Philippines Monthly Economic Developments March 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  The Philippine stock exchange index weakened in February as uncertainty abroad weighs heavy on market sentiment.  The Philippine peso came under renewed pressure, hitting another record-low in February.  January exports accelerated at its fastest pace in nearly three years, while import growth moderated.  Manufacturing activities expanded at a slower rate in January with many industries operating at full capacity.  Rising food and energy prices continued to fuel the 12-month average Consumer Price Index in February.  Credit growth remains upbeat and further accelerated its pace.  Expansionary fiscal policy in 2016 led to a wider fiscal deficit as government expenditure grew rapidly while revenues fell as a percent of GDP.  On February 20, the Philippine Development Plan (PDP) 2017-2022 was approved. The Philippine stock exchange index weakened in February as growth coincided with a strong recovery of electronics exports, uncertainty abroad weighs heavy on market sentiment. The the country’s main export commodity. Electronics exports, Philippine Stock Exchange index (PSEi) closed at 7,212.1 in which account for nearly half of total goods exports, expanded February, declining by 0.2 percent month-on-month after by 10.4 percent year-on-year, after contracting by 2.8 percent having posted a 5.7 percent growth in January. Net foreign in December 2016. Meanwhile, import growth moderated to selling increased to Php5.1 billion, a reversal from the 9.1 percent year-on-year in January 2017, from 19.1 percent in Php272.8 million net foreign buying recorded in the previous December 2016, because capital goods imports contracted by month. Cautious trading throughout the month persisted as 11.0 percent year-on-year compared to an expansion of 36.9 investors priced-in the likelihood of another interest rate hike percent in December 2016. However, consumer goods by the US Federal Reserve in March and also awaited clarity on imports, which account for nearly a fifth of the total import bill, US economic policy decisions. expanded strongly by 22.8 percent year-on-year (compared to 13.2 percent in December 2016). The Philippine peso came under renewed pressure, hitting another record-low in February. The Philippine peso once Manufacturing activities expanded at a slower rate in January again breached the Php/US$50.00 mark on February 21st, and with many industries operating at full capacity. The volume dropped further to close the month at Php/US$50.26. This was of production index (VoPI) opened the year at a slower growth the second significant drop since November 2016, and of 9.3 percent in January from 23.0 percent in December 2016 represents a new record-low since 2006. The month-on-month and compared to 36.4 percent in January a year ago. depreciation from the January closing of Php/US$49.72 was Production activities remained upbeat for wood and wood 1.1 percent. The weakening against the US Dollar happened as products, basic metals, and footwear and apparels. The Nikkei a result of an increase in US Treasury yields in the last week of ASEAN Manufacturing Purchasing Managers’ Index (PMI) February, coupled with the expectation of the US Federal indicated a stronger expansion in February, increasing to 53.6 Reserve announcing another interest rate hike in March. There from 52.7 in January, reflecting improved expectation for new was limited effort from the central bank to soften the orders, stock purchases, and output in the manufacturing depreciation: international reserves settled at US$81.1 billion industry. This ended a previous index decline of four at end-February, US$0.25 billion lower than at end-January. consecutive months. Average capacity utilization remains The present reserves cover 9.2 months-worth of imports of close to record-highs, registering 83.8 percent in January, goods and payments of services, and are equivalent to 5.9 compared to 83.5 percent in January 2016. Eleven out of the times the country’s short term debt based on original maturity. 20 major industries are operating at 80 percent or above capacity utilization, which constitutes in effect full capacity. January exports accelerated at its fastest pace in nearly three This makes ongoing investments in new production capacity of years, while import growth moderated. Goods exports key importance, as to allow for medium-term output increased by 22.5 percent year-on-year in January 2017, the expansion and growth prospects. highest growth since 2014, compared to a much weaker 4.5 percent in December 2016. The sharp increase in goods export PHILIPPINES Monthly Economic Developments | March 2017 Figure 1: The PSEi ended flat in February after a strong recovery Figure 2: ... while the Philippine peso came under renewed in January … pressure. Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Rising food and energy prices continued to fuel the 12-month Credit growth remains upbeat and further accelerated in average Consumer Price Index in February. Headline inflation pace. Commercial bank lending grew at 18.0 percent year-on- accelerated to 3.3 percent year-on-year in February 2017 from year in January further increasing from 17.2 percent in 2.7 percent in January (compared to 0.9 percent in February a December 2016. Household credit inched up further to 23.7 year ago). This was mainly driven by price increases for food percent year-on-year in January from 22.8 percent in items to 4.1 percent year-on-year in February from 3.4 percent December 2016. Household loans for car purchases marked a month ago. Prices of oils, meat and fish increased at the the highest increase at 1.3 percent on an annual basis. Firm fastest pace among food commodities. Meanwhile, energy and credit grew by 17.5 percent year-on-year in January from 16.8 fuel prices increased by 2.9 percent year-on-year from 1.8 percent in December 2016. Credit growth at the firm level was percent in January. This impacted transport prices which rose primarily driven by increasing financing demand of the real in part due to the approved Php1 hike in jeepney fares that estate, wholesale and retail trade sectors. Meanwhile, non- took effect on February 10 in select regions of the country. performing loans as a share of the total loan portfolio for the Excluding food and energy prices, core inflation also inched up Philippine banking system remained low at 1.9 percent year- to 2.7 percent year-on-year growth in February from 2.5 on-year, compared to 2.1 percent in December 2015. The percent in January, and compared to 1.5 percent in February latest available capital adequacy ratio of 15.6 percent also 2016. The next Bangko Sentral ng Pilipinas’s Monetary Board indicates stability of the Philippines banking sector. meeting will take place on March 23. Figure 3: Exports accelerated at its fastest pace in nearly three Figure 4: … while manufacturing activities expanded at a years … slower rate in January. Jan-17 Nov-16 Sep-16 In percent Jul-16 May-16 Mar-16 Jan-16 -40 -30 -20 -10 0 10 20 30 40 Exports Imports Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | March 2017 Figure 5: Rising food and energy prices continued to fuel Figure 6: Expansionary fiscal policies resulted in the largest inflation in February. fiscal deficit since 2010. Source: PSA Source: Bureau of the Treasury Expansionary fiscal policy in 2016 led to a wider fiscal deficit On February 20, the Philippine Development Plan (PDP) 2017- as government expenditure grew rapidly while revenues fell 2022 was approved. The PDP is the new government’s as a percent of GDP. Government spending expanded by 14.3 medium-term development plan that is guided by the percent year-on-year, increasing to 17.6 percent of GDP in country’s long-term vision embodied in the AmBisyon Natin 2016 from 16.8 percent of GDP in 2015. Expenditure growth in 2040. Under the PDP 2017-2022, the government aims to turn 2016 was the result of the roll-out of big-ticket infrastructure the Philippines into an upper-middle income country by 2022 projects in roads, education, and health. Budget execution also through the implementation of priority policies and programs improved significantly, with underspending estimated to anchored on the government’s 0-10 point socio-economic decrease to 3.6 percent of the programmed amount compared agenda. The National Economic and Development Authority to 12.8 percent in the previous year. Revenues decreased (NEDA) is being tasked to coordinate the implementation of slightly as a percent of GDP from 15.8 percent in 2015 to 15.2 the PDP among government agencies at the national level and in 2016, but tax collections rose by 9.1 percent year-on-year, lead the prioritization of policies and programs. compared to 5.6 percent in 2015 despite the absence of new On February 28, the President signed the Investment tax policy measures. This was largely due to tax administration Priorities Plan (IPP) which provides a blue-print for priority improvements and the streamlining of processes at the Bureau investments across the country. The memorandum order No. of Internal Revenue which led to increased efficiency both in 12, effective as of March 12, lists the priority investment collecting and monitoring taxes. However, as a share of GDP, activities of the administration for 2017-2019. The IPP tax revenue effort only inched up slightly to 13.7 percent of identified the following preferred investment areas: GDP compared to 13.6 in 2015. As a result, the government’s agriculture; forestry and fishery; manufacturing, including agri- fiscal deficit more than doubled in 2016 to 2.4 percent of GDP, processing; infrastructure and logistics, including through from 0.9 percent of GDP in 2015. However, this remained public-private partnership; and export businesses. The IPP also within the deficit target of 2.2-2.7 percent of GDP for 2016 plans to bring greater attention to the Autonomous Region of year. Muslim Mindanao, and micro-, small-, and medium-term enterprises (MSME) initiatives while providing continued fiscal incentives to the Business Operations Outsourcing industry to create more jobs outside of Metro Manila. 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 Griselda Santos. PHILIPPINES Monthly Economic Developments | March 2017