Statement of an IMF Staff Mission at the Conclusion of the 2008 Article IV Discussions with the Philippines

The following statement was issued in Manila on November 14 after the conclusion of an International Monetary Fund (IMF) staff mission to the Philippines for the 2008 Article IV Consultation:
"An IMF mission visited Manila during November 5-14, 2008 to hold the 2008 Article IV Consultation discussions with the authorities. The findings will be relayed to the IMF's Executive Board in early 2009 but a preliminary assessment is as follows:
"As the global economy reels from the biggest financial shock since the Great Depression, the major challenge for emerging economies is to navigate through these turbulent times without sustaining major damage. As for the Philippines, significant reforms in fiscal and banking sectors in the past few years, as well as the build-up of reserves in good times, have lessened the economy's vulnerability. Nevertheless, the economy is not immune to the turmoil and it is important to undertake preemptive measures to face the challenges that lie ahead. Trade and financial linkages, including through workers' remittances, between the Philippines and advanced economies have grown over time. On the back of recent mark downs in advanced country growth, the mission expects growth in the Philippines to slow from an expected 4.4 percent this year to 3½ percent in 2009.
"The mission expects the national government deficit be 0.9 percent of GDP this year (on the authorities definition which includes privatization). The tax effort is expected to remain broadly unchanged at around 14 percent of GDP as windfall revenue gains from high oil prices were broadly offset by changes to the income tax law and weakness in VAT revenues. On a note of concern, domestic taxes have performed weakly through the year and need to be carefully monitored in the period ahead. On the expenditure side, higher current spending (including through National Food Authority (NFA) operations) will likely be offset by lower capital expenditure reflecting weak absorptive capacity. Non-financial public sector debt in percent of GDP is expected to rise modestly this year, due largely to a weaker exchange rate, reversing the recent trend. The NFA is expected to incur a deficit of 1 percent of GDP this year from a broadly balanced position in 2007. The authorities' goal of protecting the poor can be better realized instead by using well-targeted conditional cash transfer schemes.
"For 2009, the key challenge for fiscal policy is to balance the need for cushioning the impact on the real sector against the benefits of maintaining fiscal discipline. On the one hand, an expansion of the deficit would help to soften the impact of the global shock on the domestic economy. On the other hand, on account of recent changes to the income tax law and the planned reduction in the corporate income tax, the tax effort may fall close to levels seen before the reform of the VAT. This could re-kindle investor concerns, especially in the context of expected tight external financing conditions for emerging markets next year. In the mission's assessment, a measured expansion of the national government deficit, to up to 1.7 percent of GDP in 2009 (authorities basis), would help to soften the reduction in growth while containing any adverse market reaction. Reforming excises on tobacco and alcohol products and rationalization fiscal incentives, as well as accelerating the implementation of the tax administration reform program, would provide more resources. These could be devoted to raising public investment and protecting the poor. In this regard, the mission reiterates the need for legislative and administrative action to raise the tax effort.
"Monetary policy has appropriately changed course. The mission shares the Bangko Sentral ng Pilipinas' (BSP's) assessment that inflationary pressures are beginning to stem. The mission expects inflation to average 9.8 percent this year and 6 percent in 2009. If the economic slowdown proves protracted and inflation expectations adjust sufficiently downwards, which appears to be a likely scenario, monetary policy could be eased in the period ahead. Also, preserving the level of reserves at a sufficiently high level will help sustain confidence in the peso as well as the resilience of the financial system.
"Recent reforms have strengthened the financial system but spillovers from the global financial crisis need to continue to be monitored. The fallout of the global financial crisis on the domestic financial system has to date been limited. While direct exposure to Lehman Brothers and to toxic assets has been small, rising sovereign spreads have led to mark-to-market losses on banks' holdings of Philippine sovereign bonds. To provide some relief from these losses, the BSP has allowed banks to reclassify assets. The mission welcomes the BSP's resolve to not allow these measures to impair transparency about the soundness of financial institutions. The BSP has also appropriately introduced a number of measures to support liquidity positions. These include the U.S. dollar denominated deposit facility and repurchase agreement with banks and lowering of the reserve requirement by 2 percentage points and doubling the size of the rediscount window. The mission supports the authorities' plan to raise the deposit insurance limit to P500,000 and suggests that some flexibility be allowed on the coverage limit. At the same time it is important to recapitalize the Philippine Deposit Insurance Corporation to match the higher insurance liabilities under the new limits. There is scope to strengthen the banking resolution framework, including through making restructuring decisions irreversible."

IMF Team Affirms Weak Links Between OFW Money, Investment

BY JEREMAIAH M. OPINIANO

MANILA—A TEAM from the International Monetary Fund observed that remittances from an estimated eight million Filipinos abroad have not led to increased investments.

Ever since the country’s investment ratio has steadily declined since the 1997 Asian financial crisis, increasing remittances “has not increased investment,” IMF’s Ayako Fujita and Srikant Seshadri wrote in a policy analysis paper of selected Philippine economic issues done by a six-person IMF team.

IMF’s Country Report 07/131 (released last March) analyzed selected economic issues such as reforms in the value added tax law, an analysis of the economic contributions of the services sector, and credit growth and bank balance sheets in the Philippines.

Both Fujita and Seshadri were part of a six-person team that consulted Philippine economic planning and finance officials last January as part of the lender’s periodic consultations with countries.The weak links between remittances and investment is such even if middle-to-high income migrant families, whose main source of income is remittances from dependents abroad, are rising, says the IMF team.

The team cited data from the triennial Family Income and Expenditures Survey of the National Statistics Office, the same data that Milan Brahmbhatt and Dan Biller based their analyses for a report on East Asia for the World Bank.

Citing 1991 to 2003 data from the triennial FIES, the number of the two lowest-income migrant families receiving remittances declined from 60 percent in 1991 to 18 percent in 2003.Likewise, the top two income brackets among migrant families that count income abroad as their main source of income rose from 40 percent in 1991 to 82 percent 12 years after.

“Given that some 80 percent of (Filipino migrant) families that receive income from abroad as their main source are now middle and high-income families, it is much more likely now than in 1991 that the uses for this income go beyond consumption and subsistence, and are put toward saving and investment,” the IMF team’s paper wrote.

But the situation surrounding remittances and investments suggests that the lack of a relationship between investment and remittances “could indeed be transitory, and that going forward, one may see a pick up in investment in physical capital.”

The weak links between remittances and investment, however, also occurs in many remittance-receiving countries. “Country specific factors could determine whether a rise in external flows leads to greater consumption, including housing-related spending on the one hand, or greater investment in fixed capital on the other,”

In the case of the Philippines, the IMF team members observed that financial intermediation is a primary issue. “(Philippine banks are) still repairing their balance sheets, and are risk averse in the current environment,” IMF observed. But even if there were financial intermediation, the IMF team thinks that remittances as a percentage of gross domestic product should have increased by three percentage points, and this situation “might have a more pronounced effect on Philippine investment, which continues to decline.

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