IMF Executive Board Concludes 2021 Article IV Consultation with Philippines

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation [1] with the Philippines.

The economy is recovering after a major, pandemic-induced economic downturn. Real GDP contracted by 9.6 percent in 2020. The authorities have deployed a comprehensive set of policy responses that have helped to mitigate the socioeconomic impact and maintain financial stability. While a moderate economic recovery started in the third quarter of 2020, the second COVID‑19 wave of infections that emerged in early 2021 will likely slow the economic recovery in the first half of the year. CPI inflation averaged 4.4 percent through June 2021, above the authorities’ target band of 2 to 4 percent, reflecting primarily food supply shocks and the price impact of pandemic‑related transportation supply restrictions. A sharp import compression in 2020 resulted in a current account surplus of 3.6 percent of GDP. Vaccination has started and is poised to accelerate from midyear.

The recovery is expected to gain momentum in the second half of 2021 and in 2022. Real GDP is projected to expand by 5.4 percent in 2021 and 7.0 percent in 2022, due to continued easing of quarantine measures, progress in vaccinations, and macroeconomic policy support. Medium‑term economic growth is forecast to return to the pre-pandemic rate of 6.5 percent. Headline inflation is expected to decrease to 3.3 percent by end‑2021, as the transitory drivers taper off and reach the mid-point of the target band over the medium term. With the economic recovery, the projected rebound in investment, and a more expansionary fiscal policy stance, the current account surplus is expected to narrow in 2021 and reach a deficit of 1.8 percent of GDP in the medium term. The risks to the outlook are larger than usual and tilted to the downside, given risks of a protracted pandemic and uncertainty around the vaccine program. Banks benefit from strong capital and liquidity buffers but are facing rising asset quality risks.

Executive Board Assessment [2]

Executive Directors commended the authorities’ comprehensive policy response to the COVID‑19 pandemic, which has helped to cushion its socio-economic impact. Strong fundamentals and prudent macroeconomic policies have helped to maintain macro-financial stability. Directors noted that there are larger-than-expected uncertainties, including related to the pandemic and the vaccination program. They underscored the importance of continuing supportive macroeconomic policies and prioritizing health policy responses to sustain the recovery.

Directors agreed that the expansionary fiscal stance strikes an appropriate balance between recovery needs and fiscal prudence, with the priority given to health, social, and infrastructure spending. They noted that the Philippines has some fiscal space to respond flexibly if downside risks materialize. Directors welcomed the authorities’ commitment to fiscal consolidation, and in this regard, emphasized the benefits of adopting a medium-term fiscal strategy, centered on revenue mobilization and expenditure control, to anchor their commitments. They encouraged continued efforts to enhance fiscal transparency and accountability, including procurement procedures.

Noting the economic slack and inflation outlook, Directors agreed that the monetary policy stance should remain accommodative and data driven, mindful of risks to financial stability. They recommended gradually phasing out direct budgetary financing to safeguard the central bank’s operational capacity and independence. A clear communication strategy would help enhance the effectiveness of monetary policy as normalization begins. Directors observed that the large current account surplus in 2020, which led to a large buildup of foreign reserves, is likely temporary. They saw an important role for the exchange rate in absorbing external shocks.

Directors highlighted that adequate credit provisioning and measures to strengthen prudential supervision remain important to preserve banking system soundness. They recommended that regulatory forbearance be allowed to expire as scheduled, and generally saw merit in limiting dividend payouts to allow for capital retention when needed. Directors underscored the urgent need to strengthen the bank resolution framework and enhance AML/CFT implementation, in line with the 2021 FSAP recommendations. Steadfast efforts are needed to facilitate swift exit from the FATF grey list and reduce the risk of disruptions to cross-border financial flows.

Directors welcomed the authorities’ emphasis on structural reforms to improve the business environment and foster more sustainable, inclusive, and greener growth. They stressed the importance of investment in training and education to facilitate sectoral reallocation. Directors also encouraged efforts to increase spending on social protection, strengthen public service delivery, and implement climate-related initiatives.