Philippines Monthly Economic Developments June 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  While the Philippine peso traded in May in a relatively stable foreign exchange market, it continues to depreciate on an annual basis.  The Philippine stock exchange index (PSEi) rallied in May, as it benefited from strong foreign purchases.  Gross Domestic Product (GDP) posted a 6.4 percent year-on-year growth in the first quarter of 2017.  In April, manufacturing activities expanded at a slower rate while average capacity utilization eased.  Exports expanded in April by 12.1 percent while imports contracted for the first time in nine months.  Headline and core inflation finally started to ease in May.  The government posted a fiscal surplus in April, as both national government revenues and expenditures contracted for the first time in 2017.  The Lower House approved the first comprehensive tax reform package. While the Philippine peso traded in May in a relatively stable on the fiscal side, public construction grew by only 2 percent foreign exchange market, it continues to depreciate on an in the first quarter of 2017, compared to 38.5 percent growth annual basis. Foreign exchange markets were less volatile in the same period a year ago. On the production-side, the during May, resulting in the peso trading within a relative services sector was the main driver of growth in the first narrow range of Php/US$49.65-50.00. The peso closed at the quarter, expanding on an annual basis at 6.8 percent. At the end of the month at Php/US$49.87, representing a slight 0.3 same time, industry growth decelerated to 6.1 percent year- percent month-on-month depreciation from the on year, from 9.3 percent in the first quarter of 2016. Php/US$49.70 closing in end-April. However, on an annual Agriculture recovered with 4.9 percent year-on year growth, basis, the peso continued to depreciate at 6.6 percent from the compared to a contraction of 4.3 percent in quarter one 2016. Php/US$46.78 closing in end-May 2016, similar to a 6.3 In April, manufacturing activities expanded at a slower rate percent year-on-year depreciation in April. while average capacity utilization eased. The volume of The Philippine stock exchange index (PSEi) rallied in May, as production index (VoPI) grew in April at 5.9 percent year-on- it benefited from strong foreign purchases. In May, the PSEi year, slowing from 10.1 percent in April 2016. This was the improved by another 2.3 percent month-on-month, closing at slowest recorded growth in the VoPI since January 2016. 7,837. It reached its highest level of the past nine months. This Production activities remained upbeat for metal products, also represents the third consecutive month of expansion for furniture, and petroleum products; however, factory activities the PSEi, which built on its 4.8 percent gain in April. Overall, slowed notably for transport equipment and chemical the index has expanded by 8.1 percent year-on-year, and 14.2 products. The average capacity utilization rate eased slightly to percent since January this year as foreign funds continued to 83.7 percent in April (from 83.8 in March), but remained higher flow back into stock exchange. Net-foreign buying totaled than the 83.4 percent recorded in April last year. Meanwhile, Php8.6 billion, compared to Php13.4 billion in May 2016. the Nikkei Philippines Manufacturing Purchasing Managers’ index (PMI) rose to 54.3 in May from 53.3 in April, signaling Gross Domestic Product (GDP) posted a 6.4 percent year-on- optimism driven by new orders and strong purchase activity. year growth in the first quarter of 2017. This marked a decline from the 6.6 percent year-on-year growth during the fourth Exports expanded in April by 12.1 percent while imports quarter of 2016 and 6.8 percent in the first quarter of 2016. contracted for the first time in nine months. Philippine Export and consumption growth remained strong, with 20.3 exports grew in double digits for the fourth consecutive percent and 5.3 percent respectively, but government month, contrary to the 3.4 percent contraction in April 2016. consumption and investment growth weakened on an annual Exports of electronics products continued to account for the basis to 0.2 and 7.1 percent respectively. This quarterly growth largest share of the total export bill, 50.9 percent. At the same outcome was in line with the World Bank growth projection, time, imports contracted by 0.1 percent year-on-year in April, given the high base in quarter one 2016, when large election- a sharp reversal from the 35.9 percent expansion in the same related spending boosted growth uncharacteristically. month in 2016, due a decline in both consumer goods and Mirroring a slower expenditure execution in the first quarter capital goods imports. PHILIPPINES Monthly Economic Developments | June 2017 Figure 1: The PSEi reached its highest level in nine months. Figure 2: Manufacturing activities expanded at a slower rate. VoPI 25 84 VaPI 83.9 Average Capacity Utilization 20 Rate 83.8 Capacity Utilization (in percentage) 83.7 15 83.6 In percentage 10 83.5 83.4 5 83.3 83.2 0 Apr-16 Jun-16 Apr-17 Aug-16 Dec-16 Feb-17 Oct-16 83.1 -5 83 Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Headline and core inflation finally started to ease in May. The is scheduled for June 22, and key policy rates are liely to be 12-month Consumer Price Index declined to 3.1 percent year- kept on hold. on-year in May, after peaking at 3.4 percent in April. This Strong credit growth continued, highlighting ample liquidity ended a nearly uninterrupted trend of accelerating inflation, in the banking system. Domestic liquidity (M3) continued to which started at 1.1 percent in March–April last year. In May, grow in April at 11.2 percent year-on-year to Php9.5 trillion, inflation slowed across all commodities. Food inflation driven by strong commercial lending increases. Lending from decelerated already for the second consecutive month, from commercial banks expanded by 19.2 percent year-on-year in its peak of 4.0 percent in March, due to lower prices for staple April, compared to 17.3 percent in April a year ago. Over the foods such as fish, oils and fats, sugar and vegetables. Energy first four months of 2017, credit growth averaged 18.9 prices softened due to a combination of lower international percent. Firm loans constitute nearly 90 percent of the total crude oil prices and lower power generation charges. Core loan portfolio, and grew in April on an annual basis of 18.4 inflation, which excludes volatile food and energy prices, also percent, largely directed to the real estate, manufacturing, and retreated. It declined to 2.9 percent year-on-year in May from wholesale and retail trade sectors. Household loans grew in its peak of 3.0 percent in April (compared to 1.6 percent in April at an even faster annual rate of 24.3 percent, based on a April 2016). This resulted in a year-to-date average headline continued expansion in salary loans and motor vehicle loans. inflation rate of 3.1 percent, which is within the central bank’s The banking system remained strong with a non-performing target range of 2-4 percent. The next monetary board meeting loans ratio of 2.0 percent in March, and a capital adequacy ratio at 15.6 percent based on recent available data. Figure 3: Exports continued to grow in double-digits. Figure 4: Headline and core inflation eased. Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | June 2017 Figure 5: The government posted a fiscal surplus in April. Figure 6: Both the unemployment and underemployment rates improved. 120 100 80 60 40 In Billion Pesos 20 - (20) Jan Jul Jan July Jan (40) 2015 2016 2017 (60) (80) (100) (120) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: Bureau of the Treasury Source: PSA The government posted a fiscal surplus in April, as both The Lower House approved the first comprehensive tax national government revenues and expenditures contracted reform package. House Bill No. 5636, which consolidated the for the first time in 2017. After a weak start for expenditure Department of Finance’s version of the tax reform bill (House execution in the first quarter, government spending continued Bill 4774) with 54 other related tax bills, was approved by the to fall below expectation in April. Expenditures reached House of Representatives on May 31 by 246 votes against 9 Php183.1 billion, declining in nominal terms by 4.5 percent (and one member abstaining). The main features of the bill year-on-year (a reversal from the 22.4 percent growth in April include the lowering of personal income taxes, limiting 2016). The decline in public spending was led by a sharp exemptions to the value added tax, adjusting the excise rates contraction in capital spending: maintenance and operating for fuel and automobiles, and the introduction of an excise tax expenditures fell in nominal terms by 27.5 percent year-on- to sugar sweetened beverages. Next, the Senate will debate year (compared to 23.7 percent growth in April 2016) and the tax reform proposal once it resumes session in late July. infrastructure spending decreased by 21.2 percent year-on- In April, the unemployment and underemployment rates year in nominal terms (compared to 82.1 percent growth in declined. Although the unemployment rate declined to 5.7 April 2016). The Department of Budget and Management percent in April year-on-year, compared to 6.1 percent in April attributes the drop in infrastructure spending to the delay in 2016, the country posted an estimated 0.4 million in net job the start of new big-ticket projects and lower disbursements losses. The services sector, which accounts for about sixty of the Department of Public Works and Highways. Meanwhile, percent of all jobs, recorded year-on-year net job losses of revenue growth also decreased in nominal terms by 4.4 557,000 in April. This coincided with the exit of some 549,000 percent year-on-year in April, reaching Php235.9 billion. Non- individuals from the labor force, leading to a decline in the tax revenues dropped in nominal terms by 54.2 percent year- labor force participation rate to 61.4 percent in April from 63.5 on-year in April as a result of a delay in remitted dividends percent in the same period last year. Both the agriculture and from government-owned and controlled corporations. Tax the industrial sector saw on an annual basis a small net job revenue growth slowed in April to 3.8 percent year-on-year in creation of around 125,000 and 39,000 workers respectively. nominal terms from 11.4 percent in April 2016 as both the Meanwhile, the underemployment rate continued to improve, Bureau of Internal Revenue and the Bureau of Customs failed declining in April to 16.1 percent year-on-year, its lowest level to meet their collection targets. As a result, the government in over a decade. This is compared to 18.3 percent a year ago, registered a Php52.8 billion surplus in April, which was 4.2 and constitutes 962,000 less underemployed workers. percent lower than the Php55.0 billion surplus of April 2016. Please contact Birgit Hansl: bhansl@worldbank.org Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of Kevin Chua and Kevin Thomas Cruz. PHILIPPINES Monthly Economic Developments | June 2017