Philippines Monthly Economic Developments May 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  In April, the Philippine stock exchange index (PSEi) reached its highest level in over six months, bolstered by strong demand from foreign investors.  The Philippine peso continued to strengthen gradually.  The 12-month Consumer Price Index levelled off at 3.4 percent in April.  Manufacturing activities sustained robust growth while average capacity utilization picked up once again in March.  Exports expanded for the third consecutive month while import growth also accelerated further.  The fiscal deficit shrank in the first quarter of 2017 compared to quarter one a year ago as expenditure growth moderated and revenues expanded at a healthy rate. In April, the Philippine stock exchange index (PSEi) reached The 12-month Consumer Price Index levelled off at 3.4 its highest level in over six months, bolstered by strong percent in April. Headline inflation recorded the same level as demand from foreign investors. In April 2017, the PSEi in March, but remained elevated compared to a headline improved by 4.8 percent month-on-month, closing at 7,661. inflation of 1.1 percent in April 2016. Food prices continued to This was a further improvement on top of the 1.4 percent gain drive inflation, they grew by 4.2 percent (compared to 4.0 reported in March, and it represents a solid year-on-year percent in March). Fuel price inflation started to retreat to 3.6 expansion of 7.0 percent. The stock exchange index benefitted percent in April from 4.0 percent in March. Core inflation from positive sentiment regarding the country’s sustained meanwhile, climbed to 3.0 percent in April from 2.9 percent in strong economic performance in the first quarter of 2017, and March (and compared to 1.5 percent in April a year ago). For expectations that the US Federal Reserve keeps interest rates the first four months, the average inflation rate stood at 3.2 steady ahead of its May meeting. The PSEi’s good performance percent, remaining within the BSP’s inflation target range of 2- was driven by robust net-foreign buying, totaling Php9.9 billion 4 percent. The Bangko Sentral ng Pilipinas left the key policy in April, in contrast to the Php11.8 billion in net-foreign selling rate unchanged at 3.0 percent during its Monetary Board a month ago, and Php1.5 billion net-foreign selling in April meeting on May 11. 2016. Manufacturing activities sustained robust growth while The Philippine peso continued to strengthen gradually. In average capacity utilization picked up once again in March. April, renewed investors interest in Philippines equities led to The volume of production index (VoPI) grew by 11.1 percent greater peso demand, prompting a 1.0 percent month-on- year-on-year in March, after having expanded by 10.7 percent month appreciation of the local currency. The peso closed the in February. This represented the third consecutive month of month at Php/US$49.70 from Php/US$50.19 in end-March. increase, pointing to sustained robustness in manufacturing However, on an annual basis the peso still depreciated 6.3 activities since the start of the year. The March acceleration percent from the closing rate at end-April 2016. In April, strong was brought about by a strong expansion in the production of dollar inflows contributed to a roughly US$1 billion increase in metal products, petroleum products, and transport the country’s international reserves to US$81.8 billion, but equipment. As a result of increased manufacturing activities, ended up lower compared to the US$83.7 billion recorded in the average capacity utilization rate started to inch up again in April a year ago. Reserves now cover 9 months’ worth of March, reaching 83.8 percent compared to 83.7 in February. imports of goods and payments of services, and primary Meanwhile, the Nikkei ASEAN Manufacturing Purchasing income, equivalent to 5.4 times the country’s short-term Managers’ Index slightly dipped to 53.3 in March from 53.8 in external debt obligations. This represented a slight weakening February as inventory drawdowns kicked in after the build-up from the 10.4 months import coverage from April a year ago. of stocks of finished goods in the previous months. Meanwhile, personal remittances from overseas Filipinos remained robust. In the first two months of 2016, they reached a cumulative US$4.8 billion, a nearly 6 percent increase compared to the first two months of 2016. PHILIPPINES Monthly Economic Developments | May 2017 Figure 1: Stronger net foreign buying fueled the PSEi. Figure 2: The peso returned to Php/US$49 levels in April. 8,500 10 52.0 8 8,000 51.0 6 50.0 7,500 4 2 49.0 PHP/US$ PHP billion 7,000 Index 0 48.0 6,500 -2 47.0 -4 6,000 Net Foreign Buy (RHS) -6 46.0 PSEi 5,500 -8 45.0 Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Exports expanded for the third consecutive month while There remained ample liquidity in the financial market as import growth also accelerated further. Merchandise exports commercial bank lending grew further in March. Domestic expanded in the double digits for the third consecutive month, liquidity (M3) reached Php9.5 trillion, growing by 11.2 percent growing in March by 21.0 percent year-on-year compared to a year-on-year in March from 11.7 percent in March 2016. The 15.1 percent contraction in March 2016. Electronic products, money supply increase was driven by sustained commercial which accounted for half of the total export bill, continued to lending to both household consumption and production fuel export growth. Led by exports of semiconductor activities. In March, commercial bank lending expanded by components, exports of electronic products expanded by 19.0 19.7 percent year-on-year, further increasing from 18.1 percent on an annual basis in March compared to a meager 1.0 percent growth in February. Household credit grew by 24.6 percent growth in March 2016. Meanwhile, import growth percent year-on-year with the strongest expansion registered also accelerated, to 24.0 percent year-on-year in March from for motor vehicle and salary-based general consumption loans. 11.7 percent in the same month a year ago. Import growth was Firm loans grew on an annual basis by 18.5 percent in March, driven by a robust expansion in both capital goods and and were primarily directed to real estate activities, intermediate goods imports, which grew by 24.9 percent year- manufacturing, and wholesale and retail trade. Meanwhile, on-year and 26.4 percent, respectively. Imports of consumer non-performing loans as a share of the total loan portfolio for goods grew at a lower rate of 6.6 percent year-on-year, as the banking system remained steady at 2.0 percent in purchases of both passenger vehicles and imported food items February. The banking system remained well-capitalized with moderated in March. the latest available capital adequacy ratio at 15.6 percent. Figure 3: Headline inflation levelled off in April. Figure 4: Manufacturing activities sustained robust growth. Metro Manila Outside Metro Manila VoPI 25 84 Core Inflation Headline Inflation 9.0 Food & Non-alcoholic beverage VaPI 83.9 8.0 Average Capacity Utilization 20 Rate 83.8 7.0 Capacity Utilization (in percentage) 83.7 6.0 15 IN PERCENT 83.6 In percentage 5.0 4.0 10 83.5 3.0 83.4 5 2.0 83.3 1.0 83.2 0 0.0 Nov-16 Jul-16 May-16 Jan-17 Mar-16 Sep-16 Mar-17 83.1 Jul-13 Jul-14 Jul-15 Jul-16 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Jan-14 Jan-15 Jan-16 Jan-17 Oct-13 Oct-14 Oct-15 Oct-16 -5 83 Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | May 2017 Figure 5: The government posted a fiscal deficit for the second Figure 6: All 17 regions of the Philippines recorded positive consecutive month in March. growth in 2016. 100 14.0 2015 2016 80 12.0 60 10.0 40 8.0 Percent In Billion Pesos 20 6.0 4.0 - Jan Jul Jan Jul Jan July Jan 2.0 (20) 2014 2015 2016 2017 0.0 (40) CALABARZON CARAGA Mindanao CAR MIMAROPA NCR Bicol Region Eastern Visayas Northern Mindanao Philippines Davao Region Visayas SOCCSKSARGEN ARMM Luzon Ilocos region Cagayan valley Central Visayas Zamboanga Peninsula Central Luzon Western Visayas -2.0 (60) (80) (100) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: Bureau of the Treasury Source: PSA The fiscal deficit shrank in the first quarter of 2017 compared President Duterte appointed Nestor Espenilla, deputy to the first quarter of 2016, as expenditure growth governor for banking supervision and regulation, to succeed moderated and revenues expanded at a healthy rate. In the in July Amando Tetangco Jr. as the new central bank governor first quarter of 2017, revenues expanded by 11.1 percent effective. Espenilla will also chair the Monetary Board and the quarter-on-quarter in nominal terms, reaching Php532.4 Anti-Money Laundering Council, and represent the Philippines billion. In comparison, during the first quarter of 2016 revenue as its governor at the International Monetary Fund and as growth was only 1.8 percent. Tax revenues posted also double alternate governor at the World Bank and the Asian digit growth in the first quarter of 2017, increasing by 12.8 Development Bank. Having worked for the central bank for percent quarter-on-quarter in nominal terms, outperforming more than three decades, he is an advocate for financial the 5.4 percent growth posted in the same period of 2016. market structural reforms, including tighter capital buffers, Both, Bureau of Internal Revenue and the Bureau of Customs, sound risk management, and the easing of foreign exchange saw double-digit growth in revenue collections. Meanwhile, rules. The incoming central bank governor announced that despite a significant increase in the budget for 2017, growth in under his leadership there will be continuity in the way the expenditures had a slow start in the first quarter of 2017. central bank will conduct its policy mandate. Expenditure execution expanded in nominal terms by 4.0 Recently-released Gross Regional Domestic Product data percent quarter-on-quarter in the first three months of 2017, shows growth across all regions during 2016. Out of the total compared to the 17.3 percent posted in the same period in of seventeen regions, ten regions saw economic growth 2016. The moderate growth may be explained in part by a high accelerating. The Eastern Visayas registered the fastest pace of base effect due to election-related spending in early last year growth at 12.4 percent year-on-year, compared to 4.6 percent that contributed to higher-than-average expenditure growth. in 2015. In contrast, the Autonomous Region of Muslim In addition, interest expenditures, which account for 15.9 Mindanao posted the lowest growth rate of 0.3 percent year- percent of total expenditures, declined by 4.6 percent quarter- on-year, which nonetheless reflected a rebound from the 0.4 on-quarter in the first three months of 2017, compared to 2.0 percent contraction in 2015. Meanwhile, the National Capital percent growth in 2016. This led to a narrower fiscal deficit of Region remained the center of economic activity in the Php83.0 billion in the first quarter of 2017, a 26.2 percent year- Philippines, contributing 2.7 percentage points to overall on-year decline compared to the Php112.5 billion budget gap growth, while accounting for nearly 40 percent of total output in the first quarter of 2016. in 2016. Its real per capita GRDP was nearly thrice the national per capita GDP of Php79,000. 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 | May 2017