Philippines Monthly Economic Developments August 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  In the Second Quarter of 2019, the Philippine economy expanded by its slowest pace in over four years, driven by a major contraction in investment largely driven by delayed budget approval and spending ban due to the elections.  Weakness in manufacturing sector’s persisted in June 2019.  Inflation further eased in July to its slowest pace in two years. The Philippine economy expanded by its slowest pace in over contracted, and manufacturing activity slowed. Meanwhile, four years in the second quarter of 2019, driven largely by the agriculture sector barely improved, accelerating slightly to contraction in investment. Economic growth decelerated to 0.6 percent year-on-year in Q2 2019 from 0.3 percent a year 5.5 percent year-on-year in Q2 2019 from 6.2 percent in the ago. The agriculture sector continues to remain unproductive, previous year, driven by the decline in investments in the highlighting its vulnerability to weather related phenomenon, construction sector and durable equipment investments. The such as the El Nino drought, which led to lower production in contraction in investment growth is related to the lingering key crops such as Palay, Corn, and Banana. effect of the delayed passage of the 2019 budget and the Weakness in the manufacturing sector persisted in June. The spending ban during the election period which lead to a Volume of Production Index for the manufacturing sector contraction in public construction. Slowing global demand and declined by 10.5 percent in June, a deeper contraction than the uncertainty caused by corporate tax reform (TRABAHO) 9.9 percent in May. The contraction was fueled by the decline contributed to a contraction in durable equipment investment. in food, electrical equipment, and chemicals manufacturing. Private consumption spending decelerated to 5.6 percent from The sector’s weakness comes amid the backdrop of slowing 6.0 percent a year ago despite lower inflation, dampened by external demand and mirrors the weakness of global worsening consumer confidence. In addition, exports grew by manufacturing and trading activities. Nevertheless, the its lowest rate in over four years, impacted by slowing global outlook may improve as the Nikkei Philippines Purchasing growth, and policy uncertainty due to the ongoing US-China Managers’ Index registered an increase to 52.1 in July from trade war. 51.3 in June. The services sector fueled growth, while both agriculture and The trade gap shrank for the third consecutive month in June. industry struggled. Growth of the services sector accelerated Merchandise exports grew by 1.5 percent, year-on-year, to 7.1 percent year-on-year in Q2 2019 from 6.5 percent a year improving modestly from May (1.0 percent). Electronic ago, fueled by the robust performance of the financial services products, which account for 59.0 percent of total export sales, and wholesale and retail trade sectors. In contrast, the continued to drive exports, growing by 4.3 percent, albeit industry sector grew by 3.7 percent year-on-year, its slowest significantly decelerating from its performance in the same pace in eight years (2.9 percent in Q4 2011), as construction month last year (14.9 percent) and in May (6.2 percent). On Figure 1: The Philippine economy grew at its slowest pace in Figure 2: The manufacturing sector contracted for the seventh four years. straight month in June. 30 VoPI 84.6 15 VaPI 25 Capacity Utilization (in percentage) 10 84.4 20 5 15 84.2 Percentage point 10 0 84 In percentage 5 -5 0 83.8 -10 -5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 83.6 -10 2016 2017 2018 2019 Private consumption Govt consumption -15 83.4 Feb-19 Dec-18 Aug-18 Apr-19 Jun-18 Jun-19 Oct-18 Investments Discrepancy Net exports GDP Growth Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | August 2019 the other hand, imports contracted by 10.4 percent, along its range of 2-4 percent. The price of the major component of the downward trajectory for the third month. Nine of the headline inflation food and non-alcoholic beverages further country’s top ten commodity imports registered negative moderated to 1.9 percent in July from 2.7 percent in June, growth. Raw materials and intermediate goods fell by 16.5 largely contributed by the lower price of rice. Inflation in percent, while capital goods declined by 3.4 percent. Steady energy items also slowed due to a cutback in the price of export growth and the double-digit decline in imports led to liquified petroleum gas and downward adjustments in the balance of trade deficit narrowing from US$3.3 billion in electricity rates. Core inflation lowered to 3.2 percent in July May to US$2.5 billion in June. from previous month’s 3.3 percent. The BSP trimmed its key policy rate by 25 basis points to 4.25 percent in early August, Higher net foreign buying boosted the Philippine Stock as the inflation continues to moderate and as growth slowed Exchange index (PSEi) in July. The PSEi closed at 8,045 in July, in the first two quarters of the year. rising by 0.6 percent month-on-month from the closing of 7,999 in June. It reached a high of 8,365 in mid-July, its highest The Philippine government posted a reduced budget deficit level since March 2018. The stock market robustness was in June. The Philippine government registered a Php41.8 supported by net foreign buying, totaling Php4.1 billion in July, billion deficit in June, a 22.9 percent decline compared to a a substantial improvement from the net foreign selling of year ago. Public spending contracted, fueled by a 39.5 percent Php7.1 billion in June. Market sentiment was enhanced with decline in infrastructure spending. However, the growth of news of dovish stance by the US Federal Reserve and the ECB, current operating expenditures accelerated in June, as the and supportive policies by the BSP. government rolled out the 4th and last tranche of the salary standardization adjustments and the increase in salaries and The Philippine peso appreciated in July. Along with the strong pensions of military and uniformed personnel. Tax revenue stock market performance, the Philippine peso appreciated by growth remained robust, expanding by double-digits for the 4.4 percent year-on-year to close at Php/US$51.01 in July, a fourth time in the past five months. 0.7 percent appreciation on a month-on-month basis. The peso appreciation coincided with strong net foreign buying. As Domestic liquidity expanded, while bank lending slowed a result, the international reserves rose to US$85.2 billion in down in June. Domestic liquidity (M3) grew by 6.4 percent to July from a downward-revised US$84.9 billion in June. The about Php11.8 trillion in June, unchanged from May. Demand reserves can cover 7.4 months’ worth of imports and payment for credit eased but remained the main driver of money supply of services and income, the same import coverage as in June. growth. Domestic claims grew due to the sustained growth in credit to the private sector. Outstanding loans of universal and Inflation further eased in July to its slowest pace in two years. commercial banks, net of reverse repurchase placements, Headline inflation slowed to 2.4 percent year-on-year in July grew at 10.5 percent in June from 11.9 percent in May. Loans from the previous month’s 2.7 percent. The moderating for production activities and household consumption both inflation yielded a 3.3 percent year-to-date inflation in July, increased at a slower pace. lower than the 4.5 percent last year, and within BSP target Figure 3: The Philippine peso appreciated further in July. Figure 4: The government posted a budget deficit in June, but spending remained weak. 55.0 340 320 300 54.0 280 260 240 53.0 220 200 In Billion Pesos 52.0 180 160 PHP/US$ 140 51.0 120 100 80 50.0 60 40 20 49.0 - (20) 48.0 (40) July Jan July Jan (60) (80) 2018 2019 47.0 (100) (120) (140) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: Bangko Sentral ng Pilipinas (BSP) Source: Bureau of the Treasury PHILIPPINES Monthly Economic Developments | August 2019 Developments to Watch  Manufacturing output: will the contraction continue or will output start to stabilize?  Budget execution: will public expenditure start to pick up to offset the slow start to the year?  Inflation: will the declining trend continue? Selected Economic and Financial Indicators 2017 2018 Q4 2018 Q1 2019 Q2 2019 May-19 Jun-19 Jul-19 Real GDP growth, at constant market prices 6.7 6.2 6.3 5.6 5.5 Private consumption 5.9 5.6 5.3 6.3 5.6 Government consumption 7.0 12.8 12.6 7.4 6.9 Gross fixed capital investment 9.5 14.0 8.5 5.7 -4.8 Exports, goods and services 19.5 11.5 14.4 5.8 4.4 Imports, goods and services 18.1 14.5 12.4 8.3 0.0 Industry Performance Value of Production Index -1.4 8.0 -1.4 -3.7 -7.5 -2.1 -9.6 Volume of Production Index -0.5 7.2 -2.3 -7.3 -9.5 -4.0 -10.5 Capacity Utilization 83.8 84.2 84.3 84.3 84.3 84.4 84.3 Nikkei Philippines Purchasing Managers' Index 53.2 52.5 53.8 51.9 51.1 51.2 51.3 52.1 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 5.9 3.8 3.0 3.2 2.7 2.4 Core Consumer Price Index 2.5 4.1 4.9 3.6 3.4 3.5 3.3 3.2 Domestic liquidity (M3) 13.3 11.6 8.7 7.1 6.6 6.4 6.4 Credit growth 17.8 16.4 15.1 11.9 10.7 10.0 10 Business loans 17.4 17.2 16.2 13.3 10.7 11.0 9.4 Consumer loans 20.5 15.1 11.3 10.0 11.3 11.0 11.9 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -3.6 -2.1 1.0 2.5 -41.8 Total Revenue (% of GDP) 15.7 16.4 14.9 16.3 18.6 317.2 233.9 Tax Revenue (% of GDP) 14.2 14.7 13.6 14.6 16.5 265.4 210.5 Total Expenditure (% of GDP) 17.9 19.6 18.6 18.5 17.6 314.7 275.7 National government debt (% of GDP) 42.1 41.9 41.9 44.0 43.7 7,916 7,869 Stock market PSEi (month-end value) 8,558 7,466 7,466 7,921 7,974 7,970 7,999 8,046 External accounts Current account balance (% of GDP) -0.7 -2.4 -2.6 -1.5 Exports of merchandise goods (growth rate) 18.4 -0.3 -0.7 -3.1 1.2 1.0 1.5 Imports of merchandise goods (growth rate) 13.6 9.4 3.1 4.7 -5.9 -5.4 -10.4 Net foreign direct investment (in million US$) 10,057 9,802 1,712 1,941 Balance of payment (% of GDP) -0.3 -0.7 3.0 4.7 International reserves (in million US$) 81,273 78,140 76,529 83,613 84,722 85,358 84,932 85,183 Import cover 8.4 7.1 6.7 7.4 7.4 7.4 7.4 7.4 Nominal exchange rate 50.40 52.68 53.27 52.36 52.06 52.26 51.80 51.14 Labor Market Unemployment rate 5.7 5.3 5.1 5.1 Underemployment rate 16.2 16.4 13.3 13.5 Sentiments Consumer confidence index (end of period) 9.5 -22.5 -22.5 -0.5 -1.3 -1.3 Business confidence index (end of period) 43.3 27.2 27.2 35.2 40.5 40.5 Prepared by a World Bank team consisting of Rong Qian, Kevin Chua, Kevin Thomas Cruz, Ray Gomez, Karen Lazaro, Jiyoung Song and Isaku Endo, under the guidance of Ndiame PHILIPPINES Diop. Monthly Economic Developments | August 2019 Contact Rong Qian (rqian@worldbank.org) for questions.