An International Monetary Fund (IMF) mission, headed by Chikahisa Sumi, has assessed the Philippine economy’s performance as positive but believes there’s room for improvement.
During their visit to Davao and Manila from June 28 to July 12, the mission engaged with various stakeholders, including the Governor of the Bangko Sentral ng Pilipinas (BSP), economic ministers, high-ranking government representatives, private sector leaders, and financial experts. Sumi’s post-mission statement highlighted the following:
“The Philippine economy rebounded from a mid-2015 slowdown to achieve a strong 6.9% growth rate in the first quarter of 2016, aligning with our projection of 6% (year-on-year) growth for the entire year. Both consumption and investment have increased significantly, while weak global demand has hampered net exports. Despite robust economic activity, inflation dipped below the government’s target range (3±1%) in 2015 and the first half of 2016 due to lower food and fuel prices. However, it is anticipated to return to the target range later this year and in 2017 as commodity prices stabilize. The external current account remains in surplus, driven by robust remittances and business process outsourcing revenues, while international reserves are stable and at a comfortable level.
“The robust macroeconomic foundation provides a strong base to address remaining challenges. Despite strong economic growth and improved governance, it is essential to ensure that the benefits are distributed more inclusively. Infrastructure quality and social indicators still lag behind those of comparable nations. Although the unemployment rate has fallen to a decade-low of 5.3%, significant under-employment and poverty persist.
“The sustained economic growth in 2016, despite external challenges, can be partially attributed to fiscal stimulus and supportive monetary conditions. The national government budget deficit reached 1.4% of GDP in 2015 and has remained below the 2% target in recent years due to slow budget execution and weaknesses in public financial management. However, budget execution has improved since mid-2015 due to enhanced public finance and procurement management, making the 2% deficit target achievable in 2016. Monetary policy continues to support growth, and the implementation of the interest rate corridor (IRC) system will enhance monetary policy transmission.
“The current monetary stance is appropriate but should remain attentive to the impact of further fiscal stimulus on inflation. The flexible exchange rate regime and strong external position should help buffer the economy from external shocks. The risks to the short-term 2016 outlook are balanced, with upside potential tied to better-than-expected execution of the 2016 budget and downside risks stemming from the external environment, including Brexit.
“President Duterte’s 10-point reform agenda will guide policy formulation and structural transformation in the medium term. Considering the substantial infrastructure and social needs, along with ample fiscal space, we support raising the national government budget deficit to 3% of GDP over the medium term. This is consistent with maintaining a broadly stable debt-to-GDP ratio. Furthermore, we encourage a comprehensive and equitable tax reform package that generates substantial additional revenue. This would finance increased productive spending, in turn encouraging private investment. A scenario with higher revenue and productive spending of around 3% of GDP, coupled with swift implementation of the 10-point reform agenda, could boost the IMF staff’s baseline growth projection of approximately 6-7% to a range of 7-8% over the medium term. This additional effort scenario would position the Philippines among the fastest-growing (if not the fastest) economies globally and contribute to reducing poverty towards the government’s ambitious target.”
The IMF proposes that this medium-term strategy should encompass:
A tax reform package that simplifies the personal income tax (PIT) rate structure, adjusts tax brackets for inflation, and removes exemptions. The IMF suggests that such a package could be implemented progressively while increasing the relatively low revenue ratio by offsetting with higher fuel excises, rationalizing VAT exemptions, and implementing excises on sugary drinks. The package could also include simplifying and lowering the corporate income tax (CIT) rate structure while streamlining tax incentives.
Increased infrastructure investment, particularly in areas previously overlooked, should contribute to job creation and more inclusive growth.
Structural reforms, such as liberalizing foreign investment and land use regulations, will help amplify the impact of increased government spending.
Strengthened competition in the vital transport, logistics, and telecommunications sectors should be achieved through the resolute implementation of competition law and by avoiding regulations that unfairly hinder new entrants.
“The authorities’ initiatives to enhance systemic risk monitoring in the financial sector are welcomed,” the statement continued. “The BSP’s micro and macro prudential policies, as well as enhanced monitoring of real estate and credit conditions, including the introduction of the residential real estate price index (RREPI), have helped maintain financial stability amidst a challenging global financial environment. We also commend the regulatory agencies’ joint efforts to preserve financial stability through the Financial Stability Coordination Council (FSCC). These efforts include addressing data and regulatory gaps related to real estate developers, mitigating concentration risks posed by conglomerate structures, and managing rising corporate leverage. Developing the capital market is crucial for growth and infrastructure investment, including public-private partnerships (PPPs), while reducing concentration risks in the banking system. The recent incident involving the unauthorized transfer of US$81 million from Bangladesh’s international reserves to entities in the Philippines underscores the need to strengthen anti-money laundering legislation and procedures. It also highlights the importance of easing bank secrecy laws to align with international practices, including classifying tax evasion as a predicate crime.”
The mission recommends resubmitting amendments to the BSP charter to bolster the BSP’s efforts to maintain monetary and financial stability.
“The Philippines’ positive medium-term outlook faces potential downside risks, primarily from the global environment,” the statement concluded. “On the downside, slower growth in China and the region, tighter global financial conditions, and a surge in global financial volatility could trigger capital outflows and tighten domestic financial conditions. Should these risks materialize, the authorities are well-prepared to respond, particularly given the Philippines’ strong fundamentals and ample policy space.”