Philippines Monthly Economic Developments August 2017 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) posted solid gains in July, yet net foreign buying weakened. • The Philippine peso traded for most of July around the Php/US$50 level and reached its weakest level in over ten years. • In June, Philippine external trade slowed, with export growth moderating significantly and imports contracting. • Manufacturing activities continued to expand at a slower pace in June and average capacity utilization remained elevated. • Inflation picked up slightly to 2.8 percent in July. • Credit expansion remained uninterruptedly high, in line with growth in domestic liquidity. • The government’s fiscal balance widened in the first six months of 2017 as expenditure growth picked up in the second quarter of the year. • The government submitted its proposed 2018 national budget to Congress, with expenditure priorities broadly in line with the previous year’s budget. The Philippine Stock Exchange index (PSEi) posted solid gains total exports. Exports of wood manufactures, garments, and in July, yet net foreign buying weakened. In the first seven processed food and beverages contracted. At the same time, months of 2017, the PSEi has increased by 17.2 percent, in line electronic goods exports, which make up about half of the with top performing major stock indexes in the Asia-Pacific total export bill, increased by 4.4 percent year-on-year. region. In July, the PSEi improved by 2.2 percent month-on- Especially semi-conductors and electronic products for data month and closed at 8,018, its highest level so far in 2017. The processing grew at healthy rates. Meanwhile, imports shrank PSEi also grew on a yearly basis (0.7 percent), but foreign by 2.5 percent year-on-year, compared to robust growth in participation weakened significantly. In July, total net-foreign May at 17.8 percent. The contraction was a result of the buying decreased to Php1.9 billion, compared to Php19.1 decline in the imports of capital goods, and raw materials and billion in May and Php19.6 billion registered a year ago, when intermediate goods, which shrank by 3.5 percent and 6.9 the PSEi came close to the 2015 record high of 8,127. percent year-on-year, respectively. On the other hand, consumer goods imports continued to grow, but growth The Philippine peso traded for most of July around the slightly moderated in June to 7.0 percent year-on-year from Php/US$50.00 level and reached its weakest level in over ten 8.3 percent in May. years. It closed the month at Php/US$50.58, marking a 0.2 percent month-on-month depreciation compared to June. This Manufacturing activities continued to expand at a slower also represented a marked 7.4 percent year-on-year pace in June and average capacity utilization remained depreciation. The central bank reportedly intervened during elevated. The volume of production index (VoPI) for July to temper excessive volatility in the foreign exchange manufacturing grew in June by 8.1 percent year-on-year, market. As a result, the gross international reserves slipped to slower than the revised 9.8 percent growth in May. Production US$80.8 billion in July from US$81.3 billion in June (compared activities in most sectors remained robust and exceptionally to US$85.5 billion in July 2016). International reserves cover strong for the footwear and apparel sector, and for metal 8.6 months’ worth of goods imports and payments of services production which expanded annually at 340.4 percent and and primary income. It is also equivalent to 5.5 times the 154.2 percent, respectively. Factory output for chemical country’s short term external debt based on original maturity, production, and for rubber and plastic production, however, and 3.7 times based on residual maturity. was weaker and declined. Signaling a potential slowdown, the July Nikkei Philippines Manufacturing Purchasing Managers’ In June, Philippine external trade slowed, with export growth index (PMI) slid further to 52.8, compared to 53.9 in June and moderating significantly and imports contracting. Exports 54.3 two months earlier. Nonetheless, the July PMI stayed in grew at its slowest pace in 2017, expanding by 0.8 percent expansionary territory with solid reports on output and new year-on-year. This marks a notable reduction from the 13.7 orders. At the same time, average capacity utilization percent growth reported in May. The moderation in export remained elevated in July at 83.8 percent, amplifying the need growth was a result of the stagnation in growth of exports of to invest into new capacity in the manufacturing sector. manufactured goods, which accounted for 85.9 percent of PHILIPPINES Monthly Economic Developments | August 2017 Figure 1: The PSEi posted solid gains throughout July. Figure 2: The Philippine peso hovered around Php/US$50 and reached its weakest level in over ten years. Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) policy horizon. With this signal it is likely that it will maintain the key policy rate at 3.0 percent in the near term. Inflation picked up slightly to 2.8 percent in July. The 12- month Consumer Price Index rose marginally compared to the Credit expansion remained uninterruptedly high, in line with downward-revised 2.7 percent in June (previously 2.8 growth in domestic liquidity. Domestic liquidity (M3) growth percent). The uptick in the CPI inflation was brought about by accelerated further in June to 13.2 percent year-on-year, higher prices in the transport sector. Here price increases for compared to 11.3 percent in May. Credit expansion is the domestic petroleum products and fare adjustments for the principal driver of growth in money supply as loans of Philippine National Railways drove up inflation. At the same commercial banks, net of reverse repurchase placements time, food inflation continued its deceleration and slowed in (RRPs), grew in June by 20.0 percent year-on-year from 18.7 July to 3.3 percent year-on-year from 3.5 percent in June, and percent in May. Loans to firms dominate the banks’ loan compared to its peak of 4.0 percent in March. This was due to portfolio and constitute net of RRPs 88.5 percent of the slower price rises for key food items such as meats, oils and aggregate loan portfolio and were primarily driven by real fats, and fruits and vegetables. In the first seven months of the estate activities, manufacturing, and wholesale and retail year, headline inflation averaged 3.1 percent while core trade. Household loans continued to grow at around 18 inflation averaged 2.7 percent, remaining within the central percent year-on-year. The banking system remains stable with bank’s 2-4 percent target range. In early August, the central a registered annual asset growth of 13.4 percent, funded by bank issued a statement on the medium-term inflation path, sustained inflows of deposits. Banks maintained a strong citing a manageable inflation outlook over the near-term capital adequacy ratio of 15.4 percent. Figure 3: Imports contracted and exports posted its lowest Figure 4: Manufacturing activities expanded at a slower pace growth so far in 2017. in June. Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | August 2017 Figure 5: Headline inflation rose slightly in July. Figure 6: The fiscal deficit widened in the first six months of 2017 as spending picked up. Source: PSA Source: Bureau of the Treasury The government’s fiscal balance widened in the first six for 18.3 percent of the total budget, the largest among all months of 2017 as expenditure growth picked up in the sectors. Meanwhile, the government’s infrastructure program second quarter of the year. In the first half of 2017, revenues is proposed to expand in 2018 by 27.8 percent year-on-year, improved by 6.8 percent year-on-year in nominal terms, increasing to Php1.1 trillion (estimated at 6.3 percent of GDP) compared to 1.4 percent a year ago, reaching PHP1.1 trillion. from Php858.1 trillion (estimated at 5.3 percent of GDP) in Tax revenue growth stood at 8.8 percent year-on-year in 2017. Deliberations by the House Committee on nominal terms, slightly lower compared to 10.1 percent in the Appropriations on the proposed 2018 national budget began same period of 2016. Both the Bureau of Internal Revenue and on August 1, 2017, and are expected to last until late August. the Bureau of Customs narrowly missed their collection targets The House of Representatives is targeting to send its approved in the first six months of this year. Meanwhile, government version of the budget, the General Appropriations Act, to the expenditures soared to PHP1.2 trillion, increasing in nominal Senate of the Philippines by September 21, 2017 to conduct its terms by 9.0 percent year-on-year in the first half of 2017, own set of deliberations. compared to 13.9 percent a year ago. Recurrent cost, The Asia-Pacific Group (APG) on Money Laundering removed specifically salary and pension spending, and the expansion in the Philippines from its watch list of vulnerable jurisdictions. capital outlays drove this growth in equal parts. While In July, the Philippines was removed from the APG’s list of personnel cost expanded by 13.1 percent, capital outlays rose jurisdictions needing further evaluation, citing the country’s by 12.3 percent year-on-year in nominal terms. As a result, the significant progress in addressing gaps in legislation and fiscal gap increased in the first half of 2017 by 28.4 percent regulation in curbing money laundering. The APG year-on-year in nominal terms, reaching Php154.5 billion. This acknowledged the passing of Republic Act No. 10927 on July gap was financed primarily through domestic sources with net 14, 2017, which requires all casinos to report daily transactions domestic financing increasing by more than three times in size of at least Php5 million to the Anti-Money Laundering Council. compared to the same period in 2017. As a result, the Philippines avoided to be included in the APG’s The government submitted its proposed 2018 national black list of countries, which would carry penalties on the budget to Congress, with expenditure priorities broadly in country’s financial transactions. line with the previous year’s budget. The President submitted the proposed Php3.77 trillion national budget, equivalent to 21.6 percent of GDP, after the President’s second State of the Nation Address on July 24, 2017. The 2018 national budget represents a 12.4 percent increase over the Php3.35 trillion budget for 2017 and will continue the government’s focus on increasing investment in human capital accumulation and infrastructure. The budget for the education sector accounted Please contact Birgit Hansl: bhansl@worldbank.org PHILIPPINES Monthly Economic Developments | August 2017 Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of Kevin Chua, Kevin Thomas Cruz and Griselda Santos.