Washington, DC: International Monetary Fund (IMF) Executive Board Concludes 2021 Article IV Consultation [1] with the Philippines.

The economy is recovering after a major economic downturn triggered by a pandemic. Real GDP contracted by 9.6% in 2020. The authorities deployed a comprehensive set of policy responses that helped mitigate the socio-economic impact and maintain financial stability. While a moderate economic recovery began in the third quarter of 2020, the second wave of COVID-19 infections that emerged in early 2021 will likely slow the economic recovery in the first half of the year. CPI inflation averaged 4.4% through June 2021, above the authorities’ target range of 2-4%, mainly reflecting food supply shocks and impact on prices of transport supply restrictions linked to the pandemic. A strong compression of imports in 2020 resulted in a current account surplus of 3.6% of GDP. Vaccination has started and is expected to accelerate from the middle of the year.

The recovery is expected to accelerate in the second half of 2021 and into 2022. Real GDP is expected to grow 5.4% in 2021 and 7.0% in 2022, due to the continued relaxation of quarantine measures, progress in immunizations and macroeconomic policy support. . Medium-term economic growth is expected to return to the pre-pandemic rate of 6.5%. Headline inflation is expected to decline to 3.3% by the end of 2021, as transitional factors ease and reach the midpoint of the medium-term target range. With the economic recovery, the expected rebound in investment and a more expansionary fiscal policy, the current account surplus is expected to narrow in 2021 and reach a deficit of 1.8% of GDP over the medium term. The risks to the outlook are greater than usual and on the downside, given the risks of a protracted pandemic and the uncertainty surrounding the immunization program. Banks benefit from strong capital and liquidity buffers, but face increasing asset quality risks.

Board assessment [2]

Directors praised the authorities’ comprehensive political response to the COVID-19 pandemic, which has helped mitigate its socio-economic impact. Strong fundamentals and prudent macroeconomic policies have helped maintain macro-financial stability. Directors noted that there are greater uncertainties than expected, particularly related to the pandemic and the immunization schedule. They stressed the importance of pursuing supportive macroeconomic policies and prioritizing health policy responses to support the recovery.

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

Noting the economic slowdown and the outlook for inflation, Directors agreed that the stance of monetary policy should remain accommodative and data-driven, given the risks to financial stability. They recommended phasing out direct budget funding in order to preserve the operational capacity and independence of the central bank. A clear communication strategy would help strengthen the effectiveness of monetary policy as normalization begins. Directors observed that the large current account surplus in 2020, which led to a large build-up of foreign exchange reserves, is likely temporary. They saw an important role for the exchange rate in absorbing external shocks.

Directors stressed that adequate credit provisioning and measures to strengthen prudential supervision remain important to preserve the soundness of the banking system. They recommended that regulatory forbearance be allowed to expire as planned, and generally saw the benefit of limiting dividend payments to allow capital retention when needed. Directors underscored the urgent need to strengthen the bank resolution framework and improve AML / CFT implementation, in line with the recommendations of FSAP 2021. Continued efforts are needed to facilitate an early graduation from the gray list of the Bank. FATF and reduce the risk of disruption to cross-border financial flows.

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