Philippines Monthly Economic Developments July 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  The World Bank projects continued strong growth for the Philippines and expects the economy to expand at 6.8 percent in 2017.  After a brief rally in early June, the Philippine stock exchange index (PSEi) flattened out by the end of the month.  The Philippine peso weakened in June and once again crossed the Php/US$50.00 mark  During the first five months of the year exports registered double-digit growth.  Manufacturing activities expanded at a weaker pace in May.  After peaking in April, headline and core inflation further slowed during June.  In May, the government’s fiscal balance swung into deficit as spending for infrastructure and operation & maintenance accelerated.  In the first quarter of 2017, the balance of payments deficit increased significantly, fueled by a widening merchandise trade deficit and persistent capital outflows. The World Bank projects continued strong growth for the The Philippine peso weakened in June and once again crossed Philippines and expects the economy to expand at 6.8 the Php/US$50.00 mark. The peso closed at the end of June at percent in 2017. The slightly revised 2017 projection considers Php/US$50.47, which represents a 1.2 percent month-on- recent economic trends and compares with the 6.9 percent month depreciation compared to end-May. The weakening forecast released in the April edition of the World Bank was linked to the Federal Reserve’s mid-June decision to hike Philippine Economic Update. The forecast for 2018 remains interest rates and is in line with the reactions of most regional unchanged at 6.9 percent. Growth in the first quarter of 2017 currencies. On an annual basis, the peso has depreciated 7.1 was in line with the World Bank growth projection, given the percent from the Php/US$47.13 closing at end-June 2016. high base in the first quarter of 2016, when large election- During the first five months of the year exports registered related spending boosted growth. Consumption is anticipated double-digit growth. Exports continued their strong recovery to grow at a stable rate, supported by robust remittance flows. in 2017, expanding by 13.7 percent year-on-year in May, Global economic activity and trade are gradually improving compared to a 1.4 percent contraction in May 2016. This which is expected to boost demand for Philippine exports. growth was fueled by the continued rise of electronics exports, However, higher investment levels will be critical to sustain the which account for half of total goods exports. Meanwhile, economy’s growth momentum in the medium term, and t he imports grew in May at a slower rate, by 17.8 percent year-on- government’s ability to realize its infrastructure spending year, compared to the 46.2 percent growth in May 2016. agenda will determine if the Philippines can achieve the Imports were driven by strong capital goods imports, which growth target of 6.5-7.5 percent for 2017. increased in May by 20.1 percent year-on-year. After a brief rally in early June, the Philippine stock exchange Manufacturing activities expanded at a weaker pace in May. index (PSEi) flattened out by the end of the month. The PSEi Growth in the volume of production index (VoPI) softened in closed at the end of June at 7,843, slightly higher than the May to 5.8 percent year-on-year compared to 7.4 percent in 7,837 at the end of May. Following the US Federal Reserve’s May 2016, marking the slowest expansion since January 2016. decision to raise interest rates by 25 basis points for the This was largely due to weaker activities in the rubber, plastic second time this year, and the slump in global oil prices, it and chemical production. Nevertheless, the overall failed to sustain a brief rally in early June when it breached the performance of the manufacturing sector remains solid, 8,000 level. Nevertheless, the PSEi still improved for the fourth especially for the apparel and metal production. Signaling a consecutive month, due to strong foreign participation in the slight slowdown, the June Nikkei Philippines Manufacturing local stock exchange. Since January, the PSEi has expanded by Purchasing Managers’ index (PMI) slid to 53.9 from 54.3 in 14.7 percent, and is among the top performers in the Asia May. However, growth in new orders remained the key drivers Pacific region. Total net-foreign buying reached Php19.1 billion of growth. The average capacity utilization rate remained high in June, an increase of 31.5 percent year-on-year compared to in May at 83.8 percent (compared to 83.4 percent in May the Php14.5 billion net-foreign buying recorded in June 2016. 2016), with 11 of the 20 major industries operating at 80 percent and above capacity utilization. PHILIPPINES Monthly Economic Developments | July 2017 Figure 1: The World Bank broadly maintains the growth Figure 2: After a brief rally, the PSEi closed flat as of end-June. projections for the Philippines. Source: Philippine Statistics Authority (PSA) and World Bank staff estimates Source: Philippine Stock Exchange After peaking in April, headline and core inflation further Strong credit growth was sustained as domestic liquidity slowed during June. The 12-month Consumer Price Index continued to grow. Domestic liquidity (M3) continued to declined in June to 2.8 percent year-on-year from 3.1 percent expand in double-digits and expanded in May by 11.3 percent in May, and compared to its peak of 3.4 percent in April. Food year-on-year to Php9.6 trillion. This sustained the 11.2 percent inflation decelerated significantly to 3.5 percent year-on-year expansion from the previous month. Lending from commercial compared to 3.8 percent in May, and 4.0 percent when it banks, net of reverse repurchase, increased in May by 18.7 peaked in March. This was due to lower price increases for key percent year-on-year from 19.2 percent in April. On an annual food items such as fruits, vegetables, and oils and fats. Energy basis, firm loans grew by 17.6 percent compared to 18.4 prices also rose less following a downward adjustments in percent in April. They constitute nearly 90 percent of the total electricity charges and price reductions in petroleum products. loan portfolio and largely comprise loans to the real estate, Core inflation, which excludes volatile food and energy prices, manufacturing and wholesale & retail sectors. Although eased in June to 2.6 percent year-on-year from 2.9 percent in representing a smaller market segment, household loans May, compared to its peak of 3.0 percent in April. The year-to- continue to grow at an even faster rate: 23.6 percent year-on- date average headline inflation rate stood at 3.1 percent, year in May due to the rapid increase in motor vehicle and which is within the 2-4 percent central bank’s target range. The credit card loans. The banking system remained stable with central bank’s monetary board met on June 22 and decided to non-performing loans standing in May at around 2.0 percent maintain its key policy rate unchanged 3.0 percent. of the total loan portfolio and the latest available capital adequacy ratio of 15.6 percent. Figure 3: Exports expanded for the fifth consecutive month in Figure 4: Manufacturing activities expanded in May at a the double digits. weaker pace. Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | July 2017 Figure 5: Headline and core inflation further eased during Figure 6: The budget balance swung into deficit as spending June. significantly picked up in May. Source: PSA Source: Bureau of the Treasury In May, the government’s fiscal balance swung back into In the first quarter of 2017, the balance of payments (BOP) deficit as spending for infrastructure and operation & deficit increased significantly, fueled by a widening maintenance accelerated. Government expenditures reached merchandise trade deficit and persistent capital outflows. In Php261.7 billion in May, increasing in nominal terms by 20.4 the first three months of 2017, the current account registered percent year-on-year, similar to the 24.1 percent growth a deficit of US$318 million (or 0.4 percent of GDP), a reversal posted in May 2016. The rise in public spending was the result from the US$730 million surplus in the same period last year. of double-digit growth in several expenditure categories. This The current account deficit was driven by a surge in the included infrastructure spending which increased in nominal country’s merchandise trade deficit, as goods import growth terms by 31.4 percent year-on-year (compared to 47.1 percent outpaced goods export growth. The Philippines registered a in May 2016) due to higher spending on the rehabilitation and US$9.8 billion merchandise trade deficit in the first quarter of construction of roads, flood control projects, and military 2017, which was partially offset by the surplus in services trade equipment upgrades. Maintenance & operating expenditures of US$2.4 billion, and net receipts of US$7.1 billion from the increased in nominal terms by 34.0 percent year-on-year primary and secondary income accounts. In the first quarter of (compared to 53.1 percent in May 2016). At the same time, 2017, the BOP deficit increased to US$994 million, nearly five revenues increased in nominal terms by 14.3 percent year-on- times the US$210 million deficit of the first quarter of 2016. year (reaching Php228.3 billion) which represents a reversal The deficit was driven by net outflows from the financial from the 17.6 percent contraction in May 2016. This was account, which reached US$579 million as the result of US$3.2 largely due to an increase in non-tax revenues, as government- billion outflows in portfolio investments. This was partially owned and controlled corporations remitted their dividends to offset by foreign direct investment, which registered net the Bureau of the Treasury. Tax revenues grew in May by 8.6 inflows of US$1.1 billion and the other investment account percent year-on-year in nominal terms, but less than the 17.9 which registered net inflows of US$1.3 billion. percent expansion over the same period a year ago. While the Bureau of Internal Revenue failed to meet its collection target for the month, the Bureau of Customs increased its collection by 23.5 percent year-on-year. Overall, the fiscal deficit nearly doubled in May, to Php33.5 billion, compared to Php17.7 billion a year ago. 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 | July 2017