Staff Report for the 2008 Article IV Consultation—Informational Annex
Author: International Monetary Fund
Publication Date:
20 Feb 2009
eISBN:
9781451831436
Language:
English
Keywords:
ISCR; CR; excl. privatization receipt; headline inflation; inflation outlook; economy; exchange rate; net; Bangko Sentral ng Pilipinas; AsDB lending; financial asset; FAD tax administration advisor; cumulative AsDB lending; Loans; Imports; administration advisor
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The staff report for the Philippines’ 2008 Article IV Consultation is focused on economic developments and policies. A deepening of the global economic downturn presents downside risks to this outlook. Inflation is expected to reach 9½ percent in 2008 and decline to 6 percent in 2009, led by a decline in commodity prices and weaker demand. Bank surveillance has been strengthened and steps have been taken to reduce risks related to off-balance sheet activities.

Abstract

The staff report for the Philippines’ 2008 Article IV Consultation is focused on economic developments and policies. A deepening of the global economic downturn presents downside risks to this outlook. Inflation is expected to reach 9½ percent in 2008 and decline to 6 percent in 2009, led by a decline in commodity prices and weaker demand. Bank surveillance has been strengthened and steps have been taken to reduce risks related to off-balance sheet activities.

Annex I: Philippines: Fund Relations

(As of November 30, 2008)

I. Membership Status: Joined: December 27, 1945; Article VIII

II. General Resources Account:

III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

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Post-program monitoring ended following the advance repurchase made by the Philippines on December 29, 2006.

VI. Projected Obligations to Fund: SDR million; based on existing use of resources and present holdings of SDRs:

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VII. Exchange Arrangement:

The exchange arrangement is classified as an independent float. The value of the Philippine peso is determined in the interbank foreign exchange market; the Bangko Sentral intervenes in the spot and forward markets in order to smooth undue short-term fluctuations in the exchange rate and to strategically build reserves.

VIII. Article IV Consultation:

The Philippines is on the standard 12-month cycle. The 2007 Article IV consultation was discussed by the Executive Board on March 12, 2008.

IX. FSAP and ROSC Participation:

MCM: The Philippines’ FSAP was conducted during the fourth quarter of 2001; FSAP missions visited Manila in October and November–December 2001. The final version of the report was discussed with the authorities in June 2002. The associated FSSA was discussed by the Executive Board together with the Article IV staff report in September 2002.

FAD: Discussions on fiscal transparency were held in Manila in September 2001. The ROSC report was discussed by the Executive Board in September 2002 together with the Article IV staff report, and published in October 2002. The update to the ROSC report was published in June 2004. FAD adviser has visited Manila six times (June and September 2006, January, March, May, and July 2007). (Funding is available for a further three visits, if warranted by an improvement in reform progress).

STA: ROSC Data Module mission was conducted in September 2003, and the report was published in August 2004.

X. Technical Assistance:

An MCM resident banking supervision advisor has been stationed in Manila since May 2003, to assist the BSP in the implementation of a new supervisory model. An MCM mission visited Manila in February 2005 to review the payment systems, central bank accounting, and government bond market development. An MCM mission took place in July 2006 to review the regulation and infrastructure of the domestic debt market. Another MCM visited Manila in November 2006 to advise on liberalization of the foreign exchange market.

An STA peripatetic mission visited Manila in July–August 2003, January–February 2004, and February–March 2005 to provide technical assistance in balance of payments and international investment position statistics and in implementing the recommendations made by the ROSC Data Module mission. An STA mission took place in March–April 2006 to assist the authorities in compiling and disseminating government finance statistics in accordance with GFSM 2001.

An FAD mission to provide a briefing to the new tax commissioner took place in April-May 2001. An FAD mission reviewed VAT and excise administration in December 2001. An FAD staff member participated in the July 2004 PPM mission to evaluate and advice on tax measures. An FAD mission visited Manila in November–December 2005 to provide assistance in the areas of tax and customs administration and another mission was fielded in March 2006 to reach agreement with the authorities on the priorities of the BIR reform agenda. An FAD tax administration advisor visited Manila seven times during the period June 2006 to September 2008 to assist the Tax Administration Reform Group.

An LEG legal expert visited Manila to discuss anti-money laundering initiatives in March 2002.

XI. Resident Representative:

A Resident Representative has been stationed in Manila since January 1984. Mr. Reza Baqir assumed the post of Resident Representative in July 2005.

XII. Fourth Amendment to the Articles of Agreement:

The authorities have formally communicated to the Fund their acceptance of the Fourth Amendment, which was ratified by the Upper House of Parliament (Senate) in August 2001.

Annex II: Philippines: Relations with the World Bank Group

World Bank lending and nonlending activities

Since the World Bank started operations in the Philippines, it has committed approximately $12 billion under IBRD loans and $239 million under IDA credits (fewer cancellations). As of September 30, 2008, the Philippine portfolio consisted of 26 projects, amounting to $1.41 billion with undisbursed balance of $923.5 million. Two projects were approved in FY08: the Bicol Power Restoration Project ($12.9 million) and the National Roads Improvement and Management Project 2 ($232 million). Based on net commitments and by sector, the current portfolio can be broken down as follows: human development ($371 million, 26 percent); transport and energy ($323 million, 23 percent); rural development and environment ($304.8 million, 22 percent); urban development (244.0 million, 17 percent); social development ($136.8 million, 10 percent); and governance and economic management ($32.9 million, 2 percent).

The current Philippines Country Assistance Strategy (CAS) builds on the government's 2004–10 Medium-Term Philippines Development Plan and has two main goals: economic growth and social inclusion. It also identifies two important levers for pursuing these goals: achieving fiscal stability and improving governance. The CAS supports Islands of Good Governance (successful experiences of public service delivery and effective public institutions) in national government agencies, local governments, and dynamic sectors in the Philippines that demonstrate how improved accountability and service delivery can lead to better economic and social outcomes. The CAS Progress Report of June 2007 re-affirmed the relevance of the CAS theme of supporting Islands of Good Governance, recommended an extension of the CAS for one year (to end-FY09), and a scaling up of the Bank’s lending based on the increased fiscal space and government demand for more Bank assistance.

The extended coverage of the current CAS is up to June 2009. The World Bank is now in the process of formulating a new CAS to cover the period July 1, 2009 to June 30, 2012. Emerging shifts in strategy include: increasing focus on direct poverty alleviation; operationalizing the focus on governance; expanding and re-focusing the knowledge agenda; and strengthening linkages to global issues—climate change and disaster risk management. The new CAS is expected to be discussed by the Bank’s Board in April 2009.

An important aspect of World Bank support to the Philippines is in the form of analytical and advisory activities leveraged through partnerships with other organizations, administration of trust funds, and policy dialogue. The World Bank is implementing a more programmatic approach to its AAA program in the Philippines, and will continue this with Inclusive Growth as the AAA flagship theme that addresses the topical issue in the Philippines today of how to get more growth and how to make it more inclusive. The Inclusive Growth AAA is in addition to AAA on macro/fiscal, governance, health, education, local government issues, rural poverty reduction, environment and social safeguards. Two major pieces of ESW were delivered in FY08, including a Country Procurement Assessment Report and a Development Update for the Philippines Development Forum (PDF), and three key ESW products are expected in FY09–the Philippines Development Report, Inclusive Growth, and Country Environment Assessment.

The Bank has an extensive outreach program in the Philippines to promote knowledge sharing. Currently, there are 11 Knowledge for Development Centers (KDCs) around the country that make available Bank publications and development literature either through online access or through hard copies. The Bank has also partnered with the Asian Institute of Management to create a Global Distance Learning Network that offers distance learning sessions for a broad national, regional, and international audience. In addition, the Bank also maintains an external country website (www.worldbank.org.ph).

Partnership

Strategic partnerships, supported by large bilateral and multi-donor trust funds administered by the World Bank, are beginning to form a growing line of business in the Philippines, as the government and its development partners move toward coordinated sector-wide approaches in delivering development assistance to various sectors, in line with the Paris Declaration.

The PDF, formerly called the Consultative Group (CG), is the primary mechanism of the government for facilitating substantive policy dialogue among various development partners and other stakeholders on the country’s development agenda. The main event is held in country every 12 months, and the next PDF is scheduled to convene in March 2009. The PDF is chaired by the Philippine Government, represented by the Department of Finance, and the World Bank serves as the co-chair. The PDF has eight working groups in the following areas to facilitate the policy dialogue throughout the year related to their specific themes: MDGs and social progress; growth and investment climate; economic and fiscal reforms; governance and anti-corruption; Mindanao, sustainable rural development; infrastructure, and decentralization and local government. The World Bank is actively engaged as co-lead convener or participant in all the PDF working groups.

Table 1.

Board Approvals for Loans between July 1, 2000 and September 30, 2008

(In millions of U.S. dollars)

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NYE: not yet effective.
Table 2.

IBRD/IDA Lending Operations as of September 30, 2008

(In millions of U.S. dollars)

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Net of cancellations.

Table 3.

IFC investments as of September 30, 2008

(In millions of U.S. dollars)

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Annex III: Philippines: Relations with the Asian Development Bank

From January 2005 to June 30, 2008, the Asian Development Bank (AsDB) approved seven public sector loans totaling $1.409 billion,1 including $1.35 billion for five policy-based loans2 and $28.5 million for 25 technical assistance and grant-financed projects; generated $559 million in co-financing; approved $434.4 million for private sector operations; and supported two peso bond issues totaling P 7.5 billion to finance local currency operations.3

Since joining the AsDB in 1966, the Philippines has received 202 loans for a total of $10.15 billion, and 332 technical assistance grants amounting to $152.36 million. Energy and agriculture account for the largest proportion of lending (Table 1). Since 1998, 76 percent of lending has been for policy-based operations and 24 percent for investment projects.

Table 1.

Philippines: Cumulative AsDB Lending to the Philippines

(As of September 30, 2008)

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AsDB’s private sector operations, which are made without government guarantee, amounted to $632.2 million, including 18 loans of $595.3 million and 20 equity investments of $36.8 million. The Philippines is one of the largest clients for these activities. Private sector operations can be applied flexibly across projects, though the focus would be on the development of critical infrastructure projects and promotion of key financial sector initiatives. Targeted infrastructure projects include power generation and transmission, renewable energy, energy efficiency, water supply, sanitation and waste management sectors, toll road construction and operation, light rail systems, housing finance, and port operations. In the financial sector, target opportunities include (i) provision of a loan to domestic banks or nonbank companies to support microfinance and small and medium enterprises; (ii) asset backed securities; (iii) support for the issuance of corporate bonds to develop the capital market, and (iv) partial credit guarantees to support lending to small and medium-term enterprises.

The AsDB’s Philippines Country Strategy and Program 2005–07 (CSP) provides the framework for the alignment of AsDB’s activities with Philippine priorities. In 2007, the AsDB and the Government of the Philippines agreed on an operational program for 2007–08, which extended the CSP by one year through the Country Operations Business Plan (COBP) 2007–08. In 2008, AsDB and the government agreed on an operational program for 2009–10, which extends the CSP by another two years. The strategic focus of the CSP on fiscal consolidation, improved investment climate, and accelerated attainment of the Millennium Development Goals remains valid. The extension of the CSP to 2010 will align the cycle of the Country Partnership Strategy (CPS) with the government's planning cycle. The indicative assistance pipeline for lending products includes a total of $624 million for 2009 and $350 million for 2010. AsDB would continue its support for medium-term reforms via the Development Policy Support Program, the Financial Market Regulation and Intermediation Program, and the Local Government Financing and Budget Reform Program. The share of policy-based loans in total loans is expected to be 66 percent.

In the recent Country Assistance Program Evaluation (CAPE)4 conducted by AsDB’s Operations Evaluation Department, AsDB’s assistance over the past four years was assessed as highly relevant, aligned with national priorities. The assistance program was particularly effective in helping the government achieve progress in addressing the need to improve fiscal performance. AsDB has directly supported government efforts to increase development effectiveness and has helped implement new, more transparent procurement regulations. Loans, technical assistance projects and advocacy have had a significant impact on the direction of sector reforms and capacity development, especially for financial sector regulation and intermediation, and local government reform. To increase its relevance, AsDB’s partnerships outside the national government are being intensified or created, including those with government-owned and controlled corporations, Local government units, the Supreme Court and other pillars of justice, business groups, and civil society.

Annex IV: Philippines: Statistical Issues

Data provision has some shortcomings, but is broadly adequate for surveillance. A Report on the Observance of Standards and Codes (ROSC)—Data Module was published on the IMF website in August 2004. The ROSC identified the national accounts and balance of payments statistics as needing particular attention. The country subscribed to the Special Data Dissemination Standards in August 1996.

A. National Accounts

Despite the authorities’ efforts to improve quality, weaknesses remain in the national accounts. These include large discrepancies in GDP estimates between the expenditure and production sides (the official GDP estimates), with consequent differences in estimates of GDP growth.

The data ROSC identified a number of causes for these problems.5

  • Deaths and births of establishments are not adequately captured. This gap is of growing importance given the rapid structural change in the economy in recent years, with a large number of new establishments, in particular in the electronics and information technology industries.

  • Compilation relies on an outdated benchmark year and fixed input-output ratios. Estimates are derived by extrapolation of the 1988 benchmark year using fixed input-output ratios. For example, GDP statistics for the electronic sector suggest that value added remained at 10 percent of exports over the past years in spite of industry evidence that the domestic component of exports has been rising sharply.6

  • Statistical techniques in estimating GDP at constant prices are inadequate. For most activities, not all components of the production accounts are compiled, instead only value added is estimated. Value added at current prices is calculated by extrapolating the benchmark year value with an indicator for the value of output; data in constant prices are estimated using a price deflator for output. In addition, the national accounts constant price estimates for merchandise exports and imports are constructed by multiplying 1985 values by quantity data (weights) from the foreign trade statistics for current years. Because of this inappropriate method, implicit deflators for electric machinery products appear high compared with developments in world market prices.

The consumer price index has been compiled since February 2004 using weights based on the 2000 Family Income and Expenditures survey. A notable change was that the weight given to the group comprising food, beverages, and tobacco decreased to 50 percent in 2000 from 55 percent in 1994, the previous weight reference year.

B. External Sector Statistics

Steps have been taken to improve the quality of balance of payment statistics. In 2005, Bangko Sentral ng Pilipinas (BSP) created a new Department of Economic Statistics, with one of its units to concentrate on compiling, analyzing, and publishing the balance of payments and the international investment position. Progress since 2004 has included a significant improvement in the measurement of imports to correct an underestimation of imports of electronic goods on a consignment basis, improvements in the classification and recording of remittances, the introduction of a new methodology for measuring trade credits, and progress in the direct investment survey. Data for external debt and reserves are generally of good quality, although the data ROSC mission identified scope for improvement.

The revisions to imports have narrowed the gap between national trade data and those of partner countries on a net basis. An interagency task force on import statistics was established in July 2002 to improve the measurement of activity in the electronics sector, which accounts for about 43 percent of trade flows. Results of surveys covering electronics sector raw material imports confirmed that imports were routinely underestimated in reports to the National Statistics Office. Import figures have therefore been revised substantially, back to 2000.7 However, substantial differences remain with partner country data on gross flows of exports and imports, with the latter about 15 percent higher than the corresponding national data. The BSP is continuing research on the factors behind discrepancies in data related to trade in processed goods, such as electronics and textiles.

Challenges remain for addressing certain compilation issues. Since deregulation in the early 1990s, international transactions have increasingly flowed through nontraditional channels that are not adequately covered by the statistical reporting system. The Foreign Currency Deposit Units (FCDUs), which account for about 70–75 percent of foreign exchange settlements, are exempt from reporting requirements because of strict banking secrecy rules. Steps have been taken to measure cross-border transactions that skirt the domestic banking system, such as flows through inter-company accounts.8 Enterprise surveys, for example, have been introduced, although these are conducted on a voluntary basis and will take time to implement fully. Unless modifications are made to secrecy rules associated with FCDU accounts to facilitate the collection of data for statistical purposes, compilers of the balance of payments will continue to face challenges in securing adequate source data.

C. Monetary and Financial Statistics

Compilation of monetary and financial statistics (MFS) largely conforms to the Fund’s methodology. The October 2007 MFS mission introduced the standardized report forms (SRFs) for reporting monetary statistics to the IMF and an integrated monetary database (IMD) that will meet the data needs of the BSP, APD, and STA. The IMD will become operational when the BSP submits data in the SRFs.

D. Government Finance Statistics

While the Philippines meets the requirements of fiscal transparency in many important respects, the fiscal and data ROSCs found areas that require strengthening. An important problem is that the budget is presented on an obligations basis, while the deficit is reported on a cash basis. In addition, the budget classification differs from the accounting classification, complicating comparisons of budget and outcomes. Moreover, for levels of the public sector beyond the budgetary central (national) government, consolidated fiscal outturns for items other than the fiscal balance are generally unavailable. In addition, there is a discrepancy between stocks and flows resulting from differences in time of recording and inconsistency in the coverage and classification of some transactions related to debt guarantees and assumed debt. The authorities agreed to compare the coverage of data in the two debt recording systems, standardize the classifications of these transactions, and improve the recording of debt transactions according to international best practice.

The introduction of a standardized chart of accounts, and the electronic New Government Accounting System has facilitated the compilation of annual financial statements for all the levels of the public sector. The accounting system allows for the compilation of accrual based accounts and also provides for the compilation of a statement of cash flows. These statements become available six months after the end of a reference period. In addition, the mission worked with the authorities to revise classifications in the chart of accounts, in order to allow for the consolidation of data for the nonfinancial public sector as a whole. Also, it recommended separating the market and nonmarket activities of the government-owned-and-controlled-corporations, so that consolidated data for the general government sector could be compiled.

Annual data covering only the budgetary central government are reported for publication in the GFSY, and monthly budgetary central government data are published in the IFS. A dedicated unit in the Department of Finance was created to compile government finance statistics in accordance with GFSM 2001 framework.

TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE

(As of December 5, 2008)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-a-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on August 25, 2004, and based on the findings of the mission that took place during September 1–16, 2003) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

1

Two project loans for $59 million were among these.

2

In 2007, two policy-based loans totaling $550 million (94 percent of all lending) and one project loan were approved.

3

These comprised bond issues of P 2.5 billion in October 2005 and P 5 billion in May 2007 to fund a loan to a special-purpose vehicle for the resolution of nonperforming loans.

4

AsDB. 2008. Philippines Country Assistance Program Evaluation: Increasing Strategic Focus for Better Results. Manila.

5

Currently, the authorities are compiling new national accounts series based on the 1993 SNA guidelines.

6

Industry representatives indicate that the domestic component has increased significantly to around 30 percent in recent years.

7

Data from 1996–99 have not been revised and remain underestimated.

8

According to recent household surveys, typically about 30 percent of remittances of Overseas Filipino Workers were not channeled through the banking system, suggesting that remittances may have been underestimated by about US$3 billion (3.8 percent of GDP) in 2002.

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Cover IMF Staff Country Reports
Philippines: 2008 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Philippines
Author: International Monetary Fund
Volume/Issue:
Volume 2009: Issue 062
Publisher:
International Monetary Fund
ISBN:
9781451831436
ISSN:
1934-7685
Pages:
62
DOI:
https://doi.org/10.5089/9781451831436.002