IMF warns of risks to economic growth

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Risks to the Philippine economic growth outlook are tilted to the downside and the country is well-equipped to respond should threats materialize, the International Monetary Fund (IMF) said

“Risks to the outlook … stem mainly from external sources,” the IMF said in a statement on Tuesday regarding last month’s Article IV consultations.

The IMF projected the Philippine economy to grow by 6.6 percent this year and 6.7 percent in 2018 on account of continued robust domestic demand.

“Sustaining the growth momentum in an uncertain and volatile external environment requires protecting policy anchors, adapting policies to changing conditions and maintaining vigilance against risks,” it said.


It warned that a “combination of high credit growth, buoyant private investment, and fiscal expansion without tax reform could lead to overheating of the economy.”

While the IMF noted the breadth of planned tax reforms, it said that revenue yields could be lower due to dilution in Congress.

“Accordingly, staff encourages the authorities to consider lowering the threshold for PIT (personal income tax), raising the VAT (value-added tax) rate, rationalizing tax concessions and exemptions and accelerating the implementation of new excises on automobiles and petroleum products,” it said.

On the upside, approval of the first tax reform package will lead to a sustainable increase in infrastructure investment, the IMF added.

The main systemic risks to financial stability are high credit growth and concentration, it noted.

“Credit growth in the country has accelerated, and although most indicators find no evidence of credit booms so far, some indicators suggest that credit gaps could approach early warning levels in 2017 to 2018,” the IMF said.

High credit growth, especially in lending to the real estate and household sectors, merit continued monitoring. The IMF also said some conglomerates and real estate developers had leveraged significantly and shadow-banking activities had expanded.

“Conglomerate structure and data gaps generates challenges to measure concentration but capital market development could help reduce bank loan concentration by diversifying the sources of funding for large conglomerates. Staff supports the authorities’ efforts to have legal access to information on conglomerates’ finances,” it said.

With this, the MF stressed that macroprudential policies should be used to address systemic risks to financial stability.

“In case of a broad-based credit boom, the BSP (Bangko Sentral ng Pilipinas) should raise capital requirements, supported by monetary policy tightening if accompanied by overheating. Targeted macroprudential policies should be used if sectoral credit growth is excessive,” it said.

It also welcomed the early adoption of Basel III guidelines on banks and the role of the BSP’s new financial stability department in mainstreaming macrofinancial surveillance and strengthening the macroprudential framework.

Current monetary policy remains appropriate, the IMF said, but it added that the Bangko Sentral should be ready to tighten if there were signs of overheating.

It also said that a move to unwind high bank reserve requirements would reduce macrofinancial risks.
“However, this reform should be carefully calibrated and timed, and should aim to keep domestic liquidity broadly unchanged,” it added.

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