Statement by the IMF Staff Representative

The staff report for the 2005 Article IV Consultation on the Philippines highlights managing short-term vulnerabilities and higher investment and growth. Power generation tariffs have been raised to substantially cut the losses of the National Power Corporation (NPC). A risk to the near-term outlook for the Philippine economy is that political events, such as possible constitutional change, serve to sideline economic reforms. Executive Directors agreed that rebalancing the composition of public expenditure, with reduced current outlays providing space for capital and social spending, should form an integral part of the fiscal consolidation.

Abstract

The staff report for the 2005 Article IV Consultation on the Philippines highlights managing short-term vulnerabilities and higher investment and growth. Power generation tariffs have been raised to substantially cut the losses of the National Power Corporation (NPC). A risk to the near-term outlook for the Philippine economy is that political events, such as possible constitutional change, serve to sideline economic reforms. Executive Directors agreed that rebalancing the composition of public expenditure, with reduced current outlays providing space for capital and social spending, should form an integral part of the fiscal consolidation.

1. This statement provides an account of developments since the staff report was circulated to the Executive Board on January 20, 2006. Recent developments do not alter the thrust of the staff appraisal.

2. Fiscal performance in 2005 was substantially better than target. The National Government deficit amounted to P 146.5 billion (2.7 percent of GDP) last year, substantially below the target of 3.4 percent of GDP, and a pronounced improvement relative to the 2004 outturn (3.9 percent of GDP). Buoyant revenues and expenditure under-runs contributed about equally to the overperformance.

3. As scheduled, the government increased the VAT rate from 10 to 12 percent on February 1, completing implementation of the VAT reform package. A first round of measures, including broadening the base of the VAT to power and petroleum products and raising the corporate income tax rate, went into effect on November 1, 2005. Assuming that tax collection matches expectations, the VAT reform package should help bring the non-financial public sector deficit to 2.3 percent of GDP this year, down from 5.0 percent in 2004 and an estimated 2.7 percent in 2005, while also providing additional resources for capital and social spending, which have been compressed in recent years.

4. Real GDP growth registered 5.1 percent in 2005, slightly above expectations, but down from 6.0 percent in 2004. In the fourth quarter, growth rose to 6.1 percent (y/y), up from 4.5 percent in the previous quarter, driven in part by stronger private consumption due to surging remittances. For 2005 as a whole, the slowdown relative to 2004 mainly reflects substantially weaker investment and net exports.

5. Financial markets have continued to reward the sustained reform momentum. The peso has strengthened around 2.6 percent against the U.S. dollar since the beginning of the year, in line with other currencies in the region. Against the U.S. dollar, the peso is now at its highest level since September 2002, and the BSP has taken advantage of this strength to build reserves. Against this background, gross international reserves reached an all-time high of $20.5 billion at end-January, up by $2 billion since end-December, in part also reflecting the successful external bond placement in early January. The EMBI-PHL spread has continued to narrow since the beginning of the year and now measures 272 basis points, around 180 basis points below its level last July, when the Supreme Court suspended the VAT reform package and the former economic team resigned.

6. The attachment updates Table 1 in the Staff Report to incorporate these developments.

Table 1.

Philippines: Selected Economic Indicators, 2002–06

Nominal GDP (2004): P4,826 billion ($86.1 billion)

Population (2004): 83.5 million

GDP per capita (2004): $1,031

IMF quota: SDR 879.9 million

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Sources: Philippine authorities; and Fund staff estimates and projections.

“Reforms proceed” scenario.

Defined as difference between gross investment and current account. There is a statistical break in national saving and balance of payments data in 2003.

Fund definition. Excludes privatization receipts of the national government, and includes net deficit from restructuring the central bank.

Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments.

The sum of all nonfinancial public sector revenue net of intra-public sector payments. It is assumed that 80 percent of Bureau of Treasury revenue represents interest and dividends from other parts of the nonfinancial public sector. Privatization receipts are excluded.

Defined as difference between nonfinancial public sector revenue and balance.

Debt is consolidated (net of intra-nonfinancial public sector holdings of debt). Data on local government debt are not available for 2001; it is assumed that these debts were the same as a share of GDP as in 2002.

As of September, 2005.

January 2006.

Defined as external debt plus liabilities of foreign banks in the Philippines to their headquarters, branches and agencies, some external debt not registered with the central bank and private capital lease agreements.

Gross reserves less gold and securities pledged as collateral against short-term liabilities.

Reserves as a percent of short-term debt (including medium- and long-term debt due in the following year). Both reserves and debt were adjusted for pledged assets.

November 2005.

Philippines: Staff Report for the 2005 Article IV Consultation and Post-Program Monitoring Discussions
Author: International Monetary Fund