IMF Concludes 2024 Article IV Consultation With Philippines

Washington, DC: On December 4, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation [1] with the Philippines.

Following a strong post-pandemic rebound in 2022, the Philippine economy moderated in 2023, growing by 5.5 percent. Growth recovered to 5.8 percent in the first three quarters of 2024 driven by strong public consumption and public construction, which was partially offset by the El Nino weather phenomena and subdued private consumption. Both headline and core inflation decelerated from their peaks in early 2023—to 2.3 and 2.4 percent (year-on-year) respectively in October 2024. The current account deficit narrowed to 2.7 percent of GDP in 2023 from 4.5 percent and is expected to narrow further in 2024 amid lower commodity prices, a gradual pick-up in tourism and business process outsourcing sector receipts. The banking system has weathered the high interest environment well so far with sufficient liquidity and capital buffers.

Growth is expected to accelerate in 2024-25, supported by disinflation, and gradually declining borrowing costs as monetary policy normalizes. Growth is expected to reach 5.8 percent in 2024 and pick up to 6.1 percent in 2025. Potential output is estimated to be between 6.0 to 6.3 percent over the medium term. Inflation is projected decline to 3.2 percent on average in 2024 from 6.0 percent in 2023, supported by the reduction in rice tariffs and other non‑monetary measures to reduce food prices. The current account deficit is expected to narrow to 2.0 and 1.9 percent in 2024 and 2025. The risks to the near-term growth outlook are tilted to the downside, mainly stemming from recurrent commodity price volatility, new supply shocks, an escalation of geopolitical tensions, monetary policy stance in advanced economies turning out to be too tight for longer, a growth slowdown in major economies, major natural disasters or extreme climate events, and stalled reform momentum or lower than expected payoffs from reforms.

Executive Board Assessment [2]

In concluding the 2024 Article IV consultation discussions with the Philippines, Executive Directors endorsed the staff's appraisal, as follows:

The authorities have handled the challenges arising from multiple external headwinds well with wide-ranging plans for high and inclusive growth. Growth has been resilient, despite external shocks and an unprecedented tightening in global monetary conditions. Following a sharp increase in inflation in 2022, as in other countries, the authorities promptly adjusted the policy rate, and initiated gradual fiscal consolidation. Several key reforms have been introduced to spur investment and promote exports.

Growth is expected to pick up modestly in 2024-25 while inflation should remain within the Bangko Sentral ng Pilipinas (BSP)'s target range. Growth will be supported by an acceleration in consumption as food prices ease and by an increase in investment sustained by continued emphasis on public investment and more accommodative financial conditions. The 2023 external sector position is assessed to be broadly in line with the level implied by the fundamentals and desirable policies. Risks to the near-term growth outlook are tilted to the downside, including external risks such as recurrent commodity price volatility and escalation of geopolitical tensions, and domestic risks related to lower-than-expected payoffs from reforms. New supply shocks and recurring commodity price volatility represent upside inflation risks.

The BSP has room to ease the policy rate gradually towards a neutral stance. With inflation and inflation expectations returning towards target and the output gap turning negative, a continued gradual reduction in the policy rate is appropriate. A data‑dependent approach and careful communication will be important to manage expectations amid uncertainty and more frequent supply-side shocks. The exchange rate should continue to play its role as a shock absorber, while FXI may be appropriate under certain circumstances. Establishing a credible yield curve is important to develop the fixed-income market and improve monetary policy transmission.

Systemic risks within the financial system are moderate, but pockets of vulnerabilities remain. The banking system has sufficient liquidity and capital buffers, and non-performing loans are low. However, parts of the commercial real estate sector have seen persistently high vacancies and falling rents, and non-performing housing loans remain elevated. The rapid growth in consumer loans warrants close monitoring. The BSP should be ready to adjust macroprudential policy in line with developments in the financial cycle to mitigate the build-up of vulnerabilities and move toward a positive neutral level for the countercyclical capital buffer. Its capacity to assess financial stability risks and resolve troubled financial institutions should also be strengthened.

The authorities have made significant progress in addressing outstanding anti-money laundering and combating the financing of terrorism (AML/CFT) issues, which should continue. The Financial Action Task Force (FATF)'s initial determination that the Philippines has substantially completed its action plan is welcome. Going forward, keeping up with evolving FATF requirements will be important in the context of the next mutual evaluation in 2027. Reforming the bank secrecy law will strengthen AML/CFT effectiveness and enhance the BSP's supervisory powers.

The more gradual pace of consolidation in the revised fiscal program is appropriate and should be supported by a concrete and sustainable plan to raise tax revenues and implement expenditure reforms. The 2025 budget proposes a broadly neutral fiscal stance, which can help mitigate downside risks to growth, but additional tax measures should be considered to create more space for spending in priority areas. Tax reforms could prioritize implementing previously planned excise tax measures, enhancing value-added tax efficiency, improving tax administration, and ensuring effective control of tax incentives. Efforts should also focus on reforming the military and uniformed personnel pension system, improving expenditure efficiency, and effectively managing fiscal risks.

The Philippine economy holds significant potential with its abundant natural resources, untapped blue economy, and a sizable demographic dividend. Unlocking the medium-term growth potential will crucially depend on comprehensive and well-sequenced structural reforms. These reforms, coupled with strengthened social protection programs, should aim to boost job creation, enhance productivity, increase resilience to climate change, and reduce poverty and inequality. Priority areas include upgrading infrastructure, making significant investments in healthcare and education, addressing land fragmentation and low productivity in the agricultural sector, and enhancing governance. In this context, digitalization provides an important opportunity to improve access to quality education, promote financial inclusion, and enhance public spending efficiency.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.