By January 23, 2013
The following statement was issued in Manila today at the conclusion of an International Monetary Fund (IMF) staff mission to the Philippines for the 2013 Article IV consultation:
During 2012, the Philippine economy shrugged off weakness abroad by growing at around 6½ percent while also maintaining price stability. Robust growth was due to accelerating consumption and investment, fuelled by remittances, higher public spending and low interest rates. The external position was strong, with the current account remaining in surplus, supported by continued rapid expansion of the BPO sector and growing remittances. Reflecting the behavior of food and energy prices, average inflation moderated toward the floor of the target band, owing partly to the strong appreciation of the peso.
Going forward, growth is expected to moderate to a more sustainable level, but to remain strong compared to the past, with annual growth projected by the IMF staff at 6 percent and 5.5 percent in 2013 and 2014, respectively. Inflation is expected to remain within the target range this year and next, and the balance of payments is forecast to stay in surplus. Shocks from both external and domestic sources pose some risk to the growth outlook. There remains the possibility of extreme events originating in advanced economies. On the domestic side, a surge in capital flows could extend asset price gains in the near term, but make asset prices and growth more volatile down the road.
This growth resilience and more favorable outlook is both a testament to the Philippines' improved macroeconomic fundamentals, policy reforms and a reflection of the exceptional global setting. The focus on good governance has buoyed confidence and is supportive of more-inclusive growth. In addition, growth in the Philippines has been supported by unusually accommodative monetary policies in major advanced economies that are spilling over to domestic financial conditions.
However, new macro-financial challenges are emerging, even as structural issues remain. Large, stable foreign earnings over the past decade as well as potentially volatile capital flows are placing upward pressure on the exchange rate. Low interest rates are fuelling prices of financial assets and pushing resources to nontradable sectors, especially real estate.
Policymakers have responded in a timely and flexible manner to the difficult global conditions. We commend the BSP for utilizing a variety of instruments to help insulate domestic monetary conditions from the abundant liquidity abroad. The banking sector continues to perform well, aided by prudent BSP oversight. Nonbank financial intermediation has also expanded rapidly, providing a welcome deepening of local financial markets. The tightening of macroprudential policies by broadening the definition of banks' real estate exposures and strengthening bank governance requirements, together with accelerated introduction of Basel III capital requirement from January 2014, will help prevent the emergence of financial sector risks.
On fiscal policy, the government's strategy of generating revenue to fund priority spending while continuing to pursue a 2 percent of GDP deficit target over the medium term is appropriate. Public sector debt is expected to fall to a moderate 44 percent of GDP by 2016, thereby strengthening resilience to shocks. The recent increase in excises on tobacco and alcohol is welcome and will help fund expansion of health insurance coverage for the poor. Fully executing the planned increase in growth-enhancing spending and the conditional cash transfer program will require considerable new revenue, and revenue mobilization should continue to focus on improving tax administration and reforming the tax system.
In the structural area, continuing to improve the investment climate and raising labor productivity would further encourage resources to flow into productive sectors and generate jobs. Upgraded infrastructure and better access to formal credit by SMEs and the agriculture sector-both of which are labor intensive-are essential. Timely and transparent execution of PPP projects and large government investments could help catalyze private investment. Enhancing competition and relaxing foreign ownership limits would enhance growth prospects, particularly as integration within ASEAN and the global economy is set to deepen. Improving the job-readiness of the labor force is also important. Extending years of compulsory schooling and better access to health care are important initial steps
We thank the Philippine authorities, officials in Cebu, and our private sector interlocutors for their generous hospitality and informative discussions.
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