Philippines Monthly Economic Developments June 2018 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 (PSEi) declined in May for the fourth consecutive month, closing at its lowest level in over a year. • The Philippine peso slipped to a 12-year low and international reserves declined in May. • Exports declined for the third consecutive month while import growth accelerated strongly. • Manufacturing activities significantly expanded in May, in line with strong consumer demand. • High inflationary pressure persisted in May with inflation remaining above 4 percent. • The government registered a fiscal surplus in April while both revenue and expenditure growth significantly accelerated. • Unemployment eased but underemployment increased again in April. • Consumer confidence increased in the second quarter of 2018 and business optimism remained steady. The Philippine Stock Exchange index (PSEi) declined in May Exports declined for the third consecutive month while for the fourth consecutive month, closing at its lowest level import growth accelerated strongly. Merchandise exports in over a year. The PSEi contracted by 4.1 percent month-on- contracted for the third consecutive month in April, declining month in May, more than the 2.0 percent contraction by 8.5 percent year-on-year, a significant reversal from the registered in April, to close the month at 7,497. This was its 30.4 percent growth recorded in April 2017. Similar to the lowest level since April 2017. The continued retreat of the PSEi previous month, the contraction in exports was driven by a 6.3 was driven by a mix of domestic and external factors. percent year-on-year contraction in manufacturing exports, Domestically, rising inflation and a weakening peso have which accounted for 84.2 percent of the total export bill, and caused higher risk aversion among investors. Externally, by a sharp decline in agriculture exports, which contracted by increasing global uncertainty due to ongoing trade disputes 35.9 percent year-on-year in April. At the same time, import and geopolitical tensions lowered investors appetite in growth rebounded strongly in April after having registered flat emerging market assets. As a result, foreign investors have growth in the previous month, expanding by 22.2 percent continued to liquidate shares, with net-foreign selling year-on-year compared to 4.0 percent in April a year ago. amounting to Php9.1 billion in May, slightly more than the Import growth was equally driven by strong imports of Php8.9 billion in net-foreign selling in April. Since end-2017, consumer goods (29.9 percent, year-on-year) and capital the PSEi has declined by 12.4 percent and contracted by 4.3 goods (29.3 percent), but less so by raw materials and percent year-on-year compared to end-May 2017. intermediate goods, (11.8 percent). The Philippine peso slipped to a 12-year low and Manufacturing activities significantly expanded in May, in international reserves declined in May. The Philippine peso line with strong consumer demand. The volume of production closed at Php/US$52.69 in end-May, representing a 5.7 index (VoPI) grew by 31.1 percent year-on-year in April, percent year-on-year depreciation from the closing at significantly faster than the 0.1 percent growth in April 2017. Php/US$49.87 in May 2017. This was the weakest closing of Factory outputs have been growing at double-digits since this the peso since July 2006. The weakness of the peso has been January. Output expanded strongly in printing and petroleum traced to the widening trade deficit, marked by a slowdown in production, while contracting in the production of furniture exports and strong imports, and the interest rate hikes in the and fixtures, and footwear and wearing apparel. Average United States. The peso depreciation in May coincided with a capacity utilization rates inched up further to 84.3 in April from decline in the gross international reserves (GIR). The GIR 84.2 percent in March, and compared to 83.7 percent in April decreased to US$79.0 billion in May 2018 from US$82.1 billion last year. Twelve of the 20 major industries are now operating in May last year. At its current level, the GIR covers 7.7 months’ at 80 percent and above capacity. Factory activities are likely worth of import of goods and payments of services, compared remain strong in the coming months as the Nikkei Philippines with 8.6 months in May 2017. Meanwhile, net foreign direct Purchasing Managers’ Index (PMI) rose to 53.7 in May from investment increased to US$2.2 billion in the first quarter of 52.7 in April. This was attributed to steady consumer demand 2018 from US$1.5 billion in the first quarter of 2017. despite rising headline inflation. PHILIPPINES Monthly Economic Developments | June 2018 Figure 1: The PSEi fell to its lowest level in over a year… Figure 2: … and the Philippine peso slipped to a 12-year low. Source: Philippine Stock Exchange Source: Bangko Sentral ng Pilipinas High inflationary pressure persisted in May with inflation the reserve requirement ratio to 18.0 percent, which followed remaining above 4 percent. The 12-month consumer price the 1 percentage point reduction in March 2018. index (CPI) rose further to 4.6 percent in May from 4.5 percent Domestic liquidity continued to grow in April as credit growth in April, and compared to 2.9 percent in May 2017. The rise in expanded at double-digits. Domestic liquidity (M3) reached inflation was attributed to higher energy and transport prices, Php10.9 trillion in April, growing by 14.2 percent year-on-year, and the continued increase in the prices of alcoholic beverages faster than the 11.5 percent growth in April last year. The and tobacco. Food inflation also accelerated in May given liquidity growth was driven by commercial lending which higher prices for fish, corn, sugar and vegetables. Inflation expanded by 19.9 percent in April, higher than the 18.5 pressure has been exacerbated by the weakness of the peso percent growth in April 2017. Lending to firms, which and the rising prices of global crude oil. Excluding the volatile constituted 88.5 percent of the banks’ total loan portfolio, food and energy items, core inflation rose to 3.6 percent year- grew by 19.6 percent in April compared to 18.4 percent in the on-year in May from 3.5 percent in April, and compared to 2.7 same month last year, and went largely to the wholesale and percent in May 2017. Year-to-date core inflation averaged 3.2 retail trade, and financial and insurance activities. Lending to percent. Year-to-date headline inflation hit 4.1 percent, households grew at a slower rate of 19.0 percent year-on-year exceeding the Central Bank’s 2-4 percent target range. As part in April compared to the 24.3 percent recorded in April 2017, of its financial market reform agenda, the monetary board due to the slower growth in motor vehicle, salary and other announced on May 24th another percentage point reduction in types of household loans. Figure 3: Exports contracted for the second consecutive Figure 4: Manufacturing activities expanded again by double- month, while import growth accelerated sharply. digit in April. Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | June 2018 Figure 5: Inflationary pressure persisted in May. Figure 6: Unemployment eased in April 2018, although underemployment increased compared to April last year. Source: PSA Source: PSA The government registered a fiscal surplus in April while both net-job creation was recorded for both the services (0.8 revenue and expenditure growth accelerated significantly. million) and industry sectors (0.6 million), yet in the agriculture Government expenditures expanded by 42.7 percent year-on- sector job losses were amounting to 0.7 million. Meanwhile, year in nominal terms in April, reaching Php261.2 billion, a the underemployment rate increased again to 17.0 percent in reversal from the 4.5 percent contraction recorded in April April compared to 16.1 percent in April 2017. While lower than 2017. Strong expenditure growth was driven by the significant the 19.0 percent long-term average, it is suggesting that the acceleration in both capital outlays, which grew in nominal quality of jobs remains of concern. terms by 79.7 percent year-on-year in April, and current Consumer confidence increased in the second quarter of expenditures, which expanded by 28.6 percent. In particular, 2018 and business optimism remained steady. Consumers the national government’s infrastructure program achieved turned more optimistic in the second quarter of 2018 rapid growth, growing in nominal terms by 95.9 percent year- compared to the previous quarter, according to the Bangko on-year in April. Meanwhile, national government revenues Sentral ng Pilipinas’ (BSP) Consumer Expectations Survey. The continued to experience robust growth, expanding in nominal overall consumer confidence index increased to 3.8 percent in terms by 30.4 percent year-on-year in April to reach Php307.6 the second quarter of 2018, from 1.7 percent in the first billion, a sharp contrast from the 4.4 percent contraction quarter of 2018. The positive uptick in consumer confidence recorded over the same period a year ago. Tax revenues was due to expectations of consumers on improvements in expanded by 27.9 percent year-on-year in April, a significant peace and order, additional income, and the availability of acceleration from the 3.8 percent growth recorded in April more jobs. Meanwhile in the BSP’s Business Expectations 2017. As a result, the national government registered a Survey, firms’ overall confidence index declined slightly to 39.3 narrower fiscal surplus, declining by 12.3 percent year-on-year percent in the second quarter of 2018 compared to 39.5 in nominal terms to reach Php46.3 billion in April compared to percent in the first quarter of 2018. Concerns due to higher Php52.8 billion in April 2017. inflation, as oil and fuel prices increase, and the depreciating Unemployment eased slightly but underemployment peso dampened business optimism slightly during the second increased again in April. The unemployment rate declined quarter of 2018. However, overall optimism in the Philippine slightly to 5.5 percent in April compared to 5.7 percent in April economy continued and was attributed to higher demand 2017, and was significantly lower than its long-term average during the summer season, the pursued implementation of (2006-2017) of 6.8 percent. This was a result of higher annual government infrastructure projects, and the perceived net-job creation in April which stood at 0.6 million jobs. Strong positive impact of the recently enacted tax law. 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 Isaku Endo. PHILIPPINES Monthly Economic Developments | June 2018