Philippines Monthly Economic Developments November 2016 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  The World Bank Philippines’ growth outlook is positive with upside risks.  In September, manufacturing activities continued to expand with several sectors working close to full capacity.  The banking system shows ample liquidity and strong credit growth  October headline inflation was steady while food inflation inched up further impacted by adverse weather conditions.  The national government deficit widened in January-September as expenditure growth outpaced revenue growth.  Poverty fell significantly in 2015, as improved employment outcomes, incomes and social welfare programs lifted 1.8 million Filipinos out of poverty since 2012. The World Bank Philippines’ growth outlook is positive with bank lending continued its rapid expansion at 17.7 percent upside risks. In the recently published Philippines Economic year-on-year in September. Firm credit grew by 17.3 percent Update, the World Bank maintains its forecasts of 6.4 percent year-on-year, compared to 13.2 percent in September 2015. growth in 2016 and 6.2 percent in 2017 and 2018. These Household credits grew by 21.7 percent in September year-on growth projections incorporate the impact of the July election year, compared to 12.7 percent in September 2015, with the and include the assumption that public expenditures would fastest growth in salary loans at 50.0 percent. At the same rise through 2018. However, the current forecast assumes that time, non-performing loans continued to decline as a share of capacity limitations may slow the implementation of large- the total loan portfolio to 1.64 percent in September from 1.86 scale public infrastructure projects, and that it could take percent in September 2015. Demand for the Bangko Sentral ng longer to overcome these obstacles. Meanwhile, some Pilipinas’ term deposit facility remained strong with every remaining uncertainty regarding the new administration’s auction in October oversubscribed by a factor of two or more. reform agenda will lead to caution among investors and October headline inflation was steady while food inflation consumers. However, if the government is able to successfully inched up further impacted by adverse weather conditions. address these challenges, growth could exceed current The 12-month Consumer Price Index remained at 2.3 percent projections of 6.2 percent projected for 2017-2018. in October. However, inflation rates have progressively risen In September, manufacturing activities continued to expand since the beginning of the year, from 1.3 percent in January, with several sectors working close to full capacity. The yet remain within the 2-4 percent target band of the central Volume of Production Index for manufacturing expanded by bank. The main driver of inflation was food inflation, which 9.9 percent year-on-year in September, compared to 3.0 doubled in annual terms since January from 1.7 percent to 3.4 percent in September 2015. Strong manufacturing production percent in October (and 3.1 percent in September). Prices of was driven by basic metals, machinery, and rubber and plastic fruits and vegetables rose in October alone by 8.8 percent and production. Meanwhile, the Nikkei ASEAN manufacturing 12.6 percent, respectively, resulting from the negative impact purchasing manager’s index (PMI) for the Philippines slowed of typhoons Karen and Lawin on farm outputs. Meanwhile core marginally to 56.5 in October from 57.5 in September. Still, the inflation and non-food inflation, remained largely stable PMI reading is the highest among Southeast Asian economies, compared to September. and indicative of a strong expansion in manufacturing activity The national government deficit widened in January- in the country. The average capacity utilization rate inched up September as expenditure growth continued to outpace to 83.6 percent in September from 83.4 percent from revenue growth. Total revenues increased by 2.6 percent as of September last year. A further increase in output levels would September year-on-year, reaching Php1.6 trillion as tax require significant capital investments. revenues grew significantly, by 8.6 percent. Meanwhile, The banking system shows ample liquidity and strong credit government expenditure continued its strong growth, which growth. Domestic liquidity (M3) increased by 12.6 percent increased by 14.1 percent year-on-year as of end-September year-on-year to reach Php8.8 trillion in September 2016. 2016 to reach Php1.9 trillion. As a result, the government Domestic credit growth of 16.1 percent remained the main recorded a wider budget deficit as of end-September 2016 of source of money supply growth in September 2016, driven by Php213.7 billion, compared to the Php25.5 billion deficit in the increased private sector lending. In particular, commercial same period in 2015. PHILIPPINES Monthly Economic Developments | November 2016 Figure 1: Manufacturing output growth remains strong Figure 2: Headline was stable in October, yet food inflation 40 accelerated 35 30 25 Growth in percent 20 VoPI 15 VaPI 10 5 0 Jun-16 Sep-16 Sep-15 Dec-15 Mar-16 -5 -10 Source: PSA Source: BSP The outstanding government debt continued to increase in the Gross international reserves moderated to US$85.8 billion in third quarter of 2016. Government debt reached Php6.09 trillion October, and the Monetary Board approved the inclusion of the Renminbi in the official international reserves of the as of end-September 2016, a 2.2 percent increase from its end- central bank. Gross international reserves decreased slightly 2015 level, and a 1.8 percent increase compared to September from US$86.2 billion in September. The decrease was due to 2015. Roughly a third of the government debt is external debt and payments made by the government for its maturing foreign two-thirds domestic. Domestic government debt increased by 0.5 exchange obligations, and due to a revaluation of the central percent since end-2015 to Php3.9 trillion by end-September 2016. bank’s gold holdings given a decrease in the international price The increase in domestic debt is due to the net issuance of of gold. The decline was partially offset, however, by the government securities worth Php19.8 billion. Meanwhile, reclassification of Renminbi-denominated accounts from non- reserve to reserve eligible assets. Effectively October 13, the external government external debt increased by 5.4 percent since Monetary Board approved the inclusion of the Renminbi in the end-2015, reaching Php2.2 trillion as of end-September 2016. In official international reserves. The current reserves level September alone, it increased by 4.1 percent (Php85.9 billion), covers 10.0 months of imports. It covers 6.1 times the size of mainly due to foreign exchange adjustments on the US dollar and the country’s short term external debt based on original third currency-denominated debt. maturity, providing a buffer from external shocks. Figure 3: Money supply continued to expand by double digits Figure 4: The government deficit continued to widen 45 Net domestic assets - Private 40 Net domestic assets - Public 35 Net foreign assets - Other Depository Corp 30 Net foreign assets - BSP Liquidity aggregates growth 25 M3 growth Percentage point 20 15 10 5 0 -5 -10 Source: PSA Source: BTr PHILIPPINES Monthly Economic Developments | November 2016 Figure 5: Reserves moderated while remittances Figure 6: Poverty incidence improved significantly in the recorded its highest growth in more than two years Philippines from 2012 to 2015. Source: BSP Source: PSA Remittances from Filipinos overseas reached its highest growth in more than two years. Personal remittances Improved incomes also translated into greater equality in increased by 16 percent year-on-year in August 2016, reaching 2015, although disparity within regions remains significant. US$2.6 billion. This is the fastest growth since March 2014, Inequality improved as average family incomes continued to and a sharp rebound from the 5.4 percent decline in July of increase since 2012 especially among the lowest income this year. In the first eight months of 2016, remittances deciles. The 2015 Family Income and Expenditure survey reached US$19.5 billion, which is 4.4 higher than in the same revealed that in constant 2006 prices, the average income of period in 2015. Meanwhile, cash remittances increased by Filipino families increased by 5.0 percent since 2012 to 16.3 percent year-on-year in August, bringing the cumulative Php189,000 in 2015. Meanwhile, the average expenditure amount of cash remittances to US$17.6 billion, 4.6 percent increased at a slower pace, growing at 2.7 percent. This greater than in the same period in 2015. resulted in a 15.6 percent increase in average savings per family in real terms to Php37,000 in 2015. Within income Poverty incidence among Filipinos dropped to 21.6 percent deciles, the average family incomes increased for all per capita in 2015 from 25.2 percent in 2012, representing 1.8 million income deciles from 2012 to 2015. The first four deciles Filipinos lifted out of poverty within three years. The experienced the largest increase, averaging 13.4 percent National Economic Development Authority attributed the increase in real terms, compared to an average of 4.5 percent decline in the number of poor to a higher employment rate, a for the fifth to tenth decile. As a result, the Gini coefficient generally stable inflation environment and improved incomes. improved to 0.44 in 2015 from 0.46 in 2012. Another significant contributor has been the government’s conditional cash transfer program, the Pantawid Pamilyang On October 11, the president signed an Executive Order, Pilipino Program, whose budget increased by almost 200 approving and adopting the Ambisyon Natin 2040. The percent to Php62.3 billion between 2011 and 2015, and whose Ambisyon Natin 2040 is a 25-year long term vision for the household coverage almost doubled to 4.4 million Philippines with the ambitious goal to eradicate hunger and households. The poverty rate is within the 20-23 percent poverty in the country by 2040, or sooner. target set for 2015 under the Philippine Development Plan 2011-2016. 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 Nataliya Mylenko. PHILIPPINES Monthly Economic Developments | November 2016