Philippines Monthly Economic Developments February 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  In 2016, the economy grew by 6.8 percent driven by accelerating capital formation and robust consumption.  Manufacturing activities remained strong during 2016, but the Manufacturing Purchasing Managers’ Index started to retreat.  The Philippine stock exchange index recovered in January as the market gained confidence.  The Philippine peso stabilized in January following a four-month period of volatile foreign exchange markets.  The 12-month average Consumer Price Index picked up further in January, to its highest level in over two years.  The government’s debt-to-GDP ratio decreased to 42.1 percent in 2016, continuing its downward trend over the past six years.  The government’s first package of tax reforms was submitted to Congress on January 18, 2017 . In 2016, the economy grew by 6.8 percent, driven by in food and petroleum production, as well as machinery and accelerating capital formation and robust consumption. transport equipment manufacturing. However, the Nikkei Investment growth became the biggest contributor to growth ASEAN Manufacturing Purchasing Managers’ Index (PMI) for with capital formation expanding by 20.8 percent year-on-year the Philippines dropped to 52.7 in January from 55.7 in in 2016 compared to 15.1 percent in 2015. This was partly December, registering its fourth consecutive month of decline. fueled by the purchase of durable equipment by firms to While the PMI is still in expansion territory, this is signaling a enhance efficiency and increase production capacity, but also slowdown on the growth momentum in manufacturing. by the new public infrastructure push which led to vigorous Meanwhile, the average capacity utilization rate inched activities in the construction sector. Private consumption further up to 83.9 in December, from 83.5 in the same month growth remained strong given low inflation which boosted a year ago. This has been the tenth consecutive month of household’s purchasing power. Growing consumption was increase in capacity utilization since February 2016 and traces also supported by robust remittance inflows and low interest a rising trend that goes back to 2015, underlining the need for rates that supported a double-digit expansion in consumer continued investment to sustain medium-term growth. lending. 2016 saw overall very high consumer optimism, based The Philippine stock exchange index recovered in January as on a healthy job market and strong public assistant programs. the market gained confidence. The Philippine Stock Exchange As a result, consumption growth accelerated to 6.9 percent index (PSEi) rebounded to 7,229 in the first month of 2017, year-on-year in 2016 from 6.3 percent in 2015. However, net growing by 5.7 percent month-on-month from 6,841 in exports have been a drag on growth because a weaker-than- December. Following the market adjustment to the US Federal expected global recovery led to soft external demand. Export Reserve interest rate hike in late 2016, confidence was growth has softened as demand for electronics components, restored, supported with the release of the 2016 economic the country’s main export commodity, expanded by just 7.1 growth numbers which came in within market expectation. In percent year-on-year from 20.1 percent in 2015. While the the first eight trading sessions of the year, net foreign buying country’s exports grew 9.1 percent year-on-year in 2016, reached Php2.6 billion, but this rally was not sustained. imports grew even faster at 17.5 percent. Faster import Nevertheless, during the entire month of January, net-foreign growth was fueled by the importation of capital goods which buying reached Php272.8 million, reversing five consecutive supported the investment growth, and intermediate goods months of net-foreign selling. which are assembled for exports. The Philippine peso stabilized in January following a four- Manufacturing activities remained strong during 2016, but month period of volatile foreign exchange markets. The peso the Manufacturing Purchasing Managers’ Index started to closed on January 31 at Php/US$49.81, the same closing rate retreat. The volume of production index (VoPI) in as in end-December. The exchange rate averaged in January manufacturing grew 23.0 percent year-on-year in December Php/US$49.74 which constitutes a 0.2 percent appreciation in from 5.0 percent in December 2015, reflecting robust factory nominal terms against the December average. activities that have been sustained since mid-2015. The good December performance resulted from the healthy expansion PHILIPPINES Monthly Economic Developments | February 2017 Figure 1: Investment growth drove the Philippines expansion in Figure 2: Manufacturing activities continued to grow in 2016. December. Source: Philippine Statistics Authority (PSA) Source: PSA In December 2016, exports rebounded after a deep The 12-month average Consumer Price Index picked up contraction in November. Exports expanded by 4.5 percent, further in January, to its highest level in over two years. compared to a decrease of 7.5 percent year-on-year in Headline inflation continued to accelerate, reaching 2.7 November. This recovery was led by higher exports of agro- percent year-on-year in January compared to 1.3 percent in based products, mineral products and metal components. January 2016. Nevertheless, core inflation was steady at 2.5 However, electronics products, the country’s largest export percent year-on-year. Headline inflation continued to be commodity, contracted in December by 2.8 percent year-on- driven by food inflation, although it was slightly retreating to year. Meanwhile, import growth accelerated by 19.1 percent 3.4 percent year-on-year in January 2017 from 3.6 percent in year-on-year in December. As a sign of buoyant domestic December 2016. At the same time, the increase in global crude demand, capital goods imports increased by 36.9 percent year- oil prices led to utilities and fuel prices to pick up, rising to 1.8 on-year, while consumer goods imports increased by 13.2 percent year-on-year from 1.3 percent in December. Despite percent year-on-year in December. the uptick in inflation, the Bangko Sentral ng Pilipinas left the key policy rate unchanged at 3.0 percent during its Monetary Board meeting on February 9. Figure 3: The Philippines stock market gained confidence and Figure 4: Exports rebounded after a deep contraction in recovered in January. November. Dec-16 Oct-16 Aug-16 In percent Jun-16 Apr-16 Feb-16 Dec-15 -40 -30 -20 -10 0 10 20 30 40 Exports Imports Source: Philippine Stock Exchange Source: PSA PHILIPPINES Monthly Economic Developments | February 2017 Figure 5: CPI inflation rate further picked up in January. Figure 6: The government’s debt-to-GDP ratio continued its downward trend. Source: PSA Source: Bureau of the Treasury Credit growth continued to expand in double-digits in external debt moderated to 4.1 percent in 2016 from 8.1 December while the quality of the banking loan portfolio percent growth in 2015, leading to a total external debt stock remained stable. Overall commercial bank lending grew at of Php2.2 trillion. 17.2 percent year-on-year in December from 13.6 percent The government’s first package of tax reforms was submitted recorded a year ago. Household credit increased by 22.8 to Congress on January 18, 2017. The first tax reform package percent year-on-year, compared to 15.1 percent in December entitled Tax Reform for Acceleration and Inclusion (TRAIN) or 2015, driven by a more than 50 percent increase in salary- House Bill (HB) 4774 aims to redesign the current tax system based loans. Firm credit grew by 16.8 percent year-on-year in to be fairer and simpler, while raising more resources to December compared to 13.7 percent in December 2015, with increase investments in infrastructure and human capital. The lending largely going to the ITC sector and real estate activities. package includes reforms to simplify and lower income tax Non-performing loans as a share of the total loan portfolio for rates and to lower the rates for estate and donor’s taxes. To the entire banking system declined to 1.9 percent year-on-year offset related revenue losses, the government plans to expand in December from 2.1 percent in December 2015. The banking the Value Added Tax base by limiting exemptions and system remains well-capitalized with a capital adequacy ratio increasing excise taxes on fuel and automobiles. In addition, at 15.6 percent as of September 2016. the government is proposing a number of tax administration The government’s debt-to-GDP ratio decreased to 42.1 reform measures to complement the changes in tax policy. The percent in 2016, continuing its downward trend over the past government estimates that revenue from the first tax reform six years. As of end-2016, the government’s debt stock settled package could reach Php206.8 billion in the first year of at Php6.1 trillion, equivalent to 42.1 percent of GDP, compared implementation, of which Php162.5 billion would come from to 44.7 percent in 2015. This trend is in part due to tax policy reforms while Php44.3 billion from reforms in tax government’s prudent fiscal and debt management policies, administration. and the fast pace of economic growth. Domestic debt, which accounts for nearly two-thirds of the government’s debt stock, increased in 2016 by 1.3 percent compared to an expansion of 1.7 percent in the previous year. Meanwhile, the growth of 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 | February 2017