Washington, DC: An International Monetary Fund team led by Ms. Cheng Hoon Lim conducted discussions on the Philippine economy for the 2022 Article IV Consultation from September 12‑26, 2022. At the end of the mission, Ms. Lim issued the following statement:
“The Philippines has successfully emerged from one of the world’s strictest pandemic lockdowns, thanks to sustained reforms and disciplined macroeconomic policies that contained financial vulnerabilities and mitigated the hardships faced by the poor.”
“Following a sharp contraction in 2020, the Philippine economy rebounded in late 2021 and accelerated further in the first half of 2022, spurred by strong domestic demand and private investment. IMF staff project real GDP to grow by 6.5 percent in 2022 but to slow to 5 percent in 2023 as the confluence of global shocks weigh on the economy in the coming months. Inflation is expected to rise to 5.3 percent in 2022, then to decline modestly in 2023, supported by a moderation in commodity prices, and converge to the mid‑point of the band in 2024, as tighter monetary policy keeps inflation expectations anchored.
“The outlook is subject to significant downside risks, where policy tradeoffs between output and inflation would become more acute. Downside risks include a surge in COVID‑19 cases from more severe variants, a more abrupt or larger-than-expected tightening of global financial conditions, a deepening of the global slowdown, persistently high domestic inflation, and natural disasters. On the upside, an end to Russia’s war in Ukraine and taming of inflation both domestically and globally could lay the foundations for stronger growth than currently envisaged.”
“Looking ahead, sustaining the economy recovery will require a focus on policies to address inflationary risks, increase fiscal and financial resilience to adverse shocks, and successful implementation of reforms to mitigate pandemic scarring and raise productivity growth.”
“In this regard, IMF staff made the following policy recommendations:”
· BSP has taken prompt action to tackle inflation. Continued near-term tightening of monetary policy is appropriate to keep inflation expectations anchored and reduce headline inflation securely within the BSP’s target range of 2‑4 percent. Clear communication about inflation and BSP’s forward looking policy intentions can help reduce uncertainty and improve policy transmission.
· The banking system has shown resilience, with profitability returning to pre‑pandemic levels while non‑performing loans have increased only modestly. Nevertheless, downside risks to growth and higher interest rates warrant close monitoring of financial stability risks, especially in sectors that are overleveraged. Remaining regulatory forbearance measures should be allowed to lapse. Strengthening the BSP’s capacity to assess financial stability risks, amending the bank secrecy law, and strengthening the bank resolution framework can enhance supervision and resilience.
· Ongoing efforts to improve Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) effectiveness are welcome. Completion of the Philippines Action Plan with the Financial Action Task Force (FATF) is critical to successfully exit the FATF list. This will help improve the business environment and encourage foreign direct investment.
· The government’s plan to undertake fiscal consolidation while prioritizing higher infrastructure spending is commendable. The issuance of the Medium-Term Fiscal Framework that covers a 6-year horizon, beyond the usual 3-year horizon, helps signal the NG’s commitment to fiscal consolidation and fiscal sustainability. Fiscal consolidation should be underpinned by stronger revenue mobilization and cost-effective government spending to secure the needed resources for the Philippines’ important social and development plans. This combined with a concrete medium term fiscal strategy can reinforce sustainability and market confidence. If growth falls below the baseline, the pace of consolidation should be slower to support the recovery.
· If downside risks materialize, policies should remain nimble, and a coordinated use of fiscal, monetary, and exchange rate policies can help alleviate policy tradeoffs. Exchange rate flexibility remains critical as a shock absorber. But under conditions of heightened volatility with sharp and disorderly exchange rate depreciation, the use of foreign exchange intervention can alleviate inflationary pressures, relieving some of the pressure on monetary policy and lowering output costs. In addition, fiscal stimulus can prevent a large negative impact on output and banks can use their capital buffers to support credit growth.
· Accelerating reforms to raise productivity and harness benefits from the digital economy can reignite investment and boost potential growth. Further investments in education and training are necessary to help reduce pandemic-induced losses in human capital and reduce inequality. The recent adoption of several key legislations to promote foreign direct investment is laudable and their effective implementation is key to reap benefits. Ratification of the Regional Comprehensive Economic Partnership (RCEP) Agreement would facilitate access to imports and stimulate export diversification. Efforts to enhance food security and strengthen agricultural performance should focus on raising productivity and promoting new investments in the sector. These reforms should be complemented by strengthening existing social protection schemes and addressing climate change through a more integrated strategy that includes a carbon pricing scheme.
“The IMF team would like to thank officials in the government, the central bank, other public agencies, members of the House of Representatives and the Senate, and representatives of the private sector and civil society, for their constructive and open engagement.”