This 2011 Article IV Consultation reports that the Philippines is being affected along with other countries in the region by the fragile global environment. The key challenge is to navigate through the period of global uncertainty to maintain macroeconomic stability while building the foundations for faster and more inclusive growth. Domestic demand should support growth in 2012, as public spending picks up after a sharp decline in 2011, and IMF staff expects growth to rise from 3.7 percent in 2011 to 4.2 percent in 2012.
The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.
Economic activity remains moderate. In the 4th quarter, GDP growth was roughly unchanged from the previous quarter at 3.7 percent (year/year). Household consumption was supported by robust remittances, and public expenditure picked up significantly as a result of the government’s expenditure acceleration program launched last October. On the supply side, typhoons disrupted agricultural production, but strong services and public construction activity counteracted the effects on the overall economy. For 2011 as a whole, GDP growth was 3.7 percent, which coincided with the staff’s forecast but was lower than the authorities’ expectation (4.5 percent-5.5 percent).
External headwinds are affecting exports, but the balance of payments position remains strong. Exports continued to contract in December (by -20.7 percent, year/year), led by electronics. Net portfolio inflows stayed positive in December and January. International reserves rose to $77 billion in January (equivalent to 11 months of imports and to 5 times short-term external debt based on residual maturity). The peso has depreciated slightly in nominal and real effective terms since December.
Inflation pressures have continued to decline. Headline inflation moderated slightly faster than expected to 3.9 percent (year/year) in January, from 4.2 percent in December, largely owing to food prices. For 2011 as a whole, headline inflation averaged 4.4 percent on the 2000 basis (roughly equivalent to the staff’s forecast).
Citing external headwinds to growth prospects and a moderate inflation outlook, the BSP cut policy interest rates by 25 basis points on January 19. The cut brought the key policy rate to 4.25 percent. On February 2, the Bangko Sentral ng Pilipinas (BSP) announced measures to rationalize reserve requirements. Effective April 2012, a unified reserve requirement would replace the existing statutory and liquidity reserve requirements; the reserve requirement would no longer be remunerated; and vault cash would no longer be an eligible form of reserve requirement compliance. To offset the impact of this move on banks’ intermediation costs, the reserve requirement ratio would be reduced by 3 percentage points at the same time.