Philippines Monthly Economic Developments May 2018 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The World Bank maintains its growth forecast for the Philippines at 6.7 percent for 2018. • In the first quarter of 2018, the Philippine economy grew by 6.8 percent. • Manufacturing activities continued to expand strongly in March. • Exports contracted sharply while import growth moderated. • The Philippine Stock Exchange index continued its retreat in April with sizable net-foreign selling. • The peso hovered above the Php/US$52.00 mark most of April. • Faced with rising inflationary pressure, the monetary board raised the key policy rate by 25 basis points on May 10. • Domestic credit growth continued to expand at high double-digit rates. • The government fiscal deficit nearly doubled in the first quarter of 2018 compared to a year ago with expenditure growth outpacing revenue growth. The World Bank maintains its growth forecast for the output expansion. Output expanded strongly in printing, Philippines at 6.7 percent for 2018. The economy is growing textile and food manufacturing. Average capacity utilization at its potential, making productive investment in physical and rates remained at a very high level, 84.2 percent (the same as human capital essential for a continuation on the current in February) and slightly higher than the 83.8 percent in March growth trajectory. The medium-term economic growth a year ago. Twelve of the 20 major industries are now outlook for the Philippines is positive and assumes higher operating at 80 percent and above capacity. Meanwhile, the public spending and investment growth in 2018 and 2019. Nikkei Philippines Purchasing Managers’ Index (PMI) rose to 52.7 in April from 51.5 in March, on account of faster rises in In the first quarter of 2018, the Philippine economy grew by new orders and employment. 6.8 percent. This compared to the revised 6.5 percent year-on- year in the first quarter of 2017 and the revised 6.5 percent in Exports contracted sharply while import growth moderated. the last quarter of 2017. Consumption growth at 6.7 percent Exports shrank for the second consecutive month in March year-on-year was slightly weaker than the 6.9 percent in the 2018 and contracted by 8.2 percent year-on-year, a sharp first quarter of 2017 due to higher inflation and weaker reversal from the 26.9 percent growth registered in March consumer confidence that dampened private consumption. 2017. This represents the largest contraction in merchandise However, consumption remained the main growth engine. As exports since July 2016 and contributed to the 6.0 percent the national government expanded its public spending year-on-year export contraction in the first quarter of 2018 program, the growth in government consumption accelerated (compared to 25.5 percent growth in the first quarter of 2017). to 13.6 percent year-on-year in the first quarter of 2018 The contraction was driven by the decline of both agriculture compared to 0.1 percent a year ago. The second largest and manufacturing exports. Meanwhile, import growth was contributor to growth was capital formation which expanded flat in March (0.1 percent year-on-year) compared to 21.4 by 12.5 percent in the first quarter of 2018 compared to 11.4 percent a year ago. Imports of consumer goods, capital goods, percent a year ago. As a result of softening external demand, and raw materials and intermediate goods, which cumulatively export growth decelerated to 6.2 percent year-on-year in the account for 88.3 percent of the total import bill, all contracted first quarter of 2018 compared to 17.4 percent in the first by 7.6 percent, 2.7 percent, and 2.6 percent, respectively. quarter a year ago. Slower import growth of 9.3 percent The Philippine Stock Exchange index (PSEi) continued its compared to 18.7 percent in the first quarter of 2017, was a retreat in April with sizable net-foreign selling. The PSEi fell result of the moderation of consumer goods imports and raw by 2.0 percent month-on-month, but at a slightly slower rate materials and intermediate goods imports. than the 5.8 percent contraction in March. The PSEi was Manufacturing activities continued to expand strongly in impacted by the prospects of further rate hikes by the US March. The volume of production index (VoPI) grew by 13.6 Federal Reserve, global uncertainty amid rising trade percent year-on-year in March, compared to 24.8 percent protectionism sentiments and geopolitical tensions. The drop February (and 12.3 percent growth in March a year ago). This of the PSEi was accompanied by the third consecutive month constituted the third consecutive month of double-digit of net-foreign selling of Php8.9 billion in April, but less than the PHILIPPINES Monthly Economic Developments | May 2018 Figure 1: The Philippine economy expanded by 6.8 percent Figure 2: Manufacturing activities expanded in double-digit for year-on-year in the first quarter of 2018. the third consecutive month. 25 20 15 10 5 Percentage point 0 -5 -10 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 2016 2017 2018 Private consumption Govt consumption Investments Discrepancy Exports Imports GDP growth Source: Philippine Statistics Authority (PSA) Source: PSA Php19.3 billion registered in March. Since end-2017, the PSEi Faced with continued high inflationary pressure, the has declined by 8.6 percent, but is still 1.2 percent higher monetary board raised the key policy rate by 25 basis points compared to its closing value as of end-April 2017. on May 10. The 12-month consumer price index (CPI) rose in April to 4.5 percent year-on-year from 4.3 percent in March The peso hovered above the Php/US$52.00 mark most of (compared to 3.2 percent in April last year). This brought the April. The Philippine peso slightly recovered at the final trading year-to-date headline inflation to an average of 4.0 percent, day in April closing at Php/US$51.97 compared to the touching the upper bound of the central bank’s target ra nge. Php/US$52.21 closing in end-March. With that the peso Among the factors that drove the April inflation were higher appreciated on a monthly basis by 0.5 percent, yet on an food and transport prices. Transport and fuel prices were annual basis, it depreciated by 4.6 percent from the closing of impacted by rising global oil prices. Core inflation, still Php/US$49.70 in April 2017. The peso remained below the measured with the 2006-base, accelerated further from 4.7 Php/US$52.00 mark in early May. The gross international percent in March to 5.0 percent year-on-year in April reserves slid to US$80.1 billion in April from US$82.0 billion in (compared to 3.0 percent in April 2017). As inflation levels April last year, representing a drop in the import coverage to remain above the ceiling of the central bank’s target of 4 7.8 months from 8.7 months, respectively. Personal percent, during the monetary board meeting on May 10, the remittances grew by 5.4 percent year-on-year in February key policy rate was hiked by 25 basis points to 3.25 percent. compared to 3.3 percent growth in February 2017. Figure 3: Export and import contracted in March. Figure 4: The Philippine Stock Exchange index (PSEi) continued its retreat in April. Mar-18 Jan-18 Nov-17 In percent Sep-17 Jul-17 May-17 Mar-17 -50 -40 -30 -20 -10 0 10 20 30 40 50 Exports Imports Source: PSA Source: Philippine Stock Exchange PHILIPPINES Monthly Economic Developments | May 2018 Figure 5: Headline inflation further accelerated in April. Figure 6: The fiscal deficit widened in the first quarter of 2018 as expenditure growth outpaced revenue growth. Source: PSA Source: Bureau of the Treasury Domestic credit growth continued to expand at high double- The government fiscal deficit nearly doubled in the first digit rates. Domestic liquidity (M3) grew by 14.4 percent year- quarter of 2018 compared to a year ago with expenditure on-year to about Php10.9 trillion in March 2018, faster than growth outpacing revenue growth. In the first three months the 13.5 percent in February and the 11.7 percent expansion of 2018, government spending increased by 27.1 percent year- in March last year. This was driven by continued high growth on-year in nominal terms, a significant acceleration from the in commercial lending which expanded by 18.3 percent year- 4.0 percent growth registered in the first quarter of 2017. This on-year in March 2018, slightly slower 19.5 percent in brought expenditures to 20.0 percent of GDP in the first February (and the 20.2 percent in March 2017). Firm credit, quarter of 2018, higher than the 17.2 percent of GDP recorded which constituted 88.4 percent of the total loan portfolio, over the same period a year ago. This expansion was driven by grew by 18.1 percent in March, slightly lower than the 18.6 robust growth both in capital outlays and recurrent percent growth registered in February and the 18.9 percent expenditure, which expanded in nominal terms by 42.0 registered in March 2017. New firm lending went mainly to the percent and 22.0 percent, respectively. Government’s real estate, wholesale and retail trade, and manufacturing infrastructure spending grew in the first quarter of 2018 by sectors. Household credit growth declined to 19.3 percent 33.7 percent year-on-year in nominal terms, nearly three times year-on-year from 19.9 percent growth in February (and 24.5 the 12.2 percent growth registered over the same period a percent in March 2017) given a slowdown in motor vehicle, year ago. Meanwhile, revenues increased by 16.4 percent salary and other types of household loans. year-on-year in nominal terms in the first quarter of 2018 compared to 11.1 percent a year ago, reaching 15.8 percent of GDP compared to 14.9 percent of GDP in the first quarter of 2017. Revenue growth was primarily driven by strong tax collections in the first quarter of 2018, which increased by 16.3 year-on-year in nominal terms compared to 12.8 percent over the same period in 2017. As a result, the government’s fiscal deficit nearly doubled as a percent of GDP, widening to 4.1 percent in the first quarter of 2018 compared to 2.3 percent in the first quarter of 2017. Please contact Birgit Hansl: bhansl@worldbank.org Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of Kevin Chua, Kevin Thomas Cruz and Isaku Endo. PHILIPPINES Monthly Economic Developments | May 2018