Philippines Monthly Economic Developments July 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 projection for the Philippines at 6.7 percent for 2018 and 2019. • The Philippine Stock Exchange index (PSEi) contracted in June for the fifth consecutive month. • The Philippine peso continued to depreciate reaching Php/US$53.5 in June, weakest since 2006. • Exports declined for the fifth consecutive month while import growth remained robust. • Bangko Sentral ng Pilipinas (BSP) raised the key policy rate again in June amidst rising inflation. • Fiscal deficit narrowed slightly in May as revenue growth outpaced expenditure growth. The World Bank maintains its growth projection for the stance by the US monetary policy. In June, net-foreign selling Philippines at 6.7 percent for 2018 and 2019. The quarterly increased to Php13.4 billion from Php9.1 billion in May, forecast exercise considered recent economic data and revised representing a sharp reversal from the Php19.1 billion in net- the composition of expected growth as compared to the foreign buying registered in June 2017. Since January, the PSEi released April edition of the World Bank Philippine Economic has declined by 15.9 percent, among the worst performing Update. Given recent fiscal trends, government consumption major stock indexes in the Asia-Pacific Region. growth was revised upwards, while private consumption The Philippine peso continued to depreciate, reaching growth was kept at around six percent in 2018 and in 2019. Php/US$53.5 in June, lowest since 2006. This represents a 1.6 Due to higher public capital outlays, including increased percent month-on-month depreciation from the closing in infrastructure spending, investment growth was slightly May and a 6.1 percent year-on-year depreciation from the upgraded. Overall, it is anticipated that real GDP growth in the closing in June 2017. The weakening of the peso was partly the final quarter of 2018 and first two quarters of 2019 will be result of increased net-foreign selling and continuous weak boosted by higher election-related public spending. Export exports. The BSP may have intervened to stem excessive growth – the main growth driver of the economy in 2017 – is volatility in the exchange rate market, leading international projected to moderate in the coming years as global growth is reserves to decline to US$77.7 billion in June from US$79.2 expected to decelerate. billion in May (compared to US$81.3 billion in June 2017). At The Philippine Stock Exchange index (PSEi), contracted in its current level, the reserves can cover 7.5 months ’ worth of June for the fifth consecutive month. The PSEi closed at 7,194 import of goods and payment of services and primary income, by declining by 4.0 percent month-on-month in June 2018, a decline from 8.4 months’ worth in June 2017. similar to the 4.1 percent contraction registered in May. This Exports declined for the fifth consecutive month while import represents the lowest level since March 2017. The sustained growth remained robust. Merchandise exports fell by 3.8 decline of the PSEi was fueled by persistent outflows of foreign percent year-on-year in May, contracting for the fifth capital, increasing global trade tensions and a more aggressive consecutive month. This represents a reversal from the 24.0 Figure 1: The Philippine economy is projected to grow at 6.7 Figure 2: The PSEi contracted for the fifth consecutive month percent in 2018 and 2019. in June. 9.0 Forecast 8.0 7.6 7.0 7.1 6.9 6.7 6.7 6.7 6.7 6.6 6.0 6.1 6.1 Percent 5.0 4.0 4.2 3.7 3.0 July 2018 projections 2.0 Actual growth 1.0 1.1 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Philippine Statistics Authority (PSA) and WB staff projection Source: Philippine Stock Exchange PHILIPPINES Monthly Economic Developments | July 2018 percent growth year-on-year recorded in May 2017. the main driver of inflation in June, which was accompanied by Manufacturing exports, which made up 83.8 percent of the high inflation on educational services arising from the total export bill, contracted by 2.7 percent year-on-year. This approved tuition fee increases for academic year 2018-2019. represents a significant deceleration from the 18.9 percent Year-to-date headline inflation increased to 4.3 percent, growth a year ago. Slower growth in manufacturing exports exceeding the BSP’s 2 -4 percent inflation target range. were driven by sharp declines in exports of processed food, Excluding the volatile food and energy items, core inflation hit wood manufactures, chemicals, and iron and steel. Agriculture 4.3 percent in June, an increase from 3.6 percent in May and exports declined by 23.2 percent year-on-year in May. doubling the 2.1 percent recorded in June 2017. Year-to-date Meanwhile, merchandise imports grew by double digits for the core inflation averaged 3.4 percent. On June 20 th, the BSP second consecutive month, expanding in May by 11.4 percent raised its key policy rate by 25 basis points, bringing the year-on-year, less than the 20.2 percent in May 2017. Robust overnight reverse repurchase (RRP) rate to 3.5 percent. This is import growth was driven by strong imports of consumer and the second raise this year to stem the rising inflation. capital goods as well as petroleum crude which grew by 11.6 Domestic liquidity and bank lending continued to expand in percent, 10.1 percent, and 42.0 percent year-on-year, May. Domestic liquidity (M3) grew by 14.3 percent year-on- respectively. year reaching Php11.0 trillion in May, similar to the 14.2 Manufacturing output remained strong, growing by double percent expansion in April but higher than the 11.5 percent in digits for the fifth consecutive month. The volume of May 2017. Liquidity growth was driven by increased production index (VoPI) increased by 19.8 percent year-on- commercial lending and higher government borrowing. year in May, recovering from a contraction of 0.6 percent in Commercial lending to firms, which constituted 88.5 percent May 2017. Output expanded strongly in printing, petroleum of the banks’ total loan portfolio, grew by 19.3 percent in May, and food products. Average capacity utilization rates declined similar to the 19.6 percent in April and the 17.6 percent in May slightly to 84.2 in May from 84.3 percent in April, although 2017. It went largely to wholesale and retail trade, and higher than the 83.8 percent in May 2017. Twelve of the 20 financial and insurance activities. Lending to households grew major industries are operating at 80 percent and above at a slower rate of 18.4 percent year-on-year in May compared capacity. The Nikkei Philippines Purchasing Managers’ Index to the 19.0 percent recorded in April, and significantly lower (PMI) declined to 52.9 in June from 53.7 in May and 53.9 in than the 23.6 percent growth in May 2017. The slower growth June last year. was due to the slower growth in motor vehicle, salary and other types of household loans. The Bangko Sentral ng Pilipinas raised the key policy rate amidst rising inflation. The 12-month consumer price index remained elevated, reaching 5.2 percent year-on-year in June, higher than the 4.6 percent in May, and more than double than the 2.5 percent recorded in June 2017. Higher food prices were Figure 3: The peso continued to depreciate and breached the Figure 4: Exports contracted for the fifth consecutive month, Php/US$53.0 mark in June. while import growth remained robust. 54.0 May-18 53.0 Mar-18 52.0 Jan-18 In percent PHP/US$ 51.0 Nov-17 50.0 49.0 Sep-17 48.0 Jul-17 47.0 May-17 -50 -40 -30 -20 -10 0 10 20 30 40 50 Exports Imports Source: Bangko Sentral ng Pilipinas (BSP) Source: PSA PHILIPPINES Monthly Economic Developments | July 2018 Figure 5: Manufacturing activities have been growing strongly Figure 6: Headline inflation reached 5.2 percent year-on-year in since January. June. 35 84.4 8.0 VoPI VaPI Average Capacity Utilization Rate Metro Manila Outside Metro Manila Capacity Utilization (in percentage) 30 Core Inflation Headline Inflation 84.2 6.0 25 20 84 In percent, yoy 4.0 15 83.8 In percentage 10 2.0 5 83.6 0 0.0 83.4 -5 -10 83.2 -2.0 Sep-17 Sep-14 Sep-15 Sep-16 Jun-15 Jun-18 Jun-14 Jun-16 Jun-17 Mar-15 Mar-16 Mar-17 Mar-18 Dec-14 Dec-15 Dec-16 Dec-17 Nov-17 Sep-17 May-17 May-18 Jul-17 Mar-18 Jan-18 Source: PSA Source: PSA Fiscal deficit narrowed slightly in May, as revenue growth outpaced expenditure growth. Public expenditures expanded by 11.5 percent year-on-year in nominal terms to Php291.9 billion in May, lower than the 20.4 percent expansion registered in May 2017. Expenditure growth was driven by strong growth in capital outlays expanding in nominal terms by 14.8 percent year-on-year. In particular, infrastructure and other capital outlays expenditure expanded by 25.6 percent year-on-year, slightly less than the 31.4 percent growth registered a year ago. Infrastructure outlays were driven by ongoing projects of the Department of Public Works and Highways for roads improvements and rehabilitation, flood control, maintenance of bridges, and school facilities. Revenues expanded in May by 13.5 percent year-on-year in nominal terms to Php259.0 billion, slightly lower than the 14.3 percent growth recorded a year ago. The sustained growth in revenue collection was driven by the acceleration in tax revenue growth that expanded by 12.9 percent year-on-year in May compared to the 8.6 percent growth in May 2017. As a result, the fiscal deficit was slightly lower (Php32.9 billion) in May than a year ago (Php33.4 billion). Prepared by a World Bank team consisting of Kevin Chua, Kevin Thomas Cruz, Isaku Endo, Rong Qian, Birgit Hansl under the guidance of Ndiame Diop. Contact Rong Qian (rqian@worldbank.org) for questions. PHILIPPINES Monthly Economic Developments | July 2018