IMF / Philippines: Economic indicators pre Bali

The IMF has concluded a review of The Philippines. It makes for mixed reading.

On the one hand there is good news - or perhaps best seen as not quite so bad news: "Over the past 15 years, successive governments have made significant progress in establishing a market-orientated economy in the Philippines. Despite these efforts, the legacy of the past has proved difficult to overcome, and the economy has remained troubled. For these reasons, the Arroyo administration has reinvigorated the reform effort. It plans to balance the budget by 2006, clean up the banking system, deregulate the power sector, and rely on commercial financing until the reforms take hold."

There is faint praise for the efforts during the first year of Arroyo's government: "Despite a very difficult international environment, marked by waves of financial pressure and a sharp fall in electronics exports, the Philippine economy grew by 3¼ percent in 2001. In the first half of 2002, growth quickened to around 4 percent, aided by recovering exports, while inflation decelerated to 3½ percent, helped by a relatively stable exchange rate."

There is a "but" - "At the same time, however, underlying policy progress has begun to slip. Implementation of the power sector reform and passage of the Asset Management Corporations (AMC) bill have been delayed, raising questions about whether the authorities' aims can be achieved. At the same time, fiscal performance has veered away from the programmed path. Revenue collections were below target during January-August, and remained essentially unchanged compared to their year-ago level while spending raced well ahead of last year's pace, the result of a conscious decision to front-load expenditures."

The overall picture is beginning to look familiar: like so many countries, the Philippines has tried to spend its way out of trouble only to find that foreign investment is fickle and therefore revenues from it are uncertain in the long term. The IMF says foreign investor confidence has remained high but the period under review is before the Bali bombs and before Australia and the USA suggested people stay away, so further reducing the income within the country.

More, the IMF has pointed to a "large and growing" bad debt problem (what used to be called bad debt became "non performing loans and are now called Non-Performing Assets and have acquired a TLA (three letter acronym) of "NPA"). This risks a measure of destabilisation of the banking sector, widely seen as fragile at present.

The IMF sees a risk of foreign investory confidence falling as a result of economic factors: that these have now been compounded by both the political and economic consequences of the Bali bombing means that the IMF's hopes that the economy can be brought back to the planned budget balance by 2006 seems unlikely. See The Price of Terrorism (World Money Laundering Report: Online 14 November 2002.

Measures to strengthen the financial system are welcomed by the IMF which also saw some problems inherent in trying to make things better. The high levels of NPAs have seriously affected the health of the banking sector, reduced capital adequacy, and constraining credit to the private sector. But, says the IMF, these problems can be solved only if bank supervisors have the power compel bank owners to inject or find new capital. Yet this would require strengthening the supervisory framework. The IMF is particularly concerned to ensure that the corrective action regime should be improved and law changes made so that "supervisory decisions are final and supervisors are immune from lawsuits for actions performed in the normal course of duty."

On the sale of NPAs (so bolstering reserves and converting assets against which provisions are made to a positive balance sheet item) the IMF wants to make sure that debtors cannot buy back at a discount their own distressed debt.

The IMF has urged the Philippines to amend its laws to meet the demands of the Financial Action Task Force.