrastructure. While foreign reserves are sizable, at 226 percent of the IMF’s reserve adequacy metric, this is broadly justified by the country’s exposure to natural disasters and capital flow volatility. External debt is moderate even after large shocks to interest rates, growth, or the exchange rate (Appendix IV). The exchange rate should continue to move freely in line with market forces, with intervention limited to smoothing excessive volatility in both directions.

Authorities’ Views

10. The authorities broadly agreed with staff’s projections, risks, and scenario analysis. Staff’s “reform-and-spend” scenario shows that their growth target (7 percent to 8 percent in 2018–22) is reachable if tax reform is approved and infrastructure spending is gradually scaled up. They agreed with the assessment of external risks, but noted that the domestic risk of overheating is modest as they believe that the current growth momentum with low inflation is sustainable. They expressed their commitment to the 3 percent of GDP national government deficit target, which should prevent fiscal expansions after 2017. Credit has been expanding rapidly in line with strong and sustained economic growth. Nevertheless, the authorities are closely monitoring developments and stand ready to respond with appropriate measures, if necessary.

11. The authorities also broadly concurred with the external sector assessment. They agreed that the CAB gap is due to external policy gaps and inadequate infrastructure and should close over time. In addition, the EBA model does not capture other factors that could explain the strength of the external sector in recent years, such as remittances (10 percent of GDP), sales from the business process outsourcing industry (8 percent of GDP), and exposure to natural disasters that lead to lower investment and higher precautionary savings. They noted the need for more detailed explanation of the large differences between the estimates of the REER gap based on the CAB gap and those based on the REER approaches.

Policies for Inclusive Growth and Stability

The main policy priorities include raising public spending in infrastructure, human capital, and social protection, financed by higher revenue, to make growth more inclusive and maximize the demographic dividend. However, sustaining the growth momentum in an uncertain external environment requires protecting policy anchors, adapting policies to changing conditions, and maintaining vigilance against risks, including from high credit growth, loan concentration, and overheating.

A. Fiscal Policy

12. The Philippines has some fiscal space, which should be used judiciously to scale up productive spending, while protecting confidence and avoiding overheating. Prudent fiscal management, paired with strong economic growth, has lowered the general government net debt from 68 percent of GDP in 2003 to 34.6 percent in 2016.3 Both gross financing and long-term adjustment needs are manageable, although external financing requirements and the share of general government net debt held by nonresidents remain somewhat elevated. There is a low risk of debt stress both under the baseline and an expansionary scenario, but some vulnerability to macrofiscal shocks such as lower GDP growth, contingent liabilities, and natural disasters (Appendix IV). Thus, on balance, the Philippines has some fiscal space, which should be used to increase productive public investment in physical and human capital over the medium term. However, with the output gap now closed, fiscal policy should be calibrated—together with other macroeconomic policies—to balance against the risk of overheating. Accordingly, a tighter fiscal stance would be appropriate if economic growth turns out to be stronger than expected in 2018 and beyond.

13. Fiscal policy has been expansionary due mainly to higher infrastructure and social spending. The cyclically adjusted general government primary surplus narrowed to 1.4 percent of GDP in 2016 from 2.7 percent in 2015. Fiscal policy would also be expansionary in 2017, providing an additional fiscal impulse of 0.6 percent of GDP. The 2018 national government budget and the medium-term budget framework have deficit targets of 3 percent of GDP, implying a broadly neutral policy stance from 2018 onwards. This is an appropriate fiscal stance to reinforce policy credibility by keeping a broadly stable general government net debt-to-GDP ratio.

Fiscal Policy Stance

(In percent of GDP)

Source: IMF staff estimates.

14. The authorities are seeking to create additional fiscal space through structural fiscal reforms.

  • Staff supports the budget reform bill submitted to Congress to improve the budget process and public financial management (PFM) procedures by having annual appropriations on a cash basis (instead of obligations), strengthening cash flow management and implementing the Treasury Single Account (TSA),4 and establishing the new Office of the Comptroller General.

  • Staff also supports the tax reform bill submitted to Congress. The general government tax-to-GDP ratio, at 14.6 percent in 2016, is low relative to peers and development needs. The reform was expected to yield additional revenue of 2 percent of GDP in the medium term, with another 1 percent from administrative reforms (Appendix V). However, the bill has been diluted in Congress and, if ratified as is, would reduce the revenue yield (excluding administrative reforms) from 0.9 percent of GDP to 0.5 percent in 2018, with smaller revenue losses in the medium term. Moreover, by raising the minimum taxable income threshold to PHP 250,000, the reform leaves 83 percent of the workforce outside the tax net and increases the risks of tax evasion.5 Staff encouraged the authorities to consider a lower threshold just above the minimum wage of about PHP 150,000 and indexation to the minimum wage increases.

15. Building on recent institutional reforms, the authorities could start to consider the next generation of fiscal reforms, including a fiscal responsibility law (FRL). This law would contain explicit fiscal rules designed to avoid procyclicality, anchor debt sustainability, and establish an independent fiscal council to improve accountability, following the implementation of the budget reform bill that enhances transparency. The objective is to anchor the government’s core fiscal operations, and accordingly numerical fiscal rules are designed to focus on the national government using gross data.6 Some characteristics of an illustrative FRL with explicit fiscal rules calibrated to the Philippines that the authorities could consider in the medium term include: (i) a national government gross debt anchor of 45 percent of GDP (currently consistent with a general government net debt of 35 percent of GDP, which is similar to staff advice during the 2016 Article IV consultation);7 (ii) a cyclically adjusted national government primary deficit target of 2 percent of potential GDP; and (iii) an expenditure rule linking the growth rate of total spending excluding social assistance to potential GDP growth.8

16. Achieving inclusive growth requires a carefully balanced and sequenced approach to revenue and spending plans. Contingency plans are needed in case the tax reform is delayed or weakened, including moderating the increase in public investment, raising the value-added tax (VAT) rate, rationalizing tax incentives, and accelerating the implementation of new excises on automobiles and petroleum products.

  • Broadening the tax base and enhancing efficiency. The Philippines has an opportunity to raise additional revenues, reduce distortions, and attain an efficient and equitable tax system.9 Efforts should aim to eliminate exemptions for upper-income taxpayers, strengthen revenue administration, and rationalize the VAT and corporate income tax (CIT) systems by streamlining concessions and exemptions to broaden the tax base.10

  • Improving the composition and quality of spending. Rebalancing outlays toward investment would raise growth potential. Staff welcomes the Rightsizing the National Government Act that eliminates redundant functions and strengthens agencies that need additional resources, but noted the need for strong public investment management processes. Staff encouraged the authorities to seek IMF technical assistance on the Public Investment Management Assessment (PIMA) tool, which provides an evaluation of institutions relevant to public investment at three key stages of the public investment cycle—planning, allocation and implementation.

17. Fiscal policy could foster more inclusive growth by facilitating a broader sharing of the benefits of development. The authorities have enhanced spending on education and health through the extension of high school program and the expansion of universal health insurance. Nonetheless, public health and education expenditures are lower than in ASEAN peers (1.2 percent of GDP in 2015, compared to 2.2 percent for health, and 2.8 percent compared to 4.1 percent for education). The authorities plan to raise education spending to 4 percent of GDP in 2017.

Health Efficiency Frontier, Latest Value Available 1/

Sources; IMF FAD Expenditure Assessment Tool (EAT); World Bank; World Health Organization.

1/ Dash lines are the average of ASEAN.

2/ Healthy life expectancy (HALE) is a measure of health expectancy that applies disability weights to health states to compute the equivalent number of years of life expected to be lived in full health.

Government Education Expenditure per Student, PPP$ Adjusted, Latest Value Available

Source:: IMF FAD Expenditure Assessment Tool (EAT); and the world Bank.

18. The authorities are seeking to better monitor and control contingent liabilities and off-budget borrowing. Based on the 2015 Fiscal Transparency Evaluation, staff noted the need for central oversight and Department of Finance’s gateway role in the PPP process and large infrastructure projects, which are critical to contain risks and safeguard transparency. It is also vital to integrate PPP projects with the overall investment strategy and budget cycle, conduct a detailed feasibility study and value-for-money analysis, strengthen the risk management system, bring all PPP-contracting agencies into the coverage of fiscal accounts, and regularly publish data on all outstanding PPP commitments.11 Similarly, the Department of Finance should have the final approval capacity for any off-budget borrowing contracted through government controlled and owned corporations.

19. Addressing regional disparities may require additional administrative reforms. To improve regional development, staff recommended synchronizing the devolution of revenue and expenditure assignments to subnational governments with the development of their institutional capacity.12 Staff also stressed the need for modernizing subnational taxation—by centralizing and updating property valuations and simplifying the local business tax on turnover—and instituting adequate borrowing rules and procedures for subnational governments.

Authorities Views

20. The authorities reiterated their commitment to fiscal prudence, while scaling up public investment and social spending. They concurred with staff’s assessment and policy advice, noting significant efforts to reform the tax system in an efficient and equitable manner and strengthen the budget process and PFM procedures to ensure prudent and transparent fiscal management. In view of the country’s development needs, the authorities plan to significantly increase infrastructure spending as percent of GDP over the next five years and raise budgetary allocations to education, healthcare and other social areas in the medium term. They agreed on the need to maintain prudent fiscal policies and create additional fiscal space through tax reforms and expenditure rationalization and restated their commitment to the 3 percent of GDP national government deficit target. The authorities appreciated staff’s analytical presentation on how to strengthen the fiscal management framework in the future, including through an illustrative FRL calibrated for the Philippines, which will provide useful inputs to their future deliberations.

B. Monetary Policy

21. While monetary policy has been formally on hold since 2014, the effective policy rate (weighted average on all sterilization instruments) has risen by 60 basis points since mid-2016 through the reform of monetary operations. The BSP adopted an interest rate corridor with a term deposit auction facility to manage liquidity in June 2016, which has improved monetary policy transmission and raised the effective policy rate. While the policy rate remains low at 3 percent (real policy rate near zero), unremunerated reserve requirements (RRs) for banks are high at 20 percent. This has resulted in high interest rate margins and a tighter monetary policy stance than implied by the policy rate. High RRs have also increased financial intermediation costs and the risk that financial intermediation may migrate to the less regulated NBFIs.

22. The current monetary policy stance remains appropriate, but the BSP should be ready to tighten if signs of overheating emerge. Inflation is projected at the center of the target band, the output gap is estimated at near zero, and inflation expectations are well anchored. There is also spare capacity in the labor market, with underemployment at 17 percent13 and modest wage growth since 2013. The effective policy rate remains close to the rates implied by a Taylor rule reaction function. However, there are upside risks to inflation from commodity prices, pass through from peso depreciation, electricity tariffs, fuel excises, and robust economic and credit activity. The BSP must continue to be vigilant to risks of overheating. An acceleration in credit growth with rising inflation, a stronger-than-expected impact of the fiscal expansion on inflation, or rising external pressures could warrant monetary policy tightening. On the other hand, the BSP has also space to loosen monetary policy should downside risks materialize.

Long-Term Inflation Expectations

(In percent)

Source: Consensus Forecasts, April 2017.

Average Nonagricultural Daily Wages Growth

(In percent, year on year)

Source: Haver Analytics.

Labor Market Indicators

(In percent of the labor farce, 4-quarters moving average)

Source: IMF staff estimates.

Taylor Rule Estimates: Effective Policy Rate

(In percent)

Source: IMF staff estimates.

23. The authorities’ intention to unwind high RRs on banks is appropriate, but this requires careful calibration and timing. Lowering RRs would reduce macrofinancial risks and improve financial intermediation. However, the timing and pace of this reform should be data driven and contingent on the inflation outlook and domestic liquidity conditions. This reform should aim to keep domestic liquidity broadly unchanged, for which the BSP has several options: (i) increasing the size of the term deposit auctions to absorb the liquidity released by the reduction in RRs. This will also require allowing for higher interest rates in the term deposit auctions and preemptively raising the policy rate; (ii) considering unsterilized sales of foreign reserves when foreign exchange flows decline; and (iii) remunerating RRs during the transition period. Effective communication of the impact of this reform is crucial.

Authorities’ Views

24. The authorities agreed with the assessment of the monetary policy stance and staff’s suggested approach to unwind high RRs. They agreed that the monetary policy stance is appropriate given the stable inflation outlook, and noted that the BSP follows a data-dependent path and will be ready to adjust monetary policy if inflation pressures build. Although the authorities are prepared to lower the RRs over the medium term, they considered current domestic conditions of strong credit growth and high domestic liquidity as not conducive for this reform. They would prefer to be deliberate in adjusting the RR based on the emerging credit and liquidity conditions to achieve their inflation targets. They agreed that unsterilized sales of foreign reserves when foreign exchange flows decline would help reduce excess domestic liquidity.

C. Macrofinancial Linkages and Systemic Financial Stability Risks

25. Macrofinancial linkages arise from the global financial cycle (global interest rates and global financial volatility) through capital flows and their impact on domestic financial conditions. The Philippines received sizeable foreign exchange inflows after the global financial crisis, resulting in persistent liquidity overhang and a buildup of foreign reserves. Effective borrowing costs fell, fueling credit growth and asset price inflation. Nonfinancial corporate (NFC) leverage has risen, but remains moderate compared to peers. Credit growth has accelerated, especially to the real estate sector and households. Financial intermediation by NBFIs, which are not regulated by the BSP, remains small but is growing fast.

26. FSIs suggest that the banking sector is sound, but there are pockets of vulnerability in the NFC sector. Banks remain well capitalized, with ample liquidity, and low NPLs. Although official data on NFC leverage is not available, commercial sources indicate that it is moderate at 30 percent of GDP, with a low share in foreign currency. Moreover, the share of NFC debt at risk is among the lowest in emerging market economies.14 However, some real estate developers have leveraged significantly, while expanding shadow-banking activities through their acceptance of advances from households.15 The authorities have several initiatives to fill data gaps that hinder supervision, such as the Financial Sector Coordination Council’s (FSCC’s) efforts to enhance corporate sector balance sheet data, and efforts covering shadow banking activities by real estate developers. Staff supports giving the Security and Exchange Commission (SEC) legal access to information on conglomerates’ finances.

27. The main systemic risks to financial stability are high credit growth and concentration. Although not yet at credit boom levels, high credit growth, including for real estate and households, merit continued monitoring.16 Staff welcomes the upcoming launch of a consumer credit bureau database, which should improve transparency and availability of borrower data. The lapse of the additional Single Borrower Limit for PPPs and petroleum importers have mitigated concentration risks, but the opaque conglomerate structure and data gaps makes it hard to measure the banks’ exposure and intercompany linkages. Capital market development can help reduce bank loan concentration by diversifying the sources of funding for large conglomerates.

28. Macroprudential policies should be used to address systemic risks to financial stability. The BSP should stand ready to raise capital requirements in case of a broad-based credit boom, supported by monetary policy tightening, if accompanied by overheating. Targeted macroprudential policies should be used in case of excessive credit growth to some sectors. For real estate credit, in addition to the stress test on banks’ exposures, the authorities should consider higher risk weights or provisioning requirements on real estate loans above a certain loan-to-value ratio. For household loans, the authorities should improve data collection on borrowers’ debt-to-income (DTI) and consider higher risk weights or provisioning requirements on DTI ratios. Staff welcomes the early adoption of the Basel III guidelines and the role of the new financial stability department at the BSP entrusted with mainstreaming macrofinancial surveillance and strengthening the macroprudential framework. Staff encouraged the authorities to consider introducing stress tests on debt-to-earnings ratios for corporates and developing a borrowers’ interconnectedness index.

29. Approving the amendment to the BSP charter is crucial to preserve financial stability and improve monetary policy transmission. The current BSP charter, adopted in the early 1990s, needs to be modernized in line with a changing financial sector. The main amendments currently in Congress are: (i) introducing a financial stability mandate; (ii) extending the supervisory perimeter; (iii) establishing legal protection for supervisors; (iv) increasing the BSP’s capital; and (v) allowing the BSP to issue its own securities. In the interim period, enhanced coordination among the financial sector regulators through the FSCC should continue.

Authorities’ Views

30. The authorities broadly agreed with the assessment of systemic risks and policies to address them. The authorities are monitoring the growth of credit in general and developments in the real estate and household sectors, in particular, but they do not believe that there are signs of imminent market dislocation. They point out that the growth in credit is from a relatively low base and partly reflects the significant achievements in financial inclusion. They believe that the requirement to undertake stress tests on banks’ real state exposures, and the 20 percent concentration limit, has helped moderate real estate credit growth. Stress test results show that banks are resilient to a 20 percent write-off on their exposure to the top 20 conglomerates. The authorities also noted that the BSP’s supervisory framework has strengthened in recent years, including through the adoption of Basel III guidelines. The BSP also requires banks to report interrelated loans and can partly monitor concentration risks. Moreover, the FSCC is launching a survey that would profile the outstanding debt obligations of NFCs, although this will be voluntary for nonlisted companies.

D. Structural Policies and Inclusive Growth

31. The authorities’ main goal is to sustain rapid inclusive growth to significantly lower poverty and maximize the demographic dividend. The Philippines has a young and growing population, and thus an important priority is to provide the new labor force entrants with good job opportunities.17 With eradicating poverty by 2040 being a long-term objective,18 the government aims to reduce poverty to 14 percent in 2022 (from 21.6 percent in 2015), with a focus on rural areas. However, the Philippines has had a low elasticity of poverty reduction to growth in the past, partly due to weak employment generation, structurally high underemployment, and slow technical change, caused, in turn, by low human and physical capital investment. Thus, achieving the authorities’ objectives would require a broad set of structural reforms.

32. The authorities’ priorities for structural reforms aim to promote inclusion. The focus is on higher investment in infrastructure and human capital, sound urban development, and access to finance. Monetary and financial policies should support this agenda through price stability and financial inclusion (Appendix VI). Regulatory policy should promote competition and openness to foreign investment, while ensuring adequate consumer protection. Social policies should expand protection to uncovered sectors, disaster risk mitigation, and access to healthcare. Eliminating quantitative restrictions in rice imports while supporting affected farmers, would help reduce consumer price inflation and poverty.

33. The Philippines scores well on gender equality, but female labor force participation could be improved. Since the early 2000s, the share of adult Filipino women participating in the labor market has stagnated at 50 percent. This has led to a high gender gap compared with other ASEAN countries. In this regard, the target to raise female labor force participation by 2 percent under the PDP is welcome. Improving access to affordable child care and strengthening retraining programs aimed at returning female workers can help narrow this gap.19

Philippines: Selected Gender Inequality Indicators
20102015
GNI per capita (2011 PPP$)
Women5,9516,843
Men9,0359,919
Labor market
Labor force participation rate (percent)
Women50.250.5
Men79.678.8
Female share of employment in non-agriculture (percent)42.041.3
Unemployment rate, female-to-male ratio0.920.92
Education
Mean years of schooling (years)
Women9.29.5
Men9.09.2
Population with at least some secondary education (percent)
Women67.572.8
Men66.770.3
Health
Maternal mortality ratio (deaths per 100,000 live births)129114
Life expectancy at birth (years)
Women71.271.9
Men64.565.0
Political empowerment
Share of seats in parliament (percent)21.527.1
Sources: United Nations, Human Development data; and IMF staff estimates.
Sources: United Nations, Human Development data; and IMF staff estimates.

Global Gender Gap Ranking, 2016 1/

(Periphery = Highest ranking in gender equality )

Sources: World Economic Forum, Global Gender Gap Report 2016; and IMF staff estimates.

1/ “Economic Participation and Opportunity” is base on the gender gap in labor force participation, earned income, and the number of legislators and managers; “Education Attainment” on the gap in primary-, secondary-, and tertiary-level education and the literacy rate; “Health and Survival” on the sex ratio at birth and the gap in life expectancy; “Political Empowerment” on the gap in ministerial-level and parliamentary positions, and the terms of years in executive office.

Gender Gap in Labor Force Participation, 2016

(Difference between male and female labor force participation rate, percentage point)

Sources: World Bank, World Development Indicators (modeled ILO estimates); and IMF staff estimates.

34. Capital market development would help finance infrastructure projects and limit concentration risks in the banking system. Capital market development would facilitate investment in long-term government bonds, lower borrowing costs, and improve monetary policy transmission. The focus should be on developing secondary markets, introducing new instruments, ensuring proper supervision and regulation to promote secondary market trading, and revamping the primary dealer system to incentivize more active market-making, including through the introduction of the repo system.

35. The authorities are tightening anti-money laundering (AML) legislation in line with Financial Action Task Force standards. Following last year’s theft of Bangladesh’s foreign reserves laundered through casinos in the Philippines, the Asia-Pacific Group on Anti-Money Laundering reiterated its recommendation to include casinos in the AML legislation.20 The law was amended to cover casinos (including internet and ship-based gaming sites), which are now required to perform customer identification and record keeping obligations, and report to the financial intelligence unit all single casino cash transactions above PHP 5 million (approximately US$99,000). Notwithstanding this notable progress, the AML/CFT framework could be strengthened further by amending the bank secrecy law and making tax evasion a predicate crime.

Authorities’ Views

36. The authorities reaffirmed their commitment to inclusive growth reforms while maintaining fiscal prudence. The Philippines’ basic education program has recently been extended from a 10-year to a 12-year system, to make high school graduates more employable and better prepared for higher education. Public health insurance has also been expanded to cover a larger share of the population. The authorities also intend to push forward financial inclusion measures, including by enhancing the digitalization of the financial system. The Foreign Investment Negative List (FINL) is being reviewed with the aim of attracting more FDI. The authorities are taking steps to implement a capital market reform package as proposed by recent IMF technical assistance. They are also aiming to raise female labor force participation by providing childcare support. The current tax reform proposal includes an easing of the bank secrecy law for tax purposes, which should also improve the AML/CFT framework.

Staff Appraisal

37. The strong performance of the economy has continued, with rapid economic growth and low inflation. Economic growth is projected to remain high, supported by robust domestic demand, while inflation is expected to remain near the center of the target band. However, credit growth has accelerated, and although most indicators find no evidence of credit booms so far, some indicators suggest that credit gaps could approach early warning levels in 2017–18.

38. Risks to the outlook are tilted to the downside and stem mainly from external sources. The combination of high credit growth, buoyant private investment, and fiscal expansion without tax reform could lead to overheating of the economy. On the upside, approval of the first tax reform package would lead to a sustainable increase in infrastructure investment. The Philippines is well equipped to respond if risks materialize given its strong fundamentals and available policy space.

39. The external sector remains moderately stronger than warranted by fundamentals and desirable policies. The CAB remains above its estimated norm, largely due to inadequate infrastructure, and the gap is expected to close over time as infrastructure is upgraded. The undervaluation of the REER is estimated between zero and 4 percent, considering the estimated CAB gap and the structural impediments to investment. Foreign reserves remain sizable, but this is broadly justified by the country’s exposure to natural disaster and capital flow volatility.

40. This setting provides a good opportunity for the authorities to pursue their inclusive growth agenda. Despite the strong economic growth in the recent years, poverty and inequality remain high and the country needs to create jobs for its young and growing population. Sustaining the growth momentum in an uncertain and volatile external environment requires protecting policy anchors, adapting policies to changing conditions, and maintaining vigilance against risks.

41. Staff supports the authorities’ plans to gradually scale up productive infrastructure and targeted social spending, while keeping a broadly neutral fiscal stance. Staff supports the authorities’ ambitious development agenda, but recommends calibrating fiscal policy to balance against the risk of overheating. The increase in priority spending should be financed through additional revenue mobilization, including by widening the tax base, so that the fiscal stance remains broadly neutral. Avoiding procyclicality in fiscal policy would require a tighter fiscal stance if economic growth is stronger than expected. Staff also supports the 3 percent of GDP national government deficit ceiling, which would reinforce policy credibility and keep the general government net debt on a stable path.

42. Staff welcomes the first tax reform package designed to create additional fiscal space, and encourages the authorities to consider additional revenue measures. The ambitious development agenda depends on a series of comprehensive tax reforms that could create additional fiscal space. Staff appreciates the breadth of the envisaged tax reforms, but cautions that reform efforts may have a lower revenue yield than originally projected because of dilution in Congress. Accordingly, staff encourages the authorities to consider lowering the threshold for PIT, raising the VAT rate, rationalizing tax concessions and exemptions, and accelerating the implementation of new excises on automobiles and petroleum products.

43. The stance of monetary policy remains appropriate, but the BSP should be ready to tighten if there are signs of overheating. The authorities’ intention to unwind the high banks’ RRs over time would reduce macrofinancial risks. However, this reform should be carefully calibrated and timed, and should aim to keep domestic liquidity broadly unchanged. The exchange rate should continue to move freely in line with market forces, with foreign exchange intervention limited to smoothing excessive volatility in both directions.

44. The main systemic risks to financial stability are high credit growth and concentration. High credit growth, especially to the real estate and household sectors, merit continued monitoring. In addition, some conglomerates and real estate developers have leveraged significantly, while shadow-banking activities have expanded. The opaque conglomerate structure and data gaps generates challenges to measure concentration but capital market development could help reduce bank loan concentration by diversifying the sources of funding for large conglomerates. Staff supports the authorities’ efforts to have legal access to information on conglomerates’ finances.

45. Macroprudential policies should be used to address systemic risks to financial stability. In case of a broad-based credit boom, the BSP should raise capital requirements, supported by monetary policy tightening if accompanied by overheating. Targeted macroprudential policies should be used if sectoral credit growth is excessive. Staff welcomes the early adoption of the Basel III guidelines on banks, and the role of the new financial stability department at the BSP in mainstreaming macrofinancial surveillance and strengthening the macroprudential framework.

46. The financial stability framework would greatly benefit from amendments of the BSP Charter. The Charter should be amended to better serve the needs of a modern financial sector and economy. Staff supports the proposed revisions that (i) introduce a financial stability mandate; (ii) extend the supervisory perimeter; (iii) establish legal protection for supervisors; (iv) increase the BSP’s capital; and (v) allow the BSP to issue its own securities.

47. Staff supports ongoing reforms aimed at lowering poverty and maximizing the demographic dividend. The authorities are appropriately focusing on investing in infrastructure and human capital, reducing regional disparities, eliminating quantitative restrictions in rice imports, and improving access to finance including through capital market development. Regulatory reforms to reduce the costs of doing business and openness to foreign investment would help promoting domestic competition.

48. Staff welcomes the recent amendment to the AML law to include casinos. Notwithstanding this notable progress, the AML/CFT framework could be strengthened further by amending the bank secrecy law and making tax evasion a predicate crime.

49. It is recommended that the next Article IV consultations take place on the standard 12-month cycle.

Figure 1.Philippines: Real Sector

Figure 2.Philippines: Monetary and Financial Conditions

Figure 3.Philippines: Financial Market Comparisons

Figure 4.Philippines: Cross-Country Financial Market Developments

Figure 5.Philippines: External Sector

Figure 6.Philippines: Banking Sector

Figure 7.Emerging Markets: Social Conditions and Income Distribution

Table 9.Philippines: Financial Soundness Indicators, 2012–16(In percent)
20122013201420152016
Capital adequacy
Regulatory capital to risk-weighted assets 1/17.817.016.115.315.6
Regulatory Tier-1 capital to risk-weighted assets 1/14.815.213.512.813.7
Capital to total assets11.79.79.910.09.7
Non-performing Loans Net of Provisions to Capital2.42.42.93.13.0
Net open position in foreign exchange to capital 1/8.73.35.12.42.9
Gross asset position in financial derivatives to capital4.64.54.61.71.8
Gross liability position in financial derivatives to capital0.10.00.00.00.0
Asset quality
Non-performing loans to total gross loans2.22.42.01.91.7
Specific provisions to nonperforming loans76.080.673.570.169.7
Earnings and profitability
Return on assets1.81.91.61.41.3
Return on equity15.817.815.913.813.7
Interest margin to gross income57.857.766.670.769.2
Trading income to gross income21.321.88.65.78.3
Noninterest expenses to gross income58.756.158.661.360.8
Personel expenses to noninterest expenses37.335.936.837.636.7
Liquidity and funding
Liquid assets to total assets36.642.842.438.835.6
Liquid assets to short-term liabilities53.367.364.560.654.6
Non-interbank loans to customer deposits0.70.70.70.80.8
Sensitivity to market risk
Foreign currency denominated loans to total loans10.612.113.011.911.9
Foreign currency denominated liabilities to total liabilities20.819.119.520.320.7
Real estate markets
Residential real estate prices RREPI (percent change)6.00.2
Residential real estate loans to total loans6.97.17.37.27.3
Commercial real estate loans to total loans10.811.511.613.914.3
Source: Philippines authorities; IMF, Financial Soundness Indicators ; and IMF staff estimates.

The last obserbation is Q3:2016.

Source: Philippines authorities; IMF, Financial Soundness Indicators ; and IMF staff estimates.

The last obserbation is Q3:2016.

Table 10.Philippines: Indicators of External Vulnerability, 2012–16(In percent of GDP, unless otherwise indicated)
20122013201420152016
External indicators (including external liquidity)
Gross international reserves, (in billions U.S. dollars)83.883.279.580.781.0
Maturing short-term debt (in billions U.S. dollars)16.516.916.215.114.5
Amortization of medium and long-term debt (in billions U.S. dollars)3.64.63.63.04.6
Net FDI inflows (in billions of U.S. dollars) 1/1.0−0.11.0−0.1−4.2
FX deposits residents (in billions of U.S. dollars)25.326.132.132.736.1
Total gross external debt32.028.927.326.524.5
Nonfinancial public sector indicators:
Overall balance−0.60.60.90.4−0.3
Primary balance2.73.73.73.02.0
Net debt53.051.347.947.244.7
Net debt denominated in FX or linked to the exchange rate (in percent of total)36.033.531.933.133.4
Short-term net general government debt (original maturity, in percent of total)5.15.64.94.44.7
Average effective interest rate of general government debt (in percent)6.46.36.05.65.2
Amortization of total general government debt6.75.04.03.93.8
Sources: Philippine authorities; and IMF staff estimates.

In BPM6.

Sources: Philippine authorities; and IMF staff estimates.

In BPM6.

Table 11.Philippine: 2016 Article IV Recommendations and Related Policy Actions
2016 Article IV RecommendationsPolicy Actions Taken
Fiscal Policy
Maintain the general government net debt-to-GDP ratio broadly stable at around 35 percent while raising the national government deficit target to 3 percent of GDP to increase priority expenditures.The national government deficit target was raised to 3 percent of GDP in 2017, with the general government net debt-to-GDP ratio projected to decline to 33.7 percent in-2017.
Scale up public investment in infrastructure and human capital.The national government increased capital outlays from 3.3 percent of GDP in 2015 to 4.2 percent in 2016 and to a projected 4.8 percent in 2017.
Reform the tax system and administration to raise additional revenue.The government submitted a comprehensive tax reform bill to Congress, which has passed the House and now under discussion at the Senate.
Monetary Policy
Stand ready to tighten the policy stance in response to faster-than-expected credit growth with inflationary pressures, or a stronger-than-expceted impact of the fiscal expansion on inflation.In June 2016, the BSP introduced a new interest rate corridor with a term deposit auction facility to manage liquidity. This has resulted in a de facto monetary tightening of about 60 basis points.
Macro-prudential Policy
Monitor emerging sytemic risks (especially in the real estate sector) and stand ready to respond with targeted macroprudential measures.The BSP set up a new financial stability department (December 2016) to enhance risk monitoring, and strengthened its in-house supervisory training
Allow the additional Single Borrower Limit (SBL) for PPP to lapse in December 2016.Implemented as recommended.
Assign an explicit financial stability mandate to the BSP through amendments to its charter.An amendment to the BSP charter was submitted to Congress, which would expand the BSP’s regulatory perimeter to the less regulated non-bank sector.
Structural Policy
Lift or ease legal and administrative restrictions on inward FDIThe recently published Philippines Development Plan 2017-22 aims to relax regulatory restrictions on FDI, including amenments to the Constitution.
Develop capital market instruments to support infrastructure financing.The authorities are drawing up a comprehensive capital market development strategy, including enhancing the primary market issuance policy and introducing an interdealer repo market.
Appendix I. Bank Credit Developments

Credit growth has accelerated in 2017. Although most indicators show no evidence of credit booms so far, some indicators suggest that credit gaps could approach early warning levels in 2017–18. The latter, and the high growth of credit to some sectors, warrant continued monitoring.

Bank credit growth has picked up, increasing from 13.6 percent in 2015 to 19.7 percent in July 2017. This was initially due to a pickup in credit to the service sector and consumer loans, and more recently to the manufacturing and nonresident sectors. Consumer loans have been growing at over 20 percent since mid-2016, albeit from a low base, while real estate loans, the largest banks’ exposure, have continued to grow at around 19 percent. These trends warrant close monitoring of credit developments for these sectors.

Contributions to Credit Growth

(In percent)

Source: IMF staff estimates.

Credit Growth by Economic Sector

(In percent)

Source: IMF staff estimates.

Credit gaps are below credit boom levels in most but not all indicators. Staff analyzed several indicators to identify credit booms. The approach of Mendoza and Terrones (2008), which looks at deviations of real credit per capita from trend, shows that credit aggregates are close to trend. The approach of Dell’Ariccia and others (2012), which looks at deviations of the credit-to-GDP ratio from a cubic trend, also finds no evidence of credit booms, with the growth differential between credit and GDP remaining below the 10 percent cutoff. However, the approach of the IMF’s Global Financial Stability Report of September 2011, shows that the rise in the credit-to-GDP ratio was close to the 3 percent cutoff for early warning of credit booms in 2016, and could slightly surpass this threshold in 2017–18. Similarly, the approach of Drehmann and others (2010), which looks at deviations of the credit-to-GDP ratio from a Hodrick-Prescott trend with a high smoothing parameter, finds that the credit-to-GDP ratio could exceed the 10 percent of GDP cutoff in 2018.

Ratio of Credit to GDP

(In percent, based on Dell’Aricia and others. 2012)

Source: IMF staff estimates.

Change in the Credit to GDP Ratio

(In percent based on IMF’s GFSR, September 2011)

Source: IMF staff estimates.

Growth Differential Between Credit and GDP

(In percent based on Dell’Aricia and others, 2012)

Source: IMF staff estimates.

Ratio of Credit to GDP

(In percent, based on Drehmann and others, 2010)

Source: IMF staff estimates.

Appendix II. Philippines—Risk Assessment Matrix 1/
Nature/Source

of Main Threats
Likelihood

of

Risk/Time

Horizon
Transmission ChannelsExpected Impact of RiskRecommended Policy Response
High
Retreat from cross-border integration.Medium/Short to Medium TermA fraying consensus about the benefits of globalization could bring about protectionism and economic isolationism.

Leading to reduced global and regional policy collaboration, with negative consequences for trade, capital and labor flows, sentiment, and growth.
Protectionist policies in advanced economies could hamper remittances, exports, and business process outsourcing (BPO).

Real GDP growth would fall, and the current account balance would deteriorate, requiring additional external financing. The economy would become more vulnerable to external financing risks, although the large foreign reserves would provide a buffer.
Maintain exchange rate flexibility to serve as a shock absorber, limiting FX intervention to smooth excessive volatility.

Improve the domestic business environment to enhance the competitiveness of exports and the BPO industry.

Diversify the sources of economic growth to ensure sufficient employment opportunities domestically.
Medium/High
Higher global interest rates/surge in the U.S. dollarHigh/Short TermSharp capital outflows, leading to a peso depreciation vis-à-vis the U.S. dollar.

Tighter domestic financial conditions, asset price declines and higher credit spreads.
Rising credit cost slows down real estate and construction activity.

Banks’ NPLs may increase from low levels, but effect on capital is likely manageable. Some leveraged corporates may face debt service difficulties.

The macroeconomic impact should be limited due to strong fundamentals.

Depreciation of the peso would cushion the growth impact.
Ensure banks have adequate capital buffers and do not exceed standard ceilings on exposures to a single borrower.

Consider adopting macroprudential policies targeted to specific sectors.

Allow for exchange rate flexibility, limiting intervention to smoothing excessive volatility.

Ease monetary or fiscal policy if real economy slows down significantly.
Medium
Significant growth slowdown in China and other regional economiesMedium/Short to Medium TermA slowdown in China reduces regional exports and economic growth.

Investor sentiment toward the region weakens.
Moderate impact through direct exports to China as they are small compared to peers. Indirect effects through weaker regional growth could dominate.

Some corporates could face debt servicing problems, with knock-on effects to local equity markets and credit conditions.
Maintain exchange rate flexibility to serve as a shock absorber. Let the exchange rate adjust to the new equilibrium if China’s growth slowdown is persistent.

Implement structural reforms and boost public infrastructure spending to spur new sources of growth.
Medium
Domestic asset price and credit boom fueled by abundant liquidityMedium/Medium TermContinued inflows into financial assets and real estate. Construction and real estate related activity accelerates.

Credit exposure to the real estate sector grows.
Real estate prices grow rapidly, attracting additional real and financial resources to the sector, and boosting near-term growth. Vulnerability of the financial system builds. Asset price correction over the medium term weakens growth, including through financial sector deleveraging.Enforce existing macroprudential policies and implement new real estate specific measures.

Ensure that banks have adequate capital buffers to absorb credit losses.

Coordinated and strengthened surveillance on nonbank activities, including expansion of the BSP’s mandate to include nonbanks.
Medium
Large increase in infrastructure investment financed with debt instead of additional revenueLow/Medium TermThe tax reform fails to pass in Congress, or the approved reform is too diluted.

Infrastructure spending is increased as planned.

Public debt increases, leading to higher borrowing costs for the government.
The increase in public investment leads to overheating and only modest gains in potential GDP in the medium-term.

The increase in public debt leads to higher borrowing costs for the government.

The fiscal impulse leads to tighter monetary policy and higher domestic interest rates.

Private investment increases only slightly due to higher financing costs.
Approve the tax reform in Congress as proposed by the government.

Introduce additional revenue raising reforms if the current tax reform proposal fails to pass.

In the absence of additional revenue, increase public investment more gradually. Tighten monetary policy in case of overheating and rising inflationary pressures.
Medium
Climate change related natural disasterMedium/Medium TermNatural disaster destroys physical and human capital.

Population is displaced and businesses close.

Uncertainty increases and investment declines.
Results in a loss of output and high unemployment and poverty.

Requires additional budgetary resources for reconstruction and social needs.

Increased uncertainty reduces investment and potential growth.
Accelerate infrastructure improvements, to make it more resilient to natural disasters.

Ensure sufficient fiscal buffers to fund social and reconstruction spending.

Explore private and public sector options for insurance to natural disasters.
High
Additional revenue from tax reforms finance large increases in infrastructure investmentMedium/Medium TermTax and administrative reforms results in large revenue gains.

Infrastructure investment rises financed by additional revenue.

Inflation rises in the short term and monetary policy tightens.
Economic activity increases in the short term due to the demand impulse.

Private investment and potential growth increase in the medium term.

Monetary policy eases in the medium term as productive capacity expands.
Select public investment projects that would maximize the impact on potential growth.

Compensate the impact of the tax reform on the poor through targeted transfers.

Keep the increase in public spending in line with the revenue gains to avoid overheating.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Appendix III. Philippines—External Sector Assessment

The Philippines’ external position remains moderately stronger than warranted by fundamentals and desirable policies despite the recent fall in the current account balance (CAB). The CAB approach of the IMF’s External Balance Assessment (EBA) model indicates that the Philippines’ CAB is above the level implied by fundamentals and desired policies. This is primarily due to policy gaps from abroad and structural impediments to investment such as inadequate infrastructure. Thus, the CAB gap should close over time as external policy gaps narrow and infrastructure is upgraded in line with the authorities’ plans. Regarding the real effective exchange rate (REER), the EBA models to estimate the REER gap produce counterintuitive results, with estimates within a wide range and large unexplained residuals. Staff gives more weight to the estimates of the CAB gap, and thus assess the REER gap at between zero and 4 percent considering the estimated CAB gap and inadequate infrastructure.

  • Current account balance. The CAB fell to near zero in 2016, from 2.5 percent of GDP in 2015, due to a rise in imports of capital goods and slower growth of exports and remittances. Still, the EBA model places the gap between the CAB and its norm—the CAB consistent with fundamentals and desired policies—at 1.2 percent of GDP in 2016 (3.7 percentage points lower than in 2015). Deviations of policies from desired levels explain 1 percentage points, of which 0.8 percentage points are due to policy gaps in other countries. The other 0.2 percent of GDP is left unexplained by the EBA model and could be explained by inadequate infrastructure.

  • Real effective exchange rate. The peso depreciated by 3.1 percent in real effective terms in 2016, and by 3.9 percent in nominal effective terms. The EBA models for the REER index and level produce counterintuitive results and large unexplained residuals, pointing to an overvaluation of the peso between 4 percent and 23 percent in 2016. At the same time, applying an elasticity to the CAB gap point to an undervaluation of 3.9 percent. Staff gives more weight to the current account regression approach. The EBA REER index approach is less reliable in countries with large structural changes and short data spans. The EBA REER level approach relies on purchasing power parity prices, which suffer from data quality issues. Thus, the REER gap is assessed between zero and 4 percent considering the estimated CAB gap and inadequate infrastructure.

  • Reducing imbalances: The large current account surpluses during 2004–15 reflected low levels of investment in the Philippines compared with other emerging market economies. This changed in 2016, when a pickup in investment in the Philippines reduced imbalances by bringing the CAB closer to its norm. Going forward, staff expects public infrastructure spending to increase, which should catalyze private investment, lower the CAB, and reduce the estimated CAB gap further.

  • International reserves. The Philippines’s has ample reserves at US$81 billion or 226 percent of the IMF’s reserve adequacy metric in 2016. While the level of reserves is above adequacy levels, this is broadly justified by the country’s exposure to natural disasters and capital flow volatility. Staff agrees with the BSP that the exchange rate should continue to be allowed to move freely in line with market forces, with intervention limited to smoothing excessive volatility in both directions.

Table 1.External Balance Assessment 1/
Current AccountREER IndexREER Level
RegressionRegressionRegression
MethodApproachApproachApproach
Assessment period201620162016
Cyclically adjusted CAB (percent of GDP)A−0.4----
EBA’s CAB norm (percent of GDP)B−1.6----
EBA’s CAB gap (percent of GDP)(A-B)1.2----
Policy gaps (percent of GDP)C1.0----
Unexplained residual (percent of GDP)(A-B-C)0.2----
REER gap (percent) 2/3/D−3.93.822.6
Of which :
Contribution of identified policy gapsE−3.2−1.0−1.3
Unexplained residual(D-E)−0.64.823.9
Source: IMF staff estimates.

Based on the EBA update of June 2017.

A positive REER gap indicates overvaluation.

The value for the current account regression approach is the CAB gap (A-B), divided by the elasticity of the CAB with respect to the REER, estimated at −0.31 using autoregressive distributed lag (ADL) model.

Source: IMF staff estimates.

Based on the EBA update of June 2017.

A positive REER gap indicates overvaluation.

The value for the current account regression approach is the CAB gap (A-B), divided by the elasticity of the CAB with respect to the REER, estimated at −0.31 using autoregressive distributed lag (ADL) model.

Figure 1.Saving Investment Gap, Median Emerging Market Economy by Region

  • Size of capital flows. The Philippines received sizeable foreign exchange inflows in the years following the global financial crisis, both from the current and financial accounts, resulting in a build-up of reserves. This has changed since 2013, when capital inflows turned into outflows, and reserves remained broadly stable. Going forward, international reserves are projected to decline slightly in U.S. dollars and as percent of the IMF’s reserve adequacy metric. Foreign direct investment rose in 2016 and is expected to increase further going forward.

Figure 2.Philippines: Balance of Payments and International Reserves

Appendix IV. Public and External Debt Sustainability Analysis

The Philippines’ general government gross debt remains moderate and sustainable at 42.7 percent of GDP in 2016, with net debt at 34.6 percent, but is vulnerable to growth shocks and fiscal risks associated with contingent liabilities and natural disasters. In the baseline scenario, the general government gross debt-to-GDP ratio is projected to decline to 34.3 percent by 2022, with net debt falling to 30.9 percent. However, debt dynamics remain exposed to the volatility of growth, exchange rate and international capital flows, resulting in directional changes or slower pace of reduction under extreme scenarios of lower economic growth and higher real interest rates. External debt also remains moderate and sustainable at 24.5 percent of GDP in 2016, which under the baseline scenario is projected to decline to 13.7 percent by 2022.

A. Public Sector Debt Aggregates

The public debt sustainability analysis (DSA) focuses on general government gross debt. Staff presents different public sector debt aggregates in the report:

  • National government gross debt (42.1 percent of GDP in 2016) considers only the national government’s gross obligations.

  • National government net debt (37.7 percent of GDP in 2016) is equal to the national government gross debt minus the bond sinking fund (4.4 percent of GDP in 2016).

  • General government gross debt (42.7 percent of GDP in 2016) is the sum of the national government gross debt and the gross debt of the social security institutions and local governments.

  • General government net debt (34.6 percent of GDP in 2016) is equal to the general government gross debt minus the bond sinking fund and holdings of national government bonds by the social security institutions and local governments.

  • Nonfinancial public sector net debt (44.7 percent of GDP in 2016) corresponds to the general government net debt plus the net debt of the 14 state-owned enterprises (SOEs). The latter stood at 10.1 percent of GDP in 2016.

As SOE debt is small, the DSA assumes that they can repay it, with no contingent liabilities to the general government. In addition, the DSA focuses on gross debt as it is difficult to know how liquid the government assets are, particularly in times of financial stress. Thus, the relevant public debt aggregate for the Philippines’ DSA is the general government gross debt.1

B. Background and Realism of Key Assumptions

Baseline projections point to strong and sustainable macroeconomic performance over the medium term. The assumptions underpinning the DSA for the Philippines’ public and external debt are those of the medium-term baseline scenario presented in the staff report.2 Real GDP growth is projected to remain at 6.8 percent per annum over the medium term, with consumer price inflation at the center of the central bank’s target range. Past projections of growth outcomes indicate reasonable forecast errors without a systematic bias that would undermine the DSA. Under the baseline, the national government’s deficit is anchored to a non-binding target of 3 percent of GDP from 2017 (higher than the previous target of 2 percent), which leads to a decline in the general government primary surplus from 1.5 percent of GDP in 2016 to 0.4 percent in 2022. The external debt projections also consider the paths for the current account balance and other external debt creating flows in staff’s medium-term baseline scenario.

C. Public Debt Sustainability

General government gross debt in the Philippines is projected to remain on a downward trajectory under current policies. The 2016 DSA assessed the risk of debt distress to be low owing to prudent fiscal policies contributing to a sustained decline in the debt-to-GDP ratio. Looking forward, the general government gross debt-to-GDP ratio is projected to fall from 42.7 percent of GDP in 2016 to 34.3 percent in 2022, with net debt declining from 34.6 percent to 30.9 percent, even with an elevated profile for the fiscal deficit in 2017 and beyond. On a cumulative basis, the interest rate-growth differential is the main factor behind the projected fall in public debt, as real GDP growth is high. Furthermore, the primary budget balance also makes a significant contribution to the reduction in general government gross debt. Gross financing needs remain comfortable at around 3.5 percent of GDP throughout the projection period. The debt composition is also projected to be stable with a relatively low share of short-term debt and foreign currency-denominated debt, in line with the authorities’ debt management policy.

Alternative scenarios suggest that staff’s baseline is conservative by historical standards. The Philippines achieved a large-scale reduction in general government gross debt since 1999, supported by primary surpluses, high output growth, and exchange rate appreciation. The historical scenario, in which real GDP growth, real interest rates, and primary balances are equal to their 2007–2016 averages, leads to faster reduction in debt and gross financing needs than in staff’s baseline. The scenario with a constant primary budget surplus at the projected 2017 level of 1.2 percent of GDP also leads to lower debt-to-GDP ratios and gross financing needs than in staff’s baseline scenario.

D. External Debt Sustainability

Total external debt in the Philippines is sustainable. External debt fell sharply in the 2000s, from a peak of 76.4 percent of GDP in 2001 to 24.5 percent in 2016, due to sustained current account surpluses, strong output growth, and currency appreciation. Under staff’s baseline scenario, these trends are projected to continue, with external debt falling to 13.7 percent of GDP in 2022. Alternative scenarios suggest that staff’s baseline is conservative. The historical scenario, in which real GDP growth, real interest rates, and the non-interest current account balance are equal to their 2007–2016 averages, leads to a faster reduction in external debt than in staff’s baseline. Moreover, debt dynamics appear resilient to various shocks: one-half standard deviation shocks to interest rates, growth, and the current account lead to only modest increases in external debt ratios over the medium term. However, exchange rate volatility remains a vulnerability as a one-time exchange rate depreciation of 30 percent in 2017 would raise the external debt-to-GDP ratio by about 9.3 percentage points. However, even in this case external debt would fall below current levels by 2022.

Philippines—Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Defined as general government gross debt minus the bond sinking fund and the national government bonds held by the social security institutions and local governments.

6/ Derived as [(r - π(1 + g) - g + ae(1 + r)]/(1 + g + π + gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

7/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1 + g) and the real growth contribution as -g.

8/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 + r).

9/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Philippines—Public DSA—Composition of General Government Gross Debt and Alternative Scenarios

Source: IMF staff.

Philippines—External Debt Sustainability: Bound Test 1/2/

(External debt, in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data, Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented, Ten-year historical average for the variable is also shown.

2/ For the historical scenario, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

Philippines—External Debt Sustainability Framework, 2012–2022(In percent of GDP, unless otherwise indicated)
ActualProjections
20122013201420152016201720182019202020212022Debt-stabilizing

non-interest

current account 6/
1Baseline: External debt32.028.927.326.524.523.020.518.316.515.013.7−1.9
2Change in external debt−1.7−3.1−1.6−0.8−1.9−1.5−2.5−2.2−1.8−1.5−1.2
3Identified external debt-creating flows (4+8+9)−6.5−6.8−5.2−3.1−2.8−2.9−2.4−2.0−1.6−1.2−0.9
4Current account deficit, excluding interest payments−4.0−5.3−4.8−3.4−1.0−0.7−0.4−0.10.20.40.6
5Deficit in balance of goods and services−58.5−53.8−57.4−55.5−57.9−60.5−58.7−57.0−55.4−53.8−52.5
6Exports26.725.026.524.724.525.624.824.023.322.622.1
7Imports−31.8−28.9−30.9−30.8−33.4−34.9−33.9−33.0−32.1−31.2−30.4
8Net non-debt creating capital inflows (negative)−0.30.0−0.10.2−1.4−1.5−1.4−1.3−1.2−1.1−1.0
9Automatic debt dynamics 1/−2.2−1.5−0.40.1−0.3−0.8−0.7−0.6−0.6−0.5−0.5
10Contribution from nominal interest rate1.21.11.00.90.80.80.70.60.50.50.4
11Contribution from real GDP growth−2.0−2.1−1.7−1.6−1.8−1.5−1.4−1.3−1.1−1.0−0.9
12Contribution from price and exchange rate changes 2/−1.4−0.50.30.80.6
13Residual, incl. change in gross foreign assets (2-3) 3/4.83.73.62.20.81.4−0.1−0.1−0.2−0.3−0.3
External debt-to-exports ratio (in percent)119.6115.7103.1107.299.989.882.676.170.766.162.2
Gross external financing need (in billions of US dollars) 4/8.79.79.712.019.120.621.422.423.725.126.7
in percent of GDP3.53.63.44.16.36.46.05.65.45.14.9
Scenario with key variables at their historical averages 5/32.028.927.326.50.010-Year10-Year19.514.59.64.80.10.0−0.2
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
hideNominal GDP (US dollars)250.1271.8284.6292.8304.9321.2357.9397.8442.2491.6543.7
Real GDP growth (in percent)6.77.16.16.16.95.62.06.66.76.86.86.86.8
GDP deflator in US dollars (change in percent)4.61.5−1.4−3.0−2.64.06.8−1.24.44.14.14.13.5
Nominal external interest rate (in percent)4.03.73.53.33.34.00.83.43.33.33.23.23.2
Growth of exports (US dollar terms, in percent)16.91.511.0−4.13.56.410.39.97.87.87.97.97.9
Growth of imports (US dollar terms, in percent)12.0−1.412.22.312.98.312.210.38.18.18.18.08.0
Current account balance, excluding interest payments4.05.34.83.41.04.32.00.70.40.1−0.2−0.4−0.6
Net non-debt creating capital inflows0.30.00.1−0.21.40.50.61.51.41.31.21.11.0

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix V. Update on Tax Reform Proposals

The Philippines has achieved macroeconomic stabilization and set the stage for growth acceleration, but it lags in public investment in critical infrastructure and human capital. The extent of revenue mobilization—relative to peers and the country’s own potential—is a significant bottleneck to raise government spending without undermining macro-financial stability and debt sustainability. This is partly because of narrow tax bases in most of the main areas of taxation and partly due to administrative shortcomings. To this end, the authorities have unveiled a comprehensive tax reform agenda, with the first package of reforms concentrating on personal income tax, excises and value-added tax.

Personal income tax (PIT). The government’s proposal raises the minimum taxable income from PHP 10,000 to PHP 250,000 and reduces the number of tax brackets from seven to six with a progressive schedule.

Excises. Fuel excise taxes in the Philippines are currently too low to offset negative externalities caused by petroleum consumption, including not only global carbon emissions, but also local air pollution and traffic congestion. Also, the DoF estimates that the top 10 percent of households in the Philippines consume more than half of fuel products, enjoying the benefits of an untargeted tax subsidy. The tax reform bill proposes to impose:

Personal Income Tax Schedule
Taxable baseTax rate
Current
Not over P10,0005%
Over P10,000 but not over P30,000P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000P2,500 +15% of the excess over P30,000
Over P70,000 but not over P140,000P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000P22,500 + 25% of the excess over P140,000
Over P250,000 but not over P500,000P50,000 + 30% of the excess o+ver P250,000
Over P500,000P125,000 + 32% of the excess over P500,000
Reform Proposal for 2017-2019
Not over P250,0000%
Over P250,000 but not over P400,00020% of the excess over P250,000
Over P400,000 but not over P800,000P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000P130,000 + 30% of the excess over P800,000
Over P2,000,000 but not over P5,000,000P490,000 + 32% of the excess over P2,000,000
Over P5,000,000P1,450,000 + 35% of the excess over P5,000,000
Reform Proposal for 2020 and beyond
Not over P250,0000%
Over P250,000 but not over P400,00015% of the excess over P250,000
Over P400,000 but not over P800,000P22,500 + 20% of the excess over P400,000
Over P800,000 but not over P2,000,000P102,500 + 25% of the excess over P800,000
Over P2,000,000 but not over P5,000,000P402,500 + 30% of the excess over P2,000,000
Over P5,000,000P1,302,500 + 35% of the excess over P5,000,000
Source: Philippines, Department of Finance.
Source: Philippines, Department of Finance.
  • An excise tax on diesel, kerosene, liquefied petroleum gas, and bunker oil of PHP 3 per liter in 2018, which is set to increase to PHP 5 per liter in 2019 and PHP 6 per liter in 2020;

  • An additional tax on other petroleum products, including gasoline, lubricating oils, and greases, of PHP 8 per liter in 2018, which will increase to PHP 9 per liter in 2019 and PHP 10 per liter in 2020;

  • An additional excise on automobiles that is increasing in a progressive manner with rates linked to the net selling price on top of a fixed amount; and

Excises Taxes on Petroleum Products(In Philippine peso per liter or kilogram)
CurrentReform Proposal
Fuel ProductTax201820192020
Diesel3.005.006,00
Bunker oil, kerosene, LPG3.50 to 5.35AdditionalAdditionalAdditional
3.005.006,00
Gasoline, greases.3.50 to 5.35AdditionalAdditionalAdditional
8.009.0010.00
Source: Philippines, Department of Finance.
Source: Philippines, Department of Finance.
  • A new tax on sugar-sweetened beverages of PHP 10 per liter (earmarked for the Health Promotion Fund established to address health concerns associated with sugar-sweetened beverages).

Value-added tax (VAT). The tax reform bill proposes to remove certain VAT exemptions granted to cooperatives (except those selling unprocessed agricultural products), power transmission, domestic shipping, residential leases and low-cost and socialized housing, boy and girl scouts, and special laws except those covering senior citizens and people with disability.

Excise Tax on Automobiles
Net selling price20182019
Below PHP 600,0003 percent4 percent
PHP 600,000 to

PHP 1,100,000
PHP 18,000 plus

30 percent above

PHP 600,000
PHP 24,000 plus

40 percent above

PHP 600,000
PHP 1,100,000 to

PHP 2,100,000
PHP 168,000 plus

50 percent above

PHP 1,100,000
PHP 224,000 plus

60 percent above

PHP 1,100,000
PHP 2,100,000 to

PHP 3,100,000
PHP 668,000 plus

80 percent above

PHP 2,100,000
PHP 824,000 plus

100 percent above

PHP 2,100,000
Above PHP 3,100,000PHP 1,468,000 plus

90 percent above

PHP 3,100,000
PHP 1,824,000 plus

120 percent above

PHP 2,100,000
Source: Philippines, Department of Finance.
Source: Philippines, Department of Finance.

Other taxes. The tax reform bill restructures the tax regime for micro businesses to a flat rate of 8 percent (in lieu of income and VAT or other types of taxes) for businesses with gross sales less than PHP 3 million. Similarly, the proposal reduces the donor’s tax to a single rate of 6 percent on net donations for gifts exceeding PHP 100,000 on an annual basis, regardless of the nature of the donor’s relationship. Finally, tax reform bill imposes a single estate tax rate of 6 percent (instead of a tax schedule ranging from 5 to 20 percent based on the value of assets above PHP 200,000) and grants an amnesty in respect of estate tax for taxable year 2016 and prior years, which have remained unpaid as of end-2016.

Appendix VI. Financial Inclusion

Financial inclusion is an important challenge for the Philippines. In an archipelago consisting of 7,107 islands, access to financial services remains challenging across the country, with 36.2 percent of municipalities left without a physical banking office (Financial Inclusion Initiatives Report 2016). International survey results indicate that the Philippines lags its regional peers in areas such as account penetration and usage of financial services. As of 2014, only about 28.1 percent of adults have an account at a financial institution, and less than 5 percent have outstanding mortgage (World Bank, Global Findex Database). Small and medium enterprises (SMEs) also continue to face difficulty in obtaining credit, with only 30.8 percent of them having bank loans or formal lines of credit.

Adults with Formal Account

(In percent of respondents)

Sources: World Bank, Global Findex 2014; and IMF staff estimates.

Adults with Outstanding Mortgage

(In percent of respondents)

Sources: World Bank, Global Findex 2014; and IMF staff estimates.

Saving or Borrowing in the Past 12 Months

(In percent of respondents with an account in financial institutions)

Sources: World Bank, Global Findex 2014; and IMF staff estimates.

SMEs with Bank Loan or Line of Credit

(In percent of respondents)

Sources: World Bank, Enterprise Surveys; and IMF staff estimates.

1/ As of 2016 for Thailand and 2015 for Indonesia, Philippines, and Vietnam.

Innovative technologies could offer new opportunities to fostering financial inclusion. Digital financial services could play complementary roles in overcoming geographical barriers to access, promoting competition, and facilitating data collection. The Philippines already leads its regional peers in the use of mobile networks for financial transactions, partly owing to strong policies in the past. This creates a conducive setting for further penetration of new technology-based financial services. To reap their full benefits, however, public investment in education and infrastructure, including in ICT, should also provide support.

Registered Mobile Money Acounts

(Per 1,000 adults)

Sources: IMF, Financial Access Survey; Bank of Thailand; and IMF staff estimates.

Mobile Money Transactions: Value

(In percent of GDP, 2014)

Sources: IMF, Financial Access Survey; Bank of Thailand; and IMF staff estimates.

Mobile Money Transactions

(Thousand, number per 1,000 adults)

Sources: IMF, Financial Access Survey; Bank of Thailand; and IMF staff estimates.

Usage of Internet for Financial Services

(In percent of respondents)

Sources: World Bank, Global Findex 2014; and IMF staff estimates.

Adequate financial supervision and consumer protection are essential to minimize associated financial stability risks. Financial inclusion can help promote inclusive growth provided risks are well managed.1 Adoption of innovative financial services should be carefully paced considering the supervisory capacity in place. Cooperation at the international level, including with international bodies, could help better identify and understand these risks, and formulate appropriate regulatory responses at the national level (IMF, SDN/16/03). Financial inclusion should also be accompanied by a greater focus on consumer protection. These could include enhancing financial literacy programs with effective delivery channels and strengthening the administrative capacity for oversight and supervision (IMF, SDN/15/17). Institutionalizing financial education in the school system, as proposed in the 2014 Consumer Finance Survey, could contribute to the former.

Notable policy initiatives are underway. Over the recent years, the Philippines has been at the forefront of the global financial inclusion agenda, especially in the areas of microfinance and mobile banking, and through active contribution to international fora. The launch of the National Strategy for Financial Inclusion in 2015 and the subsequent formation of the inter-agency Financial Inclusion Steering Committee were welcome steps and should be followed up with sustained implementation efforts. In particular, the National Retail Payments System project led by the BSP would help steer the prevailing use of physical checks and cash for retail inter-bank transactions toward electronic transfers, thus lowering the transaction costs and improving efficiency. The recent introduction of the regulatory framework for virtual currency exchanges is timely given the rapid increase in the transaction volume especially for remittances.

See Chapter 1, “Spillover Effects from United States Policy Shifts and Lower Growth in China,” Philippines—Selected Issues, forthcoming.

These models point to an overvaluation of the peso between 4 percent and 23 percent in 2016, which is difficult to reconcile with a positive CAB gap. Moreover, these models have several shortcomings as explained in Appendix III.

The general government net debt is the sum of the national government net debt (gross obligations minus the bond sinking fund) and the net debt of the social security institutions and local governments.

As of end-March 2017, around 50 percent of total central government balances is still outside the TSA system.

Under the existing personal income tax (PIT) system, about 28 percent of the workforce have a tax-exempt status.

In most countries, debt rules are set in gross rather than net terms, as it is difficult to know how liquid the government’s assets are, particularly in times of financial stress.

See Appendix IV for a detailed discussion of the different public debt aggregates.

See Chapter 2, “The Case for Fiscal Responsibility Law,” Philippines—Selected Issues, forthcoming.

The VAT code has more than 140 exemptions totaling 3.5 percent of GDP in 2016. There are many tax incentives granted by 18 investment promotion agencies under 180 separate bills without a central control over the design and cost-benefit analysis. The CIT expenditures were estimated at 1.5 percent of GDP in 2014.

See Chapter 3, “Does Taxation Stifle Corporate Investment?,” Philippines—Selected Issues, forthcoming.

In line with the IMF’s Government Finance Statistics Manual 2014, PPPs meeting certain criteria should be included in the government’s balance sheet, even if carried out by a private company.

IMF, 2009, “Macro Policy Lessons for a Sound Design of Fiscal Decentralization,” Fiscal Affairs Department.

Underemployment refers to employed persons who want additional working hours in their present job, or to have an additional or new job with longer working hours.

IMF, Global Financial Stability Report, October 2016.

Buyers that do not qualify for bank loans can make advances for properties under construction. These advances are considered trade receivables by real estate developers, who keep ownership of the property until fully paid. Thus, these fully collateralized loans are exposed to default, if house prices decline or interest rates increase.

Although growing fast, household leverage at around 18 percent of GDP, remains low compared to peers.

The average growth rate of the labor force was 2.2 percent during 2010–16, or about 1 million people per year.

The Philippine Development Plan (PDP) for 2017–22.

IMF, Staff Discussion Note, SDN/13/10.

After the enactment of the Republic Act No. 10365 in 2013, which strengthened the anti-money laundering legislation, the Philippines was removed from the FATF’s list of jurisdictions with serious AML/CFT deficiencies. However, casinos were not put under scrutiny of this law as it may have discouraged tourism and casino activity.

However, the appropriate public debt aggregate to target under a fiscal rule on the national government is different. For this, staff uses national government gross debt as it is unclear how freely the government can use the bond sinking fund.

The new DSA framework is described in http://www.imf.org/external/no/pp/eng/2013/050913.pdf.

Looking at different segments of the population, the gap in financial inclusion is the most prominent across income groups. Compared to other countries in the region, poor Filipino households face disproportionately more limited access to financial services than the rich. The gender gap, on the other hand, is relatively small and often in favor of women in most financial inclusion indicators.

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