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Philippines: 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Philippines

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
September 2018
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Context

1. The Philippines has been one of Asia’s strong performers over the past years. Sound policies and a favorable external environment have delivered robust growth, low inflation, and a strong fiscal position. Nevertheless, poverty and inequality remain high, underscoring the need for inclusive policies. The economic cabinet, which has been delegated the policymaking responsibilities, has adopted a long-term perspective on policies and reforms, which has contributed to strengthening confidence in the economy.

Economic Performance During 2001–2017

Sources: Haver Analytics; Philippines, Department of Finance: and IMF staff

2. The economy faces near-term challenges from the risk of overheating and a less benign external environment. The projected positive output gap, rising inflation and inflation expectations, high and sustained credit growth, and the planned fiscal expansion in 2018–2019 point to the risk of overheating. The rise of inflation to above the target in recent months has weakened political support for tax reform. The combination of tighter global financial conditions, higher oil prices, a widening current account deficit (CAD) and portfolio outflows, have put downward pressure on the peso.

Selected Exchange Rates Against U.S. Dollar

(Index, January 2015=100, upward=appreciation)

Sources: Haver Analytics; and IMF staff estimates.

Recent Developments, Outlook, and Risks

3. Growth, inflation, and external account. Real GDP in 2017 grew at 6.7 percent and 6.3 percent in 2018:H1, y/y, led by strong public investment (Figure 1). Inflation rose to 5.7 percent (y/y) in July 2018, averaging 4.5 percent year to date and above the inflation target band of 2–4 percent, led by adjustments in excise taxes, the rise in global oil prices, the weaker peso, and above-trend growth. Investment-led growth and sustained supply pressures have likely raised employment and renewed wage demand pressures respectively. Following surpluses before 2016, the CAD widened to 0.8 percent of GDP in 2017, driven mainly by imports of capital goods, oil, and raw materials, reflecting strong investment growth (Figure 4).

4. Bank credit growth and stability. Bank credit continues to outpace the rate of economic growth. Banks’ high capitalization and stable nonperforming loans, and low exposure to external and FX-denominated financing provide some buffer against financial stability risks. While the pace of credit growth has slowed recently, the credit-to-GDP gap has widened, approaching early warning levels (Figure 5). Financial intermediation by the less regulated nonbank financial institutions (NBFIs) is small but has grown rapidly in recent years.

5. Outlook. Real GDP is projected to grow at 6.5 percent in 2018 and 6.7 percent in 2019, led by strong domestic demand. The government’s infrastructure push and stable FDI are expected to support investment growth. Private consumption would remain robust, underpinned by remittances and rising employment. Despite the monetary tightening since May that raised the policy rate to 4 percent, inflation is projected at above the 4 percent upper target bound in 2018 and stay in the upper half of the target band (3–4 percent) during 2019–2020. Output would stay above potential in 2018–2020, and the CAD is expected to widen to 1.5 percent of GDP in 2018 driven by a continued rise of capital goods imports, mostly financed by FDI. Over the medium term, real GDP growth would gradually rise to 6.9 percent as implementation of structural reforms promote investment and innovation.

Potential GDP Growth

(In percent, adjusted for inflation)

Sources: Barro and Lee (2016) Educational Attainment Dataset; and IMF staff estimates.

6. Risks (Appendix I). On balance, risks to the growth outlook are tilted to the downside, stemming mainly from rising inflation and overheating, higher oil prices, high credit growth, intensification of global trade tension, and the impact of higher U.S. interest rates and volatile capital flows on borrowing costs over the short term. On the upside, fiscal incentive for streamlining and liberalizing foreign investment, if approved and implemented, would boost productivity over the medium term and strengthen investor confidence.

External Sector Assessment

7. External sector. In 2017, the external position was assessed to be broadly in line with fundamentals and desirable policies (Appendix II). The cyclically-adjusted current account balance was -1.0 percent of GDP, within the range of the estimated current account norm of between – 2.0 and 0.8 percent of GDP, driven by demographics and strong growth potential. The real effective exchange rate was assessed to be broadly consistent with fundamentals and desirable policy settings in 2017. Gross reserves, at US$76.7 billion as of July 2018 and equivalent to 192 percent of the IMF’s reserve adequacy metric for 2017, are ample. Compared to its regional peers, the peso depreciated significantly, by almost 6.0 percent in January–July against the U.S. dollar and about 4.5 percent in nominal effective terms.

Authorities’ Views

8. The authorities expected robust growth momentum to continue, with risks mainly originating from external sources. The projected 7–8 percent growth over the medium-term would be driven by strong private consumption, higher public spending in infrastructure and social programs, resurgence in manufacturing, and growing FDI and tourism. Based on an assessment of inflation dynamics, output, liquidity, and credit conditions, the authorities continued to see limited evidence of overheating in the economy, with the initial impact of excise tax increases on inflation stabilizing and new bank credit mostly directed to productive sectors. They expected the approval of the pending rice reform bill to replace rice import quotas with tariffs to help reduce consumer prices. The authorities agreed with the main thrust of the staff’s external sector assessment, while noting that the recent widening of the CAD has been driven by imports of capital goods, raw materials and intermediate/manufactured goods related to infrastructure investment and overall strong domestic demand. Meanwhile, they expect that while the potential direct impact of global trade tensions may not be substantial, continued trade friction could, nevertheless, affect overall investment sentiment, and increasing uncertainty on the global growth prospects could take its toll on the external sector. Nonetheless, authorities viewed that the Philippines can rely on increasing intraregional trade, strengthening domestic demand, and its robust external payments position as buffers against possible negative effects of protectionist measures.

Policy Issues

A. Adjusting the Policy Mix to a Changing Economic Environment

9. There is a need to adjust the policy mix to address rising domestic and external imbalances. The planned fiscal stimulus, combined with strong private investment and consumption growth, will feed price and current account pressures. Monetary policy should continue to be tightened to protect price stability and preserve market confidence, supported by a shift to a neutral fiscal stance centered on priority infrastructure and social spending. Exchange rate should remain flexible to play its shock absorber role against external shocks, while macroprudential measures should safeguard financial stability by keeping systemic risks in check.

Fiscal Policy—Supporting Inclusive Growth while Safeguarding Stability

10. On current policies, fiscal policy would be expansionary in 2018–2019. The authorities plan to raise the deficit from 2.2 percent of GDP in 2017 to 3 percent in 2018 and 3.2 percent in 2019, implying a fiscal impulse of 0.5 percent and 0.2 percent, respectively, led by infrastructure investment and social spending. In contrast, staff projects a lower deficit of 2.8 percent in 2018 given implementation constraints. As of June 2018, the deficit stood at 1.1 percent of projected 2018 GDP against the authorities’ target of 1.5 percent as revenue has outperformed due to an effective implementation of the Tax Reform for Acceleration and Inclusion (TRAIN), the first package of the government’s Comprehensive Tax Reform Program, while public spending remains broadly on target.

Overall Fiscal Deficit

(In percent of GDP)

Sources: Philippine authorities; and IMF staff proposal.

11. The Philippines has some fiscal space. Prudent fiscal management and sustained reforms helped bring the general government gross debt to 40 percent of GDP in 2017 from 52.4 percent in 2007 (Appendix III). Gross financing and long-term adjustment needs are low, although the government’s reliance on external financing poses a moderate risk.

12. Nonetheless, the current environment warrants a neutral fiscal stance to balance growth and stability objectives. A neutral stance over 2018–2019, implying a deficit of 2.4 percent in 2018 and 2.5 percent in 2019, would support pro-growth infrastructure investment without overburdening monetary policy, limit overheating risks, and help preserve buffer against unexpected adverse shocks. This could be achieved by intensifying efforts on the revenue side and containing nonpriority spending, such as new hiring of public sector employees and non-urgent capital projects. Further reduction in nonpriority spending, especially those unrelated to flagship infrastructure projects and social protection, would be warranted if tightening of global financial conditions engenders a surge in borrowing costs, while expanding social protection spending as needed.

13. The planned tax incentive reform would make the system more effective and generate economy-wide productivity gains. The current regime provides extensive tax incentives based on more than 220 laws and granted at the discretion of 14 investment promotion agencies without adequate central control, at an estimated fiscal cost of over 2 percent of GDP.Package 2 of the tax reform program focuses on streamlining tax incentives while gradually reducing the corporate income tax (CIT) rate from 30 to 25 percent. The reform would make tax incentives more effective in achieving national policy goals and improve overall productivity. Any CIT rate reduction, however, should be conditional on proportionate fiscal incentive consolidation to offset revenue losses.

14. Enhancing the VAT refund system would support the tax reforms. These require sustained efforts to improve tax authority’s administrative capacity through training and establishing dedicated staff teams. Other measures could include launching a pilot project to implement a risk-based approach for VAT refund. Such an approach could modernize and improve the entire operation of tax administration.

15. The international taxation framework could be strengthened. Outbound FDI by Philippines-based multinational corporations has risen significantly over the recent years, increasing the risk of revenue losses from base erosion and profit shifting. Addressing this risk would require increasing capacity building efforts and implementing prioritized reforms, such as limiting corporations’ interest payment deductions to a specified percentage of earnings before interest, taxes, depreciation and amortization. Strengthening transfer pricing enforcement could also address revenue losses caused by tax incentives that could allow for domestic transfer pricing.

16. There is room to gradually expand social protection. Reallocating resources from nonpriority spending, and unconditional cash transfers eventually, would allow the expansion of other programs that have been assessed to be effective in reducing poverty such as the conditional cash transfer program. Public spending on education, health, and infrastructure could also place priority on improving access to public services by low-income households (Box 1). Implementation of the approved national identification system will help improve targeting of social spending.

17. Public expenditure management should aim to maximize the return from the large infrastructure investment. Priority should be on selection and prioritization of capital projects, periodic review of ongoing programs and projects, and contingent liability management and oversight over PPP. The IMF technical assistance which conducted a Public Investment Management Assessment has helped identify specific areas of reform in public investment management and institutions.

Authorities’ Views

18. The authorities underscored the need for uninterrupted investment in infrastructure projects but were open to review the staff’s advice on the neutral fiscal stance. They saw limited scope for spending adjustment for those infrastructure projects already under construction but noted that some room exists elsewhere in case the overall spending needs to be adjusted. Regarding the tax incentive reform, the authorities’ goal is to make the system more performance- based and transparent, including by strengthening the cost-benefit analysis and delegating the central oversight role to the Department of Finance. The CIT rate cuts would supersede incentive consolidation. The authorities also agreed on the need for gradual expansion of social protection programs and further improvement of their public investment management and prospective assessment by the IMF.

Monetary and Exchange Rate Policy—Tackling Inflation, Modernizing Operations, and Maintaining a Flexible Exchange Rate

19. While temporary supply-side factors explain much of the rise in headline inflation, demand-side pressures also played a role. The price change in core services, which is less affected by those factors and hence a better indicator of domestic demand pressure, has picked up substantially since late 2017 (Box 2). The risk of unanchored inflation expectations has risen, based on survey results, and the government bond yield curve steepened, consistent with higher inflation expectations. Addressing potential second-round effects from supply pressures on broader prices and rising wage demand pressures has become a major policy issue.

Inflation Decomposition and Momentum(In percent)
(1) 2018 July (y/y)(2) 2017 Average (y/y)(3)=(1)-(2) Differences(4)=(3)*CPI Weight Contribution
Headline5.72.92.82.8
Food, Beverages and Tobacco7.83.34.51.8
Gas, fuel and lubricants20.510.210.30.5
Core goods1.81.70.10.0
Core services3.51.71.80.5
Residual (net contibutions from other items)0.0
Sources: Philippine Statistics Authority; and IMF staff estimates.
Sources: Philippine Statistics Authority; and IMF staff estimates.

Inflation Expectations: Up Versus Down

(Diffusion index, +0 = higher inflation expected in the current quarter)

Source: BangkoSentral Ng Pilipinas, and IMF staff estimates.

Ten-Year Treasury Bond Yield

(In percent)

Source?: Haver Analytics; and IMF staff estimates.

20. The BSP’s recent decisions to raise its policy rate were appropriate and the BSP should look to do more. Despite the monetary tightening since May that raised the policy rate by 100 bps to 4 percent this year, monetary policy remains accommodative. Staff estimates the real policy rate to be close to zero percent as of August 2018, 1–2 percentage points below the neutral real interest rate, implying the need for further tightening (Box 3). Higher rates will also mitigate inflation risks from the expected fiscal stimulus, weaker currency, and help anchor inflation expectations. The exact pace of monetary tightening should depend on evolving external and domestic conditions.

21. Exchange rate flexibility should continue to support the economy’s ability to adapt to external shocks. With official international reserves more than adequate, the authorities should continue with the policy of allowing the exchange rate to move freely in line with market forces, while limiting foreign exchange intervention to avoid disorderly market conditions.

22. The BSP has made progress in implementing its interest corridor system (IRC), and staff supports continued fine-tunings of monetary operations (Box 4). The recent advances in domestic capital market and FX liberalization reforms are also welcome and should be sustained. While the monetary effect of two bank reserve requirement cuts in 2018 (lowering the ratio to 18 from 20 percent) were largely sterilized by BSP’s term deposit auctions, the authorities’ decision to put further cuts on hold until inflation expectations are well anchored is appropriate.

Authorities’ Views

23. The BSP agreed that the higher inflation was mainly driven by supply-side factors and recent tightening of monetary policy was meant to signal the BSP’s strong commitment to ensuring macroeconomic stability, by helping anchor inflation expectations and tempering further second-round effects. At the same time, they noted the possibility of demand-side pressures that needs to be closely evaluated and monitored. The main risks to the inflation outlook would include additional upward adjustments of minimum wages, transport fares, and electricity rates. The BSP agreed that the exchange rate should remain flexible; nevertheless, sustained pressures on the peso could adversely affect inflation, requiring vigilance against the potential inflation threat from peso volatility and second-round effects. The authorities expressed strong willingness to undertake follow-through actions to help ensure inflation expectations are anchored and that the inflation target for 2019 is attained. They also plan to sustain efforts to improve the IRC and monetary operations.

B. Addressing Systemic Financial Stability Risks

24. The financial system appears sound, dominated by well-capitalized banks, but available data suggest that corporate leverage has increased. Historic low borrowing costs have fueled credit growth and asset price inflation. With increasing loans, corporate leverage for listed firms, measured by debt-to-asset ratio, has risen to 21.4 percent in 2016, surpassing the average in peer countries. Large data gaps prevent a more recent analysis and anecdotal evidence suggest that corporate FX debt has fallen. Credit growth slowed in 2018 across most sectors but is expected to accelerate as private investment gathers momentum.

Corporate Leverage 1/

(Debt in percent of total asset, sample median)

Sources: IMF Corporate Vulnerability Utility Database; and IMF staff estimates.

1/ Based on 237 publicly traded nonfinancial firms in 2016.

Nonfinancial Corporate Debt Issuance 1/

(In percent of GDP)

Sources: IMF, Vulnerability Exercise Securities Database; and IMF staff estimates.

1/ Includes syndicated loans and based on residence of issuer.

25. New initiatives have been proposed to address the slow progress in closing existing data gaps. Data gaps are particularly large for non-financial corporates (NFCs) and NBFIs outside the BSP’s regulatory perimeter. The lack of timely available data has hampered the BSP’s ability to identify and monitor emerging systemic risks outside the banking system and formulate more targeted policy measures. An Electronic Information Sharing project launched in May is intended to provide a centralized, web-based system to facilitate the sharing of reports of supervised institutions in the Philippines, which include audited financial statements of the top 1,000 corporations and related key performance indicators. Furthermore, requirements of more granular data in the reporting templates on real estate and project finance are expected to help BSP’s surveillance of vulnerabilities from related exposures and policy response to emerging credit concentration risks.

26. The approval of the proposed amendments to the BSP charter should be a priority. These will grant the BSP the authority to obtain data from any person including the NFCs for statistical and policy development purposes and for safeguarding the soundness of the banks. Other important elements of the new charter include the capitalization of the BSP, legal protection for staff, and the ability to issue BSP instruments to better control inflation.

27. The BSP has implemented macroprudential tools to pre-empt the buildup of risks to financial stability, but additional efforts are needed. The BSP has revised its guidelines on liquidity risk management, implemented targeted macroprudential policies to stem excessive credit growth in specific sectors, and approved the adoption of the Net Stable Funding Ratio to enhance banks’ ability to absorb liquidity stress. The real estate stress test (REST) limits of 25 percent write-off rates on real estate, to ensure banks have a sufficient capital buffer to withstand potential property price corrections, has been effective in moderating real estate loan growth from its previous high levels. The BSP plans to introduce the framework for implementing banks’ countercyclical capital buffer (CCyB), with the level initially set at zero. Clear communication with market participants will be important, including on the methodology and comprehensive set of indicators that will be used to calibrate the CCyB, which in staff’s assessment will need to be set above zero considering sustained rapid credit growth and credit-to-GDP gap approaching early warning levels (Figure 5). Against further concerns of credit risk, additional measures by BSP, namely the Debt-to-Earnings-of-Borrowers’ Test (DEBT), and the Borrowers Interconnectedness Index (BII) aim at assessing the debt servicing capacity of systemic borrowers under stressed market conditions, and concentration of the systemic importance of conglomerates in the banking system, respectively.

Authorities’ Views

28. The authorities view the domestic banks’ credit exposure as firmly supported by demand of a growing economy, with appropriate tools in place to safeguard financial stability. BSP’s macroprudential and strong financial surveillance policies have aimed at improving governance practices and the risk management system to support expanded lending activities. This has included adopting guidelines on Credit Risk Management Practices and on the conduct of stress testing exercises (i.e., the REST and the DEBT tests), assuming Basel III reforms which include adopting a minimum leverage ratio, enhancing the liquidity position of financial institutions, a supervisory framework for D-SIBs, and imposing the Capital Conservation Buffer as a CET1 requirement to absorb market shocks. More recently, communication issues raised by the banking industry regarding a CCyB proposal are being strengthened to secure its adoption, by stressing the CCyB buffer function in protecting the banking sector from the buildup of systemic vulnerabilities.

C. Structural Reforms to Support Inclusive Growth

29. The reform momentum should be sustained to foster inclusive growth. Despite rapid growth in recent years, poverty and inequality remain high (Figure 7), while there is room to continue to improve the business environment (Figure 8). Stringent foreign ownership restrictions and high non-tariff barriers have hampered competition and technology spillovers. Staff supports the authorities’ reform agenda to address these problems, including:

  • Replacing the rice import quota system with one based on tariffs, which would benefit consumers by reducing domestic rice prices. This action should be accompanied with policies to support the affected small farmers through training and crop substitution.
  • Shortening the foreign investment negative list (FINL), combined with effective implementation of the Ease of Doing Business Law and the Philippine Competition Act, including by streamlining government procedures and cutting the processing time for permits would support private investment.
  • Financial inclusion initiatives, including plans to create a central registry system for movable assets, which would allow easier access to credit for small- and medium-sized companies by expanding the set of eligible collateral for bank loans.

30. There is a need to modernize the labor market regulation. The authorities’ intention to eliminate the practice of repeatedly using temporary contracts (to avoid paying workers fringe benefits) is sensible. To avoid adverse effects on employment, this should be accompanied with actions that can provide more flexibility to the labor markets, such as simplifying the procedures and reducing the pecuniary costs required for laying off workers with regular status.

31. More investment in human and physical capital would be needed to leverage digital technologies. The use of mobile financial transactions is widespread in the Philippines, supported by the recent introduction of a nationwide digital identification system and retail payment systems. To reap their full benefits, however, more investment is needed in education and training and ICT infrastructure, accompanied by efforts to enhance cybersecurity. The authorities’ digital strategy is appropriately aligned with these priorities (Box 5).

ICT Infrastructure 1/

Sources: World Bank, World Development Indicators; World Economic Forum, The Global Technology Report 2016; and IMF staff estimates.

1/ Fixed broadband and mobile tell Liar subscriptions are per 100 people. Internet speed is proxied by internet bandwidth in kb/setond per user Personal computer ownership is in percent of total households. Mobile celluar tariffs are per PPP J/min.

32. Important challenges remain in the AML/CFT framework, despite recent improvements. The amended legislation covers casinos, which are now required to perform customer identification and meet record-keeping obligations, and report to the financial intelligence unit all single casino transactions above PHP5 million. Nonetheless, the AML/CFT framework could be strengthened further by amending the bank secrecy law and making tax evasion a predicate crime. The relaxation of bank secrecy law and enhanced customer due diligence measures for domestic politically exposed persons will also help improve tax compliance and anti-corruption.

Authorities’ Views

33. The authorities highlighted significant progress in promoting inclusive growth and reaffirmed their commitment to accelerate reforms. The restrictions on foreign investment have been significantly eased in recent years and the authorities plan to further shorten the FINL through executive orders and legislations. They saw a shift to a tariff-based rice import system as an important priority to promote lower domestic prices and improve access to rice by poor households. The authorities also recognized the need to protect the vulnerable farmers from increased rice imports; hence the proposed legislation also states that the proceeds from tariffs will be utilized to provide additional resources to farmers to further enhance productivity and competitiveness. They underscored the need to further develop domestic capital markets to better support the national infrastructure initiative and noted their ongoing initiatives to leverage digital technologies to promote financial inclusion and address potential disruptions to BPOs. The authorities also note the recent anti-corruption efforts, including the approval of the Ease of Doing Business Law and the creation of the Presidential Anti-Corruption Commission, and their legislative initiatives to ease bank secrecy for tax compliance verification.

Staff Appraisal

34. The economy continues to perform well but is facing new challenges. Real GDP is projected to grow strongly in 2018 and 2019, supported by domestic demand. However, short-term risks have risen, including inflation and overheating risks, and greater external uncertainty. The medium-term economic outlook remains favorable, which places the country in a good position to tackle still elevated levels of poverty and inequality.

35. To balance growth and stability objectives, the authorities should adopt a neutral fiscal stance over 2018–2019. This implies an overall deficit of 2.4 percent in 2018 and 2.5 percent of GDP in 2019 (compared to staff’s current baseline of 2.8 and 3.2 percent), which would support pro-growth infrastructure investment without overburdening monetary policy, while containing inflationary pressures. Raising tax revenues and reallocating spending from nonpriority programs can support the continued expansion of public investment and social spending.

36. Further monetary policy tightening to anchor inflation expectations is needed and its pace should be conditional on domestic and external developments. The BSP’s recent decisions to increase the policy rate three times this year were appropriate. With policy rates still well below neutral, staff welcomes the BSP’s announced readiness to take further action to safeguard price stability by controlling potential second-round effects from sustained supply pressures and rising wage inflation as well as its decision to delay the bank reserve requirement cuts until inflationary expectations are more firmly anchored.

37. Exchange rate flexibility should continue to support the economy’s ability to adapt to external shocks. Foreign exchange intervention should be limited to preventing disorderly market conditions. The external position was assessed to be broadly in line with fundamentals and desirable policies.

38. Macroprudential measures backed by sound financial surveillance should continue to safeguard financial stability against systemic risks, including those related to conglomerate structures and real estate. Implementation of the CCyB should aim at maintaining the banking sector’s appropriate flow of credit through the cycle, while there is a need to close data gaps on NBFIs and conglomerates.

39. Authorities should maintain the momentum for reforms in seeking broader economic benefits. Priorities include amendments to the BSP Charter, streamlining tax incentives, modernizing the bank secrecy legal framework, promoting competition by opening new sectors of the economy to foreign investment, and further improving the business environment, including through better infrastructure and labor regulations, and strengthened governance.

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

Box 1.Distributional Effects of TRAIN—Scenario Analysis

Model simulation results suggest TRAIN can bring significant output gains and reduce poverty, provided its revenue is used for productive investment. But lowering inequality would require targeted pro-poor investment in physical and human capital such as the conditional cash transfer program.

TRAIN could have significant distributional impacts over the long term, depending on how its revenue is used. While essential to finance infrastructure investment without endangering long-run fiscal sustainability, the tax reform package by itself is regressive, with most of the revenue raised from consumption taxes. This aspect of the TRAIN underscores the need for designing an expenditure strategy that is both growth-enhancing and inclusive.

TRAIN’s growth and distributional effects are analyzed using a DSGE model. The theoretical framework, based on Peralta-Alva and others (2017), features three sectors—services, manufacturing, and an informal one not subject to taxation. The model is calibrated to match key characteristics of the Philippine economy, including the level and composition of tax revenue—labor, corporate income, and consumption taxes—and the overall consumption inequality (GINI index).

Two illustrative scenarios are considered to highlight the different effects of spending strategies linked to TRAIN. In the first scenario (“Infrastructure”), TRAIN revenue is invested in infrastructure projects every year and perpetually, which boosts productivity and leads to higher private investment. In the second scenario (“Unproductive Redistribution”), the revenue is redistributed equally to households as lump-sum transfers, which they can either consume or save. Under both scenarios, the annual TRAIN revenue is assumed to amount to 0.6 percent of GDP—1.5 percent gain from consumption tax increases, net of 0.8 percent of GDP revenue loss from personal income tax reduction. The steady states under the two scenarios are benchmarked against a baseline of no TRAIN.

Macroeconomic Impacts

(Percentage change from “no TRAIN” levels, adjusted for inflation)

Source: IMF staff estimates.

Distributional Impacts on Average Consumption

(Percentage change from “No TRAIN” levels, adjusted for inflation)

Source: IMF staff estimates.

Under the infrastructure scenario, all households would be better off, especially the poor. Infrastructure investment would increase output and reduce prices in the long run as the productive capacity expands. This strategy also lowers poverty by boosting the average real consumption of the lowest household quintile. In comparison, “unproductive redistribution” would lower investment with virtually unchanged output, engendering higher prices in the long term. Importantly, poverty reduction would be less than in the infrastructure scenario.

Regarding inequality, the results provide a mixed picture. Consumption inequality worsens in the infrastructure scenario, although marginally so, as richer households consume more than the poor. However, the opposite holds for wealth inequality: the poor households accumulate more wealth relative to their existing saving given the higher income generated by infrastructure investment. The higher saving provides a stronger buffer against large economic shocks, allowing these households to better smooth their consumption profile over time.

Consumption Share of Bottom-50 and Top-10 Percent

(In percent of aggregate consumption and by consumption decile)

Sources: IMF staff estimates.

Impacts on inequality: GINI Index

(Difference from “no TRAIN” levels, 100 = perfect inequality)

Source: IMF staff estimates.

The analysis highlights the merit of targeted public investment in physical and human capital, which can have more direct and larger impact on poverty and inequality. These include targeted social protection program, such as the conditional cash transfer program, or basic infrastructure in rural areas, such as farm-to-market roads or water and sanitation facilities.

Box 2.Inflation Momentum and Decomposition

Headline inflation rose sharply in 2018 to 5.7 percent (y/y) in July from an average of 2.9 percent (y/y) in 2017, driven primarily by goods inflation. Registering the highest reading since 2013 (2012 weights), a large part of the increase stems from higher (supply-driven) excise taxes on auto, fuel, tobacco, and sweetened beverages, higher global oil and gas prices, and challenges in managing rice inventories. Goods inflation (58 percent of the CPI basket) accelerated from 3.6 percent (y/y) in December 2017 to 7.2 percent (y/y) in July 2018. Energy and food items were the main contributors, with energy inflation rising fast following higher international oil prices since the beginning of 2015 and increased excise tax on oil imports implemented in January 2018. Non-energy goods inflation, however, was mainly driven by domestic factors as non-oil import price growth was mild. Services inflation also rose in 2018, from 1.9 percent (y/y) in Dec 2017 to 3.4 percent (y/y) in July 2018.

Inflation

(In percent, y/y)

Sources: Philippine Statistics Authority; and IMF staff estimates.

Inflation on Goods Items

(In percent, y/y)

Sources: Philippine Statistics Authority; and IMF staff estimates.

Core inflation has also accelerated in 2018, with core services rising more sharply than goods. Measuring the CPI change for the core consumption basket after removing selected food and energy items (largely affected by supply factors),1 core inflation rose moderately to 3.0 percent (y/y) as of July 2018. Measured on month-to-month basis (annualized), core inflation moderated somewhat in 2018:Q2 (2.4 percent) relative to Q1 (4.8 percent) before it picked up again in July (5.5 percent). Within core inflation:

  • Core goods experienced a moderate rise in price changes from 1.4 percent (y/y) in December 2017 to 1.8 percent (y/y) in July 2018.
  • Core services inflation (as a relevant indicator for domestic demand or wage pressures) has risen more sharply in 2018 (from 1.7 percent (y/y) in Dec 2017 to 3.5 percent in July 2018 (y/y), suggesting rising inflation pressures beyond supply and external factors (i.e., import prices and exchange rate fluctuations).2 The fastest rises appear to be in health services, restaurant, and housing prices.

Core Inflation Rates

(In percent)

Sources: Philippines Statistics Authority; and IMF staff estimates.

Core Goods and Core Services Inflation

(In percent, y/y)

Source: Philippine Statistics Authority; IMF staff estimates.

Core Goods and Core Services Inflation

(In percent, m/m, annualized)

Sources: Philippine Statistics Authority; and IMF staff estimates.

In summary, higher core services inflation suggests inflationary pressures are partly driven by demand factors. It implies that inflationary pressures have spread from items directly affected by supply-side factors (such as rice and oil) to a broader spectrum of the economy. Although this trend abated somewhat in 2018:Q2 compared to 2018:Q1, its pickup in July requires continued monitoring.

1/ Coverage of core goods and services items defined by staff is different from the Philippines Statistics Agency (PSA). Core basket covers 80 percent of the CPI basket (2012 weight) per PSA versus 42 percent per staff. Staff excludes items whose prices are less market-based (e.g. education services) and all food and beverage items (rather than selected food and beverage items per PSA).2/ Core services are considered services items whose prices are more market-based (i.e., housing and catering services) and non-core services include items whose prices are less market-based (i.e., education services).

Box 3.Estimating the Neutral Real Interest Rates

To evaluate the monetary stance in the Philippines, we estimate the neutral real interest rates (NRIRs) and compare them to actual. NRIR refers to the equilibrium interest rate where output is at its potential and inflation is stable. It is unobservable and must be estimated.

Actual real interest rates in Philippines have been on a declining path since the early 2000s. Along this path, real rates experienced bouts of temporary increases while also turning negative on occasions.1/

Structural-based estimates of the NRIRs have increased slightly in the past few years, falling within the 1–2 percent range.2/ These stable or slightly increasing NRIRs are consistent with the robust potential growth in the Philippines. Estimated neutral rates above actual rates point to a monetary stance that has been broadly loose since the global financial crisis (i.e., a period of monetary stimulus). A statistically-driven approach (Hodrick- Prescott (HP) univariate filtering) points to NRIR estimates declining steadily from 4 to 0.1 percent during 2000–2017—this method treats the trend of actual rates as proxy for neutral, ignoring the possibility that actual rates can deviate from neutral for a prolonged period time. As such, staff assesses the structural-based estimates of the NRIRs to better reflect the Philippines’ strong output and consumption growth conditions.

NRIR: LW Method 1/

(In percent)

Source: IMF staff estimates

1/ Different specifications refer to differences in the starting year of the sample and the imputed elasticities at NRIR5 with respect to trend growth rates.

NRIR: HP Filter Method

(In percent)

Source: IMF staff estimates.

1/ The real interest rate refers to the annualized nominal policy rates minus inflation expectations. For policy rates, we use the weighted average of various BSP policy rates (RRP, TDF, ODF). For expected inflation rates, we use data from BSP Business Expectations Survey from 2013, and actual inflation rates before 2013.2/ See Laubach and Williams, LW, methodology (2003).

Box 4.Progress in Modernizing the Monetary Policy Framework

In 2016, the BSP adopted an interest rate corridor (IRC) system for monetary operations. The 100-basis-point-wide IRC consists of the overnight deposit and lending rates (the floor and ceiling of the IRC) and the Reverse Repurchase Facility (RRP) rate in the middle of the IRC. The system has sought to improve monetary policy transmission by better aligning money market rates with the policy rate (RRP rate), foster money market development, and encourage banks to manage liquidity more actively. Historically, the large structural excess liquidity led to interbank interest rates falling below the RRP rate, with low market activity.

In late 2017, the BSP’s OMO started to push market rates into the upper half of the IRC (left text chart). The BSP absorbed liquidity using regular Term Deposit Facility (TDF). By late 2017, short-term market rates had drifted up within the BSP’s IRC and very few funds remained in the BSP’s overnight deposit standing facility. A reduction in structural excess liquidity reflecting a reversal of capital flows also helped push market interest rates higher. The interbank market has become more active as banks have had to more intensively manage their liquidity needs.

Attention is shifting towards fine-tuning of operations, in keeping market rates close to the policy rate. This entails, increasing the frequency of OMOs, catalyzing interbank market development through working with other agencies to develop the repo market, upgrading the settlement infrastructure used for repo transactions, developing more indicators of repo activities, and changing the way the BSP trade repos in its RRP facility. In shifting the policy rate from a fixed rate on the RRP operation to a target for market rates, the operating target can be specified as a combination of available market rates. The BSP could then offer its overnight RRP instrument via variable-rate auctions to boost price discovery in the repo market as it develops further. Last, reduce reserve requirements gradually, liquidity conditions permitting, and lengthen the reserves maintenance period (to 2–4 weeks).

BSP Policy and Market Rates, 2012–2018

(In percent)

Source: Bangko Sentral ng Pilipinas.

Interbank Call Loan Market Activity

(Average daily volume, in billions of pesos)

Source: Bangko Central ng Pilipinas.

Box 5.Digital Strategy in the Philippines

The Philippine government sees the development of its digital economy as a strategic priority. Four strategic pillars are identified to achieve the objective of transitioning to a digital economy: transparent government and efficient services delivery; internet opportunities for all people; investing in people—digital literacy for all; and ICT industry and business innovation for national development. To support these pillars, the government has also formulated a National Broadband Plan to guide the development of information infrastructure.

The National Government Portal is a key project to promote e-governance and improve government services through online platforms. The goal is to create a single online entity wherein all web-based government information is centralized, eliminating the need for maintaining multiple systems and reducing the time needed to visit government offices. The President has recently signed into law a congress-approved bill to establish a national identification system, which, once implemented, would improve service delivery through better targeting of government services. The government is also establishing an e-invoicing system to facilitate payments and tax administration.

Digitalization in the financial sector has been a major focus in improving efficiency and financial inclusion. The BSP has set an ambitious target of raising the share of electronic transactions from the present 1 percent to 20 percent by 2020. To this end, the BSP has launched two automated clearing houses under the National Retail Payments System (“PESONet” and “InstaPay”), with the latter largely aimed at SMEs and individuals to improve financial inclusion.

The government is working with the private sector to ensure its continued success in the digital age. Automation based on artificial intelligence is widely seen as a threat to low-skill, manual, and routine work, especially within the BPO industry. The government is working with the BPO industry to upgrade the skills of BPO workforces, focusing on training and retooling. This would support the industry’s efforts to move up the value chains and remain competitive. The government has also recognized the country’s weaknesses in digital infrastructure and is attempting to bring a third telecom player to break the current duopoly in the sector.

Regulatory reforms are supporting the digital economy strategy. To encourage digital innovation, the BSP has adopted a sandbox approach to regulating fintech firms. The government has also formulated a National Cybersecurity Plan and is pushing for digital literacy through training and information outreach.

Figure 1.Drivers of Growth

Figure 2.Inflation Dynamics

Figure 3.Monetary and Financial Conditions

Figure 4.External Sector

Figure 5.Macrofinancial Linkages

Figure 6.Fiscal Developments

Figure 7.Poverty and Inequality

Figure 8.Business Environment 1/

1/ The indicators above should be taken with caution and come with the following limitations: The World Bank Doing Business indicators, from which the distance to frontier scores are derived, measure de jure business regulation facing domestic small and medium-size firms, usually using the largest city to represent the economy. The World Economic Forum Global Competitiveness Index are partly based on opinion survey of business executives. The OECD FDI restrictiveness index captures stated regulatory restrictions in national documents, and the Trade Facilitation Indicators are partly based on survey data.

Table 1.Philippines: Selected Economic Indicators, 2013–19
Demographic: Population (2017): 104.9 million; Life expectancy at birth (2016): 69
Poverty (2015, percent of population): Below $1.90 a day: 8.3; Below the national poverty line: 21.6
Inequality (2015, income shares): Top 10 percent: 31.3; Bottom 20 percent: 6.6
Business environment (2017 country ranking): Ease of doing business: 113 (out of 190); Starting a business: 173 (out of 190)
IMF quota: SDR 2,042.9 million
Main products and exports: electronics, agriculture products, and business process outsourcing
201320142015201620172018

Proj.
2019

Proj.
National account(Annual percentage change, unless otherwise indicated)
Real GDP7.16.16.16.96.76.56.7
Consumption5.55.36.57.46.06.56.5
Private5.65.66.37.15.95.85.9
Public5.03.37.69.07.011.310.7
Gross fixed capital formation11.87.216.926.19.518.611.7
Domestic demand6.85.78.711.76.99.78.0
Net exports (contribution to growth)-2.61.0-3.1-4.9-0.8-4.0-2.2
Real GDP per capita5.24.34.35.25.24.44.6
Output gap (percent, +=above potential)0.50.3-0.10.10.00.20.1
Labor market
Unemployment rate (percent of labor force)7.16.8 1/6.35.45.75.55.4
Underemployment rate (percent of employed persons)19.318.418.518.316.1
Employment (percent change)0.90.42.84.7-1.62.52.4
Non-agriculture daily wages (Q4/Q4) 2/2.20.03.22.14.34.3
Price
Consumer prices (period average, 2012 basket)2.63.60.71.32.94.93.9
Consumer prices (end of period, 2012 basket)3.81.90.72.22.95.23.6
Residential real estate (Q4/Q4)3.35.7
Money and credit
3-month PHIREF rate (percent, end of period) 3/-0.41.82.72.03.34.0
Credit to the private sector (percent of GDP)35.939.241.844.747.851.553.8
Credit to the private sector (percent change)17.219.612.416.416.620.015.8
Public finances (in percent of GDP)
National government overall balance 4/-1.5-0.6-1.4-2.4-2.2-2.8-3.2
Revenue and grants14.815.115.415.215.616.016.2
Total expenditure and net lending16.315.716.817.617.918.819.4
General government gross debt45.742.141.539.039.939.538.9
Balance of payments (in percent of GDP)
Current account balance4.23.82.5-0.4-0.8-1.5-1.5
FDI, net0.00.40.0-1.9-2.6-2.5-2.3
Gross reserves (US$ billions)83.279.580.780.781.676.373.9
Gross reserves (percent of short-term debt)406.2413.3409.5423.9422.9384.7372.0
Total external debt28.927.326.524.523.321.319.5
Memorandum items:
Nominal GDP (US$ billions)271.8284.6292.8304.9313.6334.7360.7
Nominal GDP per capita (US$)2,7682,8492,8832,9532,9893,1293,305
GDP (in billions of pesos)11,53812,63413,32214,48015,80617,57419,480
Real effective exchange rate (2005=100)109.9109.5116.8113.2108.6
Peso per U.S. dollar (period average) 5/42.444.445.547.550.453.4
Sources: Philippine authorities; World Bank; and IMF staff estimates and projections.

Estimates exclude data of the entire Region VIII.

In National Capital Region. Latest observation as of June 2018.

Benchmark rate for the peso floating leg of a 3-month interest rate swap. Latest observation as of July 2018.

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

Latest observation as of July 2018.

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

Estimates exclude data of the entire Region VIII.

In National Capital Region. Latest observation as of June 2018.

Benchmark rate for the peso floating leg of a 3-month interest rate swap. Latest observation as of July 2018.

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

Latest observation as of July 2018.

Table 2.Philippines: National Government Cash Accounts, 2013–19(In percent of GDP, unless otherwise indicated)
201320142015201620172018

Proj.
2019

Proj.
Revenue and grants14.815.115.415.215.616.016.2
Tax revenue13.313.613.613.714.214.915.2
Net income and profits6.26.26.46.46.55.65.6
Excises1.31.31.41.41.72.72.9
VAT4.24.44.24.24.44.84.7
Tariffs0.30.40.40.40.40.40.4
Other 1/1.31.21.21.21.21.51.5
Nontax revenue1.51.51.71.51.41.11.0
Expenditure and net lending16.315.716.817.617.918.819.4
Current expenditures13.212.813.413.213.413.713.9
Personnel services5.04.85.05.05.15.25.2
Maintenance and operations2.52.43.02.92.92.93.0
Allotments to LGUs2.12.22.32.42.52.52.5
Subsidies0.60.60.60.70.80.80.8
Tax expenditure0.20.20.10.10.10.10.1
Interest2.82.62.32.12.02.22.3
Capital and equity expenditure3.02.83.34.34.55.15.5
Capital expenditure2.92.83.34.24.55.15.5
Equity0.10.00.00.10.00.00.0
Net lending0.10.10.10.10.00.00.0
Balance-1.5-0.6-1.4-2.4-2.2-2.8-3.2
On the authorities’ presentation 2/-1.4-0.6-0.9-2.4-2.2-2.8-3.2
Financing1.50.61.42.42.22.83.2
External financing (net)-0.70.10.5-0.20.2-0.1-0.1
Domestic financing (net)3.51.30.21.74.03.03.4
Change in cash (negative=accumulation)-1.3-0.80.20.9-2.0-0.1-0.1
Privatization0.00.00.50.00.00.00.0
Memorandum items:
Cyclically-adjusted primary balance 3/1.31.71.0-0.4-0.3-0.6-0.9
Structural primary balance 3/0.02.11.3-0.1-0.1-0.5-0.9
Gross financing requirement 4/5.94.75.25.95.25.96.1
National government gross debt 5/49.245.444.742.142.141.641.1
Domestic32.430.229.227.228.128.328.9
External16.915.215.514.914.013.312.1
GDP (in billions of pesos)11,53812,63413,32214,48015,80617,57419,480
Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and non-cash collections.

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

In percent of potential GDP. Compared to the cyclically-adjusted balance, the structural balance also controls for the effect of cyclical fluctuations

Defined as the sum of deficit, amortization of medium- and long-term debt, and the stock of outstanding short-term debt.

Includes national government debt held by the bond sinking fund and excludes contingent/guaranteed debt.

Sources: Philippine authorities; and IMF staff projections.

Includes other percentage taxes, documentary stamp tax, and non-cash collections.

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

In percent of potential GDP. Compared to the cyclically-adjusted balance, the structural balance also controls for the effect of cyclical fluctuations

Defined as the sum of deficit, amortization of medium- and long-term debt, and the stock of outstanding short-term debt.

Includes national government debt held by the bond sinking fund and excludes contingent/guaranteed debt.

Table 3.Philippines: General Government Operations, 2013–19 1/(In percent of GDP, unless otherwise indicated)
201320142015201620172018

Proj.
2019

Proj.
Revenue18.819.019.419.119.619.920.1
Taxes14.514.514.514.615.115.816.1
Taxes on income, profits, and capital gains6.26.26.46.46.55.65.6
Taxes on goods and services6.66.66.66.67.18.48.6
Taxes on international trade and transactions0.30.40.40.40.40.40.4
Taxes not elsewhere classified1.41.21.21.21.21.41.4
Social contributions2.12.22.42.42.42.42.4
Grants0.00.00.00.00.00.00.0
Other revenue2.32.32.52.22.11.71.7
Total expenditure18.718.118.819.519.920.921.5
Expense15.315.015.114.915.115.415.7
Compensation of employees 2/5.04.85.05.05.15.25.2
Purchases/use of goods and services 2/2.52.43.02.92.92.93.0
Interest 2/2.52.32.11.81.71.92.0
Social benefits1.92.12.22.22.42.52.6
Expense not elsewhere classified3.43.42.82.92.92.92.9
Net acquisition of nonfinancial assets3.33.13.74.64.95.45.8
Net lending/borrowing0.20.90.6-0.4-0.4-1.0-1.4
Memorandum items:
Primary balance2.73.12.71.51.31.00.6
General government gross debt 3/45.742.141.539.039.939.538.9
Domestic28.926.926.024.125.926.126.8
Foreign16.915.215.514.914.013.312.1
GDP (in billions of pesos)11,53812,63413,32214,48015,80617,57419,480
Sources: Philippine authorities; and IMF staff projections.

Based on GFSM2001. General government includes the national government, social security institutions (SSIs), and local government units (LGUs).

National government only. The expense item related to SSIs and LGUs are not separately available and included under “Expense not elsewhere classified.”

Includes national government debt held by the bond sinking fund and excludes contingent/guaranteed debt.

Sources: Philippine authorities; and IMF staff projections.

Based on GFSM2001. General government includes the national government, social security institutions (SSIs), and local government units (LGUs).

National government only. The expense item related to SSIs and LGUs are not separately available and included under “Expense not elsewhere classified.”

Includes national government debt held by the bond sinking fund and excludes contingent/guaranteed debt.

Table 4.Philippines: Depository Corporation Survey, 2013–19 1/(End of period, in billions of pesos, unless otherwise indicated)
201320142015201620172018

Proj.
2019

Proj.
Total
Net foreign assets3,5753,7523,9994,3094,4034,6204,765
Net domestic assets4,4795,3045,8906,8978,0839,44810,986
Net claims on nonfinancial public sector1,2881,4711,6101,9411,9932,4962,898
Claims on private sector4,1384,9635,5646,4867,5509,05710,486
Net claims on other financial corporations1792742944809211,0761,261
Broad money8,0549,0509,88911,21512,48714,06815,751
National currency6,9257,7048,4299,50610,63611,98313,417
Foreign currency1,1291,3461,4581,7091,8512,0852,335
Bangko Sentral ng Pilipinas
Net foreign assets3,6443,5143,7633,9474,0044,0103,951
Net domestic assets-1,713-1,190-1,293-1,187-864-540-47
Claims on private sector0000000
Net claims on financial corporations-1,576-1,072-1,065-999-384-240-21
Base money1,9262,3242,4672,7583,1373,4673,901
Currency in circulation7979301,0051,1241,2671,4011,576
Other depository corporations liabilities1,1281,3871,4561,6321,8672,0642,322
Other liquid liabilities5132333
Other depository corporations
Net foreign assets-69238236363400610813
Net domestic assets7,4778,0968,8539,91911,03412,27213,611
Net claims on nonfinancial public sector1,4031,5781,7201,6961,9352,4602,895
Claims on private sector4,1384,9635,5646,4867,5519,05710,486
Net claims on financial corporations3,0452,9563,0363,3243,4013,7033,868
Liquid liabilities7,4098,3299,08910,29011,43412,88214,424
Memorandum items:
Broad money (percent change)28.812.49.313.411.312.712.0
Claims on private sector (percent change)16.519.912.116.616.420.015.8
Broad money (in percent of GDP)69.871.674.277.579.080.080.9
Claims on private sector (percent of GDP)35.939.341.844.847.851.553.8
Nominal GDP11,53812,63413,32214,48015,80617,57419,480
Sources: 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.

Sources: 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 5.Philippines: Balance of Payments, 2013–19(In BPM6, billions of U.S. dollars, unless otherwise indicated)
201320142015201620172018

Proj.
2019

Proj.
Current account balance11.410.87.3-1.2-2.5-5.1-5.3
Trade balance of goods and services-10.6-12.8-17.9-28.5-31.7-35.9-37.6
Goods-17.7-17.3-23.3-35.5-41.2-47.9-51.2
Exports, f.o.b.44.549.843.242.748.252.656.6
Imports, f.o.b.62.267.266.578.389.4100.4107.9
Services7.04.65.57.09.512.013.6
Receipts23.325.529.131.235.639.241.8
Payments16.320.923.624.226.127.228.2
Primary income, net1.00.71.92.63.13.53.5
Receipts from resident workers abroad7.07.47.87.57.98.48.8
Secondary income, net21.122.823.324.726.127.328.8
Recepits from nonresident workers remittances19.320.821.523.224.125.326.7
Payments0.60.70.80.70.70.80.9
Capital account0.10.10.10.10.10.10.1
Financial account 1/2.29.62.30.2-2.20.3-3.1
Direct investment-0.11.0-0.1-5.9-8.1-8.2-8.4
Portfolio investment-1.02.75.51.53.94.11.6
Financial derivatives-0.10.00.00.0-0.1-0.1-0.1
Other investment3.45.9-3.14.62.14.43.8
Errors and omissions-4.2-4.1-2.40.3-0.60.00.0
Overall balance5.1-2.92.6-1.0-0.9-5.3-2.2
Memorandum items:
Nominal GDP (US$ billions)272285293305314335361
Current account (percent of GDP)4.23.82.5-0.4-0.8-1.5-1.5
Short-term debt (original maturity)16.916.215.114.514.314.114.1
Short-term debt (residual maturity)20.519.219.719.019.319.819.9
Gross reserves83.279.580.780.781.676.373.9
External debt (US$ billions)78.577.777.574.873.171.370.4
External debt (percent of GDP)28.927.326.524.523.321.319.5
Sources: Philippine authorities; and Fund staff projections.

An increase in either assets or liabilities is positive and a decrease is 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.

Sources: Philippine authorities; and Fund staff projections.

An increase in either assets or liabilities is positive and a decrease is 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.

Table 6.Philippines: Medium-Term Outlook, 2016–23(In percent of GDP, unless otherwise indicated)
201620172018

Proj.
2019

Proj.
2020

Proj.
2021

Proj.
2022

Proj.
2023

Proj.
GDP and prices
Real GDP (percent change)6.96.76.56.76.76.86.96.9
CPI (percent change, annual average)1.32.94.93.93.33.13.03.0
GDP by expenditure
Consumption (percent change)7.46.06.56.56.56.76.76.7
Private7.15.95.85.96.36.66.76.6
Public9.07.011.310.77.57.07.07.0
Gross fixed investment (percent change)26.19.518.611.78.86.86.97.1
Net exports (contribution to growth)-4.9-0.8-4.0-2.2-1.3-0.8-0.8-0.8
Investment and saving
Gross investment24.425.127.528.629.029.129.129.2
Private20.320.922.723.323.623.623.423.5
Public4.14.24.85.25.45.55.65.7
National saving24.024.326.027.127.827.827.827.8
Private19.920.021.822.923.323.323.323.4
Public4.14.44.24.24.54.54.54.4
Public finances
National government balance-2.4-2.2-2.8-3.2-3.0-3.0-3.0-3.0
Total revenue15.215.616.016.216.416.516.616.7
Total expenditure and net lending17.617.918.819.419.419.419.619.7
General government gross debt39.039.939.538.938.237.637.036.5
External sector
Trade balance of goods and services-9.3-10.1-9.2-8.8-8.6-8.5-8.2-8.2
Current account-0.4-0.8-1.5-1.5-1.3-1.3-1.3-1.3
Reserves (US$ billions)80.781.676.373.973.573.573.272.1
Reserves/short-term liabilities 1/423.9422.9384.7372.0365.6358.7358.4344.2
Total external debt24.523.321.319.517.916.615.414.3
Monetary sector:
Credit to private sector 2/44.747.851.553.855.256.356.757.4
Credit to private sector (percent change) 2/16.416.620.015.813.212.110.811.6
Sources: Philippine authorities; and IMF staff projections.

Remaining maturity basis.

Based on the depository corporations survey. In addition 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.

Remaining maturity basis.

Based on the depository corporations survey. In addition 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 7.Philippines: Financial Soundness Indicators, 2013–17(In percent)
20132014201520162017
Capital adequacy
Regulatory capital to risk-weighted assets17.016.115.314.514.4
Regulatory Tier-1 capital to risk-weighted assets15.213.512.812.612.7
Capital to total assets9.79.910.09.710.0
Non-performing Loans Net of Provisions to Capital2.42.93.13.03.1
Net open position in foreign exchange to capital3.35.12.42.07.9
Gross asset position in financial derivatives to capital4.54.61.71.81.6
Gross liability position in financial derivatives to capital0.00.00.00.00.0
Asset quality
Non-performing loans to total gross loans2.42.01.91.71.6
Specific provisions to nonperforming loans80.673.570.169.766.9
Earnings and profitability
Return on assets1.91.61.41.31.3
Return on equity17.815.913.813.713.6
Interest margin to gross income57.766.670.769.273.9
Trading income to gross income21.88.65.78.34.3
Noninterest expenses to gross income56.158.661.360.860.9
Personel expenses to noninterest expenses35.936.837.636.736.6
Liquidity and funding
Liquid assets to total assets42.842.438.835.632.9
Liquid assets to short-term liabilities67.364.560.654.651.8
Non-interbank loans to customer deposits0.70.70.80.80.8
Sensitivity to market risk
Foreign currency denominated loans to total loans12.113.011.911.911.1
Foreign currency denominated liabilities to total liabilities19.119.520.320.720.2
Real estate markets
Residential real estate loans to total loans7.17.37.27.37.2
Commercial real estate loans to total loans11.511.613.914.314.1
Sources: Philippine authorities; IMF, Financial Soundness Indicators; and IMF staff estimates.
Sources: Philippine authorities; IMF, Financial Soundness Indicators; and IMF staff estimates.
Table 8.Philippines: Indicators of External Vulnerability, 2013–17(In percent of GDP, unless otherwise indicated)
20132014201520162017
External indicators (including external liquidity)
Gross international reserves (US$ billions)83.279.580.780.781.6
Maturing short-term debt (US$ billions)16.916.215.114.514.3
Amortization of medium and long-term debt (US$ billions)4.63.63.04.64.8
Net FDI inflows (in BPM6, US$ billions)-0.11.0-0.1-5.9-8.1
FX deposits residents (US$ billions)26.132.132.736.139.5
Total gross external debt28.927.326.524.523.3
Fiscal indicators:
National government overall balance-1.5-0.6-1.4-2.4-2.2
National government cyclically-adjusted primary balance1.31.71.0-0.4-0.3
Net debt denominated in FX or linked to the exchange rate (in percent of total)33.531.933.033.330.8
Average effective interest rate of general government debt (in percent)6.36.05.65.25.1
Amortization of total general government debt5.04.03.93.83.4
Sources: Philippine authorities; and IMF staff estimates.
Sources: Philippine authorities; and IMF staff estimates.
Table 9.Philippines: 2017 Article IV Recommendations and Related Policy Actions
2017 Article IV RecommendationsRelated Policy Actions
Fiscal Policy
The authorities’ planned fiscal expansion in 2017 to a 3 percent deficit and a broadly neutral stance from 2018 onwards is appropriate.The fiscal deficit in 2017 was short of the target at 2.2 percent, reflecting revenue overperformance and spending shortfall.
Scale up public investment in infrastructure and human capital.The national government increased infrastructure outlays from 3.4 percent of GDP in 2016 to 3.6 percent in 2017.
Reform the tax system and administration to raise additional revenue.The first package of the Comprehensive Tax Reform Program (“TRAIN”) has been implemented since January 2018, which is expected to generate about 0.5 percent of GDP additional revenue in 2018 from excise tax increases, VAT base broadening, and administrative measures. Package 2 of the tax reform has also been submitted to Congress, which aims to streamline tax incentives.
Monetary Policy
Monitor emerging systemic risks (especially in the real estate sector) and stand ready to respond with targeted macroprudential measures.Implemented (i) REST limits of 25 percent write-off rates on real estate and (ii) expanded reporting requirements on residential real estate prices, which helped moderate related loan growth.
The timing and pace of lowering the reserve requirement ratios (RRs) require careful calibration to keep domestic liquidity broadly unchanged.The two reserve requirement cuts in 2018:H1 were largely sterilized by the BSP’s term deposit auctions.
Stand ready to tighten the policy stance if risks of overheating emerge.(i) The BSP continued to implement the interest rate corridor system to manage liquidity. This has resulted in a de facto increase in short-term market interest rates. (ii) The BSP raised policy rates by one percent so far in 2018.
Macroprudential Policy
Develop capital markets to reduce bank loan concentration.Introduced a roadmap to develop the local debt market; launched an interdealer government securities repo program and supporting regulations to expand the depth and breadth of capital markets transactions.
Macroprudential policies to address systemic risks to financial stabilityThe BSP is proposing the following macroprudential policies: countercyclical capital buffer; debt to earnings of borrowers test (DEBT); and borrowers’ interconnectedness index (BII) to better manage credit exposures of banks and borrowers, by end-2018.
Strengthen financial stability mandate of the BSP through amendments to its charter.The House of Representatives has approved an amendment to the BSP charter granting the authority to obtain data and information aimed at safeguarding the soundness of the banks; capitalization of the BSP; and legally protecting staff.
Structural Policy
Lift or ease legal and administrative restrictions on inward FDI, including by shortening the Foreign Investment Negative List (FINL).The latest FINL (11th) would be the shortest to date, leaving the restrictions on only the following industries--electricity transmission and distribution, and water and sewage system. The list has been submitted to the President for approval.
Eliminate quantitative restrictions on rice imports.A reform bill has been submitted to Congress, which would replace the current quota-based system for rice imports with one based on tariffs (35 percent). If implemented, rice imports will be liberalized, allowing private companies to compete for importation of rice.
Promote financial inclusionThe Secured Transaction Bill has been approved by Congress. The bill aims to improve access by small and medium-sized firms by clearly specifying the set of movable assets eligible as collateral and establish a central electronic registry system for movable assets.
Reduce the costs of doing businessThe Ease of Doing Business Law has been implemented since May 2018, which requires all local government units to streamline procedures and shorten the processing time for government transactions and permits to 3–20 working days depending on the complexity.
Table 10.Philippines: Comprehensive Tax Reform Program (CTRP)
Expected Revenue 1/Implementation Status (as of Aug. 2018)
CTRP Packages20182019202020212022
(In percent of GDP)
Package 1A (TRAIN)Under implementation
Personal income tax-0.8-0.8-0.8-0.8-0.8
VAT base broadening0.30.40.40.40.3
Excise tax 2/0.70.80.90.80.8
Tax administration reform0.20.20.20.20.2
Others 3/0.20.20.20.20.2
Sub-total0.50.70.90.80.7
Package 1BPending in Congress
Motor vehicle users’ charge0.00.00.10.10.1
Bank secrecy law relaxation0.00.10.10.10.1
Tax amnesty0.00.10.00.00.0
Sub-total0.00.20.20.20.1
Package 1 (=1A+1B)0.50.91.00.90.8
Package 2Pending in Congress
CIT reduction-0.1-0.3-0.4
Tax incentive streamlining0.10.30.4
Package 2+Pending in Congress
Excise tax on “sin” products 4/0.30.30.3
Royalty from non-mineral reservations0.010.010.01
Package 3Pending in Congress
Property valuation and tax 5/
Package 4Submitted to Congress
Capital income tax simplification0.10.10.00.0
Total0.51.01.41.31.2
Memorandum items:
Social Protection ExpenditureUnder implementation
Cash transfer0.10.20.20.00.0
Transportation subsidy0.010.020.00.00.0

For national government and based on the authorities’ estimates.

Includes auto, fuel, sugar-sweetened beverages, and tobacco products.

Includes documentary stamp tax and other miscellaneous fees and taxes.

Includes tobacco, alcohol and mining.

Updating property values closer to market prices and modernizing the valuation system.

For national government and based on the authorities’ estimates.

Includes auto, fuel, sugar-sweetened beverages, and tobacco products.

Includes documentary stamp tax and other miscellaneous fees and taxes.

Includes tobacco, alcohol and mining.

Updating property values closer to market prices and modernizing the valuation system.

Appendix I. Risk Assessment Matrix1/
Source of RiskLocation of SourceRelative LikelihoodTime HorizonExpected ImpactDirection of ImpactInputs for Assessment 4/Main Impacts – Recommended Policy Actions
Sharp tightening of global financial conditions 2/ExternalHSTMH
DSGE simulation (2017 SIP)Higher cost of financing, depreciation pass-through to inflation, weaker consumption.

→ Allow the exchange rate to adjust fully. Tighten fiscal policy while protecting pro-growth and pro-poor spending. Approve the new BSP charter.
Rising protectionism and retreat from multilateralism 3/ExternalHST, MTM
Staff estimateSlower export growth and weaker FDI inflows, resulting in reduced technology spillovers and lower growth potential.

→ Accelerate productivity-enhancing structural reforms and remove barriers to trade and inward FDIs (Figure 8).
Approval of the tax incentive rationalization billDomesticMMTMH
IMF TA reportsMore efficient use of fiscal resources, boost investor confidence, more level playing field for businesses.

→ Implement other business-friendly reforms to attract FDIs.
Excessive real estate and consumer credit growthDomesticMST, MTM
Empirical estimation (2015 SIP)Greater inflation pressures, higher corporate leverage, weaker bank balance sheets, including higher NPLs.

→ Use targeted macroprudential measures and tighten monetary policy if credit growth becomes broad-based accompanied by prolonged above-target inflation.

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 (“L” (low) is meant to indicate a probability below 10 percent, “M” (medium) a probability between 10 percent and 30 percent, and “H” (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.

Sharp tightening of global financial conditions causes higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; and a broad-based downturn. Tighter financial conditions could be triggered by a sharper-than-expected increase in U.S. interest rates (prompted by higher-than-expected inflation) or the materialization of other risks.

Global imbalances and fraying consensus about the benefits of globalization lead to trade wars and spreading isolationism. This threatens the global trade system, regional integration, labor mobility, as well as global and regional policy and regulatory collaboration. In the short term, increased uncertainty about growth triggered by escalating trade tensions leads to increased financial market volatility. Negative consequences for growth are, in turn, exacerbated by adverse changes in market sentiment and investment.

“2017 SIP” and “2015 SIP” refer to IMF Country Report No. 17/335 and No. 15/247, 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 (“L” (low) is meant to indicate a probability below 10 percent, “M” (medium) a probability between 10 percent and 30 percent, and “H” (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.

Sharp tightening of global financial conditions causes higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; and a broad-based downturn. Tighter financial conditions could be triggered by a sharper-than-expected increase in U.S. interest rates (prompted by higher-than-expected inflation) or the materialization of other risks.

Global imbalances and fraying consensus about the benefits of globalization lead to trade wars and spreading isolationism. This threatens the global trade system, regional integration, labor mobility, as well as global and regional policy and regulatory collaboration. In the short term, increased uncertainty about growth triggered by escalating trade tensions leads to increased financial market volatility. Negative consequences for growth are, in turn, exacerbated by adverse changes in market sentiment and investment.

“2017 SIP” and “2015 SIP” refer to IMF Country Report No. 17/335 and No. 15/247, respectively.

Appendix II. External Sector Assessment

Foreign Asset and Liability Position

1. Background. The net international investment position (NIIP) was -14 percent of GDP by end-2017, which is broadly unchanged from five years ago (-13 percent of GDP in 2013). External assets and liabilities were 54 percent and 68 percent of GDP, respectively. Reserves held by the BSP accounted for about half of the total external assets. Key components of external liabilities included FDI liabilities (25 percent of GDP) and portfolio investment (28 percent of GDP). Government external debt was about 10 percent of GDP.

2. Assessment. The structure of the external balance sheet, especially the large share of FDI liabilities in total external liabilities and ample reserves, entails relatively low vulnerabilities.

Current Account

3. Background. The current account balance has been on a declining path, from an average of 3.2 percent of GDP during 2010–2015 to -0.4 percent of GDP in 2016 and -0.8 percent of GDP in 2017. The decline is largely explained by the widening deficits for trade in goods, which ultimately reflects the higher demand from strong investment growth in recent years.

EBA Current Account Model
In Percent of GDP
Current account
Actual-0.8
Cyclically adjusted-’.C
Norm-0.6
Gap-C-
Of which:
Policy gap-C.5
Fiscal policyC.7
Credit growth-0.8
Source: IMF staff estimates.
Source: IMF staff estimates.

4. Assessment. The external position in 2017 was broadly in line with fundamentals and desirable policy settings. The CA norm estimated using the benchmark EBA model was -0.6 percent of GDP, with a standard error of 1.4 percent of GDP. Considering the standard error of EBA estimation, staff estimates a CA norm range between -2.0 and 0.8 percent of GDP. The cyclically-adjusted balance was -1.0 percent of GDP. The midpoint of the CA gap, measured by the difference between the cyclically-adjusted balance and the midpoint of the CA norm, was -0.4 percent of GDP (with a CA gap range between -1.8 and 1.0 percent of GDP). The policy gap was -0.4 percent of GDP: the positive policy gap from fiscal policy (mainly driven by the misalignment in other countries) was more than offset by the impact of the fast credit growth that brought the credit-to-GDP ratio to the level above the trend (Technical Notes 1 and 2).

Real Exchange Rate

5. Background. The peso depreciated by 4.1 percent in real effective terms in 2017, and by 5.7 percent in nominal effective terms. The depreciation mainly reflects the role of the floating peso as a shock absorber, given the widening CAD and the materialized and expected U.S. interest rate hikes.

6. Assessment. The real effective exchange rate (REER) was broadly in line with fundamentals and desirable policy settings. Using standard trade elasticities, a CA gap between -1.8 and 1.0 percent of GDP was equivalent to a REER gap between -5 and 8 percent. The REER norms from the EBA REER-Index and REER-Level model were about 5 ppt and 11 ppt weaker than the actual REER in 2017. However, given the deviations (from norm) in the REER-Index and REER-Level models were largely driven by unexplained residuals, the overall assessment is based on the CA model.

7. The REER depreciated by 1.2 percent in the first seven months of 2018. The development does not warrant a change of assessment.

Capital and Financial Accounts

8. Background. Net FDI inflows increased substantially in recent years, from around zero before 2015 to 2.6 percent of GDP in 2017. Portfolio and other investments, however, registered net outflows in 2017, reflecting increasing overseas investment of residents and the portfolio rebalancing in the context of U.S. interest rates hike. Overall, the financial account balance turned negative to -0.7 percent of GDP (i.e., net inflows) from 0.1 percent of GDP in 2016.

Balance of Payments: Financial Account 1/

(in percent of GDP)

Source: Bangko Sentral ng Pilipinas.

1/ Negative (positive) values mean net inflows (outflows).

9. Assessment. As a small open economy, Philippines is inevitably exposed to the external shocks such as the increase in U.S. interest rates. However, given the large amount of foreign reserves and flexible exchange rate regime, the vulnerabilities are limited.

FX Intervention and Reserves Level

10. Background. The exchange rate is classified as floating. The value of the Philippine peso is determined in the interbank foreign exchange market. The BSP intervenes in the spot and forward markets to smooth short-term exchange rate volatilities. Intervention data is not available. Gross reserves were about US$81.6 billion (about 26 percent of GDP) at end-2017 and fell to US$76.7 billion by July 2018, largely reflecting the widening trade deficit and portfolio outflows.

11. Assessment. Reserves as of end-2017 were about eight months of imports, or about 204 percent of the IMF’s reserve adequacy metric. Both approaches indicate that reserves level is ample. The development in 2018 does not change the assessment.

12. Technical Note 1. The CA norm is assessed based on the refined EBA-CA model. Compared with previous EBA vintages, it makes a few improvements in accounting for the effects of demographics and credit growth, and in data measurement. For the Philippines, the refined model yields a better fit (i.e., a smaller regression residual) and a higher CA norm than previous versions. This is because the refined model estimates a smaller impact of productivity level and expected output growth (both factors tend to lower the Philippines’ CA norm) on the current account.

13. Technical Note 2. The revised EBA-CA model uses the share of prime savers (ages 45–64) as one of the determinant variables. However, the life expectancy in Philippines (as well as in five other countries) is lower than in other countries in the sample, making this variable less valid for Philippines. A revised EBA model with special adjustment to demographic variables (redefining prime savers as population from 40 to 59) was estimated and the CA norm in 2017 was about -1.9 percent of GDP. Although the two models yield different estimates for CA norm and CA gaps, the differences do not change the overall assessment that the external position in 2017 was in line with fundamentals under desirable policy settings.

Appendix III. Public and External Debt Sustainability Analysis

The Philippines’ general government gross debt remains moderate and sustainable at 40 percent of GDP as of end-2017. In the baseline scenario, the debt-to-GDP ratio is projected to decline to 36.5 percent in 2023. It is most vulnerable to a growth shock, followed by real interest rate and exchange rate shocks. External debt stands at a moderate 23.3 percent of GDP as of end-2017 and projected to fall to 14.3 percent in 2023, although vulnerable to large depreciation or current account balance deterioration.

Background and Realism of Key Assumptions

1. Baseline projections are predicated on strong and sustained macroeconomic performance over the medium term. Real GDP growth is projected to gradually rise to 6.9 percent per annum in 2023, with inflation returning to 3 percent as the economy’s productive capacity expands. The national government deficit would reach 3 percent of GDP in 2020 and remain at this level until 2023. The 2018 current account deficit is projected to expand to 1.5 percent of GDP due to higher infrastructure-related imports and stabilize at 1.3 percent in 2023.

Debt Sustainability

2. Public debt in the Philippines is on a gradual downward path under current policies. Prudent fiscal management and strong growth are expected to reduce the general government gross debt-to-GDP ratio from 40 percent of GDP in 2017 to 36.5 percent in 2023. The decline would be led by significant primary budget surplus, which staff assesses as comfortably achievable based on international experience. The gross financing needs remain comfortable at around 4.0–4.5 percent of GDP in 2019–2023. The debt composition is expected to be stable with a relatively low share of foreign currency-denominated debt, in line with the authorities’ debt management policy.

3. Alternative scenarios suggest that staff’s baseline is conservative by historical standards. The historical scenario leads to faster reduction in debt and gross financing needs than in staff’s baseline, reflecting the Philippines’ large-scale debt consolidation since 1999 and strong GDP growth. Under the constant primary balance scenario, the gross financing needs would gradually rise to 6.4 percent of GDP in 2023 compared to 4.4 percent in the baseline, although the debt ratio would still fall more than the baseline. In response to macroeconomic shocks, the debt ratio would fail to decline to a growth shock (39.6 percent of GDP in 2023).

4. Total external debt in the Philippines is also sustainable. The baseline external debt-to-GDP ratio is expected to fall to 14.3 percent of GDP in 2023, from 23.3 percent in 2017. The historical scenario suggests that staff’s baseline is conservative, and debt dynamics appear resilient to various shocks including to interest rates, growth, and the current account. A one-time depreciation of 30 percent in 2019 would temporarily raise the debt ratio by 9 percentage points, but still reduce it below the 2017 level by 2023.

Figure AIII.1.Figure 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.

Figure AIII.2.Figure Public DSA—Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Figure AIII.3.Figure 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 historical scenarios, 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 2010.

Table AIII.1.Philippines: External Debt Sustainability Framework, 2013–2023(In percent of GDP, unless otherwise indicated)
ActualProjections
20132014201520162017201820192020202120222023Debt-stabilizing non-interest current account 6/
1Baseline: External debt28.927.326.524.523.321.319.517.916.615.414.3-2.6
2Change in external debt-3.1-1.6-0.8-1.9-1.2-2.0-1.8-1.6-1.3-1.3-1.1
3Identified external debt-creating flows (4+8+9)-6.8-5.1-3.0-2.6-2.6-2.2-2.1-2.1-1.9-1.7-1.4
4Current account deficit, excluding interest payments-5.3-4.8-3.4-0.50.00.80.80.70.70.80.9
5Deficit in balance of goods and services3.94.56.19.310.110.710.410.09.89.59.1
6Exports25.026.524.724.326.727.427.327.126.926.626.6
7Imports28.930.930.833.636.838.137.737.136.736.135.7
8Net non-debt creating capital inflows (negative)0.0-0.10.2-2.0-2.7-2.2-2.3-2.2-2.0-1.9-1.7
8Automatic debt dynamics 1/-1.5-0.30.1-0.20.1-0.7-0.7-0.6-0.6-0.5-0.5
10Contribution from nominal interest rate1.11.00.90.80.80.70.70.60.50.50.5
11Contribution from real GDP growth-2.1-1.7-1.6-1.7-1.6-1.4-1.3-1.2-1.1-1.0-1.0
12Contribution from price and exchange rate changes 2/-0.50.40.80.70.9
13Residual, incl. change in gross foreign assets (2–3) 3/3.73.62.20.71.40.10.30.50.60.40.3
External debt-to-exports ratio (in percent)115.7103.1107.2101.187.277.771.566.161.857.853.7
Gross external financing need (in billions of US dollars) 4/9.79.712.020.921.625.125.124.925.526.427.4
in percent of GDP3.63.44.16.96.97.57.06.35.95.65.3
Scenario with key variables at their historical averages 5/10-Year Historical Average10-Year Standard Deviation21.317.113.510.06.73.3-0.6
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)7.16.16.16.96.75.62.06.56.76.76.86.96.9
GDP deflator in US dollars (change in percent)1.5-1.4-3.0-2.6-3.62.26.00.21.02.42.13.03.0
Nominal external interest rate (in percent)3.73.53.33.33.43.70.43.43.43.33.33.33.2
Growth of exports (US dollar terms, in percent)1.511.0-4.12.313.36.610.59.47.48.58.28.910.1
Growth of imports (US dollar terms, in percent)-1.412.22.313.712.78.512.310.56.77.57.88.38.9
Current account balance, excluding interest payments5.34.83.40.50.03.52.1-0.8-0.8-0.7-0.7-0.8-0.9
Net non-debt creating capital inflows0.00.1-0.22.02.70.41.12.22.32.22.01.91.7

Derived as [r – g – r(1 + g) + ea(1 + r)]/(1 + g + r + gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1 + g) + ea(1 + r)]/(1 + g + r + gr) times previous period debt stock. r increases with an apreciating domestic currency (e > 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 – r(1 + g) + ea(1 + r)]/(1 + g + r + gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1 + g) + ea(1 + r)]/(1 + g + r + gr) times previous period debt stock. r increases with an apreciating domestic currency (e > 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.

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