(STAR) The government’s fiscal reform agenda has the full support of the International Monetary Fund (IMF) which remains bullish on the country’s economic outlook, Malacañang reported yesterday.

Press Secretary Ignacio Bunye said President Arroyo’s implementation of tough fiscal reforms, which include higher taxes, as well as the stabilizing political climate has resulted in improved credit ratings for the country.

Bunye said the IMF has congratulated Mrs. Arroyo for "the positive developments in the country and the improvement of the economy under her leadership."

The improved credit ratings helped save the country some P17 billion in interest payments and boosted its foreign reserves as well as enhanced the country’s reputation as an investment destination, he added.

"Riza Baquir, IMF country representative in the Philippines, says the IMF stands behind the leadership of President Arroyo and will continue to help her until her administration achieves its goal to further improve the country’s economy and the lives of the people as a whole," Bunye said in a statement.

"It is no wonder that the International Monetary Fund (IMF) to the Philippines is quite bullish about the Philippines," he said.

Bunye must have been referring to the country’s previous upgrades in its credit rating, which remains a few notches below investment grade.

Through its fiscal reforms, the Arroyo administration aims to wipe out the budget deficit by 2008. The fiscal measures, implemented last year, included the increase of the value-added tax to 12 percent. — Paolo Rome

IMF prescribes capital hike for RP banks By Des Ferriols The Philippine Star 10/16/2006

The International Monetary Fund (IMF) said the Bangko Sentral ng Pilipinas (BSP) should pressure banks to build up capital, saying that regulatory relief should be tied to recapitalization plans.

In its mid-term post-program monitoring (PPM) report, the IMF expressed satisfaction with on-going reforms intended to resolve the sector’s problem with non-performing assets (NPAs).

According to the IMF, the banking industry has also made progress with consolidation and the efforts to raise new capital while also unloading even more NPAs under the extended Special Purpose Vehicles Act (SPVA).

However, the IMF said in the PPM report that the BSP should maintain pressure on banks to strengthen capital and pursue sound risk management and assessment practices.

"Raising capital will be particularly important for those banks that are shown to be under-capitalized based on new accounting standards," the IMF said.

According to the IMF, any regulatory relief provided to banks that require time to comply with the new regulatory standards should be tied closely to clear and transparent recapitalization plan.

"To ensure full effectiveness of the strengthened regulatory framework, [the Fund] encouraged the authorities to continue pressing for the passage of long-delayed amendments to the BSP charter," the IMF said.

The Philippine banking system, the IMF pointed out, was fragmented and saddled with high NPAs, with some banks underprovisioned and lacking capital.

The Fund said its previous analysis had indicated that deficiencies in accounting and loan classification practices cause capital adequacy to be overstated, and particularly so for some banks.

The IMF noted that profitability improved in 2005, with strong securities and foreign exchange trading gains boosting net operating income. This allowed banks to increase their provisioning and debt write-offs.

But progress had also been made with sales of P100 billion of NPAs which accounted for one fifth of the stock.

Aside from the clean-up, financial statements of banks are also required to comply with international accounting standards (IFRS), which imply more rigorous valuation requirements.

In addition, higher risk-weightings on NPLs have been introduced as a first step towards Basel II.

If effectively implemented, the IMF said these changes, as well as further measures in prospect under Basel II, should induce weaker banks to raise capital or merge with other banks.

But even with the recent mergers, the IMF said the regulatory changes underway are likely to be onerous for the weakest banks.

In a report prepared by the IMF staff that conducted the PPM evaluation, it was pointed out that the on-going reforms have also affected bank lending to some extent, especially in banks that had bigger adjustments to make.

"Bank lending remains sluggish, perhaps in part due to measures to strengthen the banking system," the IMF staff report said, observing that there was little pick-up to date in bank lending, even though banks are now disposing of their NPAs.

"While the strengthening of risk management would lay the foundation for solid lending growth over the medium term, the authorities also pointed to the demand for bank credit being weak, especially from the manufacturing sector," the IMF said.

Chief News Editor: Sol Jose Vanzi

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