Philippines Monthly Economic Developments December 2016 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  The World Bank upgraded the Philippines growth projection for 2016 from 6.4 percent to 6.8 percent, and for 2017 from 6.2 percent to 6.9 percent, given higher-than-expected third quarter growth and improved outlook assumptions.  In October, manufacturing activities continued to expand, pushing utilization levels near full capacity.  Remittances remain a key growth driver as both personal and cash remittances reached their highest levels so far.  Prospect of an interest rate hike by the US Federal Reserve resulted in losses in the local stock index and contributed to a weakening peso.  Inflation inched up further in November driven by increasing food and utility prices.  The banking system continues its expansion through strong credit growth, and Philippine banks received a stable outlook rating from Fitch Ratings on December 8.  The fiscal balance weakened in January-October as expenditure growth continued to outstrip revenue growth. The World Bank revised the growth projection for the after four consecutive quarters of double digit growth when Philippines upward: for 2016 from 6.4 percent to 6.8 percent, the government front-loaded expenditures for the May 2016 and for 2017 from 6.2 percent to 6.9 percent. Growth in the general elections. Meanwhile, net exports remained a drag on third quarter of 2016 was higher than expected with economic growth, as the softer-than-expected recovery investment and private consumption growth accelerating. This among major economies and commodity exporters led to continued the strong growth performance of the first half of weak external demand for the Philippines’ exports. the year, which was marked by the government pre-election In October, manufacturing activities continued to expand, stimulus. It trend illustrates high confidence among investors pushing utilization levels to near full capacity. The Volume and consumers, and provides the base for the more optimistic Production Index for manufacturing grew 8.4 percent year-on- outlook for the remainder of 2016 and for 2017. Strong year in October compared to 1.5 percent in the same month a performance of high-frequency indicators in October and year ago. Manufacturers for petroleum products, machinery, November, and continued policy commitment to the planned transport equipment and food products performed especially increase in public infrastructure spending are expected to well and drove this result. The Nikkei ASEAN Manufacturing carry the economy’s growth momentum over to 2017-2018. Purchasing Manager’s Index for the Philippines registered The Philippine economy expanded in the third quarter by 7.1 continued robust expansion sentiments in November at 56.3, percent year-on-year. The country registered the highest albeit slowing slightly for the second month from 57.5 in quarterly growth in three years, and among its East Asian peers September and 56.5 in October. However, the enduring remains the strongest growth performer in quarter three of expansion in manufacturing activities resulted in a continued 2016. On the production side, the manufacturing and services increase in the average capacity utilization rate, which reached sectors continued to drive growth in the third quarter, 83.7 in October 2016, compared to 83.6 in the past two accelerating by 8.6 and 6.9 percent year-on-year, respectively. months and 83.5 in October 2015. Securing investment in the In manufacturing, the durable equipment industry and the expansion of existing production capacity is now crucial, so as construction sub-sector performed particularly well. Growth not to constrain medium-term output growth. was further supported by a recovery in agriculture, where Remittances remain a key growth driver as both personal and growth rebounded in the third quarter by 2.9 percent year-on- cash remittances reached their highest levels so far. Personal year, given higher output in crops and livestock. On the remittances from overseas Filipinos grew in September by 6.3 demand side, capital formation was the main growth engine in percent year-on-year, reaching the highest monthly level in quarter three, expanding by 20.0 percent. Private 2016 so far of US$2.6 billion (while they amounted to US$22.1 consumption continued to be supported by robust billion in the first three quarters of 2016−a 4.7 percent remittances and benign inflation trends, leading to growth of increase compared to the same period in 2015). Likewise, cash 7.3 percent year-on-year, in the third quarter. However, remittances reached their highest monthly level in September government consumption slowed in the third quarter as the (growing by 6.7 percent year-on-year), reaching US$20.0 on a country entered the post-election budget cycle. Government cumulative basis in the first nine months of 2016, which is 4.8 consumption grew moderately at 3.1 percent year-on-year percent higher than in the same period a year ago. PHILIPPINES Monthly Economic Developments | December 2016 Figure 1: Manufacturing output growth remains robust ... Figure 2: … but foreign portfolio investment has been volatile. 8,500 10 8 8,000 6 7,500 4 PHP billion 7,000 Index 2 6,500 0 6,000 Net Foreign Buy (RHS) -2 PSEi 5,500 -4 Source: Philippine Statistics Authority (PSA) Source: Philippine Stock Exchange Prospect of an interest rate hike by the US Federal Reserve As investors priced in the prospect of an interest rate hike by resulted in losses in the local stock index. The Philippine Stock the US Federal Reserve, regional currencies, including the Exchange index (PSEi) declined by 8.4 percent month-on- Philippine peso, weakened. The currencies of Malaysia, month from 7,350 to 6,781 by end-November as foreign Indonesia, Singapore and Thailand weakened last month. By investors sold-off US$383 million in portfolio stocks from the end-November, the Philippines peso depreciated by 2.8 Philippines. The increasing likelihood of an interest rate hike percent month-on-month, and by 5.5 percent year-on-year. by the US Federal Reserve in December led to investors shifting The exchange rate broke the Php/US$50.00 mark on their focus to the US markets in anticipation of higher yields on November 24, falling to the lowest level in ten years, but has US government bonds. On an annual basis, the PSEi has since stabilized and closed the month at Php/US$49.67. The decreased by 2.1 percent as of end-November. How this will BSP likely intervened during November in the exchange market be reflected in foreign direct investment (FDI) trends will be to support the peso. As a result of outflows arising from foreign revealed soon in the next Balance of Payment data from the exchange operations, lower gold valuations and payments Bangko Sentral ng Pilipinas (BSP). Until August, FDI inflows made by the government for maturing foreign exchange remained strong, recording net inflows of US$5.4 billion in the obligations, the international reserves declined by end- first eight months of 2016−an increase of 71.1 percent year- November by US$2.38 billion to US$82.7 billion compared to a on-year. In August alone, net FDI inflows stood at US$711.0 month ago. They remain at comfortable levels, covering 9.6 million with equity capital infused mainly to the real estate, months of imports and are equivalent to 5.9 times the manufacturing, and wholesale and retail trade sectors. country’s short-term external debt based on original maturity. Figure 3: Until August foreign direct investment was strong. Figure 4: The peso weakened to its lowest level in 10 years. Source: PSA Source: Bloomberg PHILIPPINES Monthly Economic Developments | December 2016 Figure 5: Inflation continues to rise. Figure 6: Fiscal balances weakened. Source: PSA Source: PSA On December 8, Philippines’ banks received a stable outlook Inflation inched up further in November, driven by increasing rating from Fitch Ratings. Fitch expects local Philippine banks food and utility prices. The 12-month Consumer Price Index to remain healthy in 2017 and reap the benefits from accelerated in November to 2.5 percent year-on-year, economic growth and the expansion of credit. Improvements exceeding the BSP forecast range of 1.6-2.4 percent, but in regulations and risk management could also strengthen the remaining within the 2-4 percent inflation target. Inflation banks’ overall credit profiles, if healthy balance sheets and rates have continued to rise throughout the year: average financial metrics are maintained. Meanwhile, the overall inflation increased to 1.7 percent year-to-date, compared to liquidity position is projected to remain comfortable in 2017 as 1.4 percent in January-November 2015. Food inflation credit creation and foreign remittance inflows would help remained the main driver of headline inflation, at 3.3 percent cushion against debt and currency market uncertainties. year-on-year in November (3.4 percent in October). Inflation in utility prices picked-up to at 1.3 percent year-on-year, from The fiscal balance weakened in January-October as 0.9 percent in October. Core inflation also remained stable at expenditure growth continued to outstrip revenue growth. 2.4 percent year-on-year (2.3 percent in October). Total government expenditures expanded by 11.9 percent year-on-year in the first ten months of 2016, reaching Php2.0 Strong domestic credit growth endured as commercial lending trillion. This however, fell by 17.0 percent short of the Php2.4 continued its rapid expansion at 17.7 percent year-on-year in trillion spending target as budget execution constraints remain October, the same as in September. Firm credit sustained an issue. Government revenues grew at a much slower pace, double-digit growth (17.4 percent), with the strongest growth by 3.0 percent to Php1.8 trillion. Total revenue grew due to in administrative support services, ITC and entertainment higher tax revenues, which expanded by 8.0 percent year-on- activities. Household credits grew by 22.0 percent in October year in the first ten months given higher collections from the year-on year (12.8 percent in October 2015), with salary loans Bureau of Internal Revenue. This generated in October a year- persisting as the fastest growing segment. At the same time, the to-date budget deficit of Php216.0 billion, more than four performance of banks remained strong with stable margins and times larger than the Php52.6 billion over the same period last low non-performing loans (1.61 percent as a share of the total year. The primary balance (net interest payments) remained in loan portfolio compared to 1.81 in October 2015). The BSP surplus at Php49.8 billion pesos as of end-October 2016, but deposit facility auction on December 1 was for the first time was 77.0 percent lower than the primary surplus recorded in since its introduction in June undersubscribed due to increased the same period in 2015. yields and the banks’ preference for cash given the holiday season and uncertainties around monetary policy decisions in the US and Europe. 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 | December 2016