Philippines Monthly Economic Developments September 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The Philippines Stock Exchange index (PSEi) slightly weakened in August. • The Philippine peso rebounded in early September after a volatile performance in August. • The strong export recovery continued in July while imports contracted for the second consecutive month. • Manufacturing activities contracted in July for the first time in two years. • Higher food and energy prices pushed inflation back up to 3.1 percent in August. • Credit growth expanded in July with double-digit growth for both business and household loans. • The government fiscal deficit moderated in July compared to June because revenue growth accelerated. • In July, the unemployment rate increased marginally, while underemployment improved amidst a decline in labor force participation. The Philippines Stock Exchange index (PSEi) slightly manufactured goods exports which expanded by 8.7 percent weakened in August. The PSEi contracted by 0.7 percent year-on-year and accounted for nearly ninety percent of total month-on month, closing at 7,958 in August which was largely exports. In particular, electronic goods, which made up half of the result of seasonal factors. However, this represents a 2.2. total exports, grew by 11.9 percent year-on-year, with semi- percent improvement on an annual basis, and by end-August conductor exports expanding at 13.4 percent. Meanwhile, the PSEi has expanded by 16.3 percent since January which is imports declined at a faster rate of 3.2 percent year-on-year, comparable to the top performing major stock indices in the compared to the 2.5 percent contraction in June. However, the region. That was partly due to the return of brisk net foreign contraction was of the wrong kind, i.e. due to the decline of buying. In August, it increased to Php2.5 billion from Php1.9 imports of capital goods (11.5 percent, year-on-year) and raw billion in July, a welcome reversal from the Php2.1 billion net- materials and intermediate goods (8.2 percent, year-on-year). foreign selling registered a year ago. At the same time, imports of consumer goods accelerated further in July, expanding by 10.7 percent year-on-year The Philippine peso rebounded in early September after a compared to the 7.0 percent growth registered in June. volatile performance in August. The peso closed at Php/US$51.17 in end-August, marking a 9.7 percent year-on- Manufacturing activities contracted in July for the first time year depreciation from the closing in August 2016, and a 1.2 in two years. The volume of production index (VoPI) for percent month-on-month depreciation from July. The foreign manufacturing shrank for the first time after registering 24 exchange market remained volatile, trading in the range of months of consecutive growth since June 2015. The VoPI Php/US$50.26-51.46. In the first week of September, the peso declined by 1.1 percent year-on-year in July compared to 12.1 rebounded back to the Php/US$50.00 level mainly due to percent growth in July 2016. In all, the manufacturing sector dampened sentiments vis-a-vis the US dollar and more muted has been shedding growth momentum since January 2017. In expectations of a new U.S. rate hike. Gross international July, there was a marked slowdown in factory activities in the reserves (GIR) edged up in August to US$81.5 billion from chemical, rubber and plastic, and textile industries. Production US$81.1 billion in July, but were reportedly lower than the for footwear and wearing apparel, and fabricated metals US$85.8 billion in August last year. The change was due to remained relatively strong. Meanwhile, the Nikkei Philippines higher international gold prices and inflows from central Manufacturing Purchasing Managers’ Index (PMI) dropped bank’s investments abroad. At its current rate, the GIR covers significantly to 50.6 in August from 52.8 in July, signaling that 8.7 months’ worth of imports of goods and payment s of factory output expansion is still likely albeit at a slower pace. services and primary income. The August decline is attributed to weaker sales to domestic and foreign consumers, coupled with a decline in new exports The strong export recovery continued in July while imports orders. The average capacity utilization rate marginally eased contracted for the second consecutive month. Exports grew to 83.7 percent in July from 83.8 percent in June, with 12 of 20 by double digits for the sixth time in 2017, increasing by 10.4 major industries operating at 80 percent and above capacity. percent year-on-year in July compared to the 0.8 percent growth registered in June. Export growth was driven by PHILIPPINES Monthly Economic Developments | September 2017 Figure 1: The peso rebounded in early September. Figure 2: Exports maintained their recovery while imports contracted for the second consecutive month. Source: Philippine Statistics Authority (PSA) Source: PSA Higher food and energy prices pushed inflation back up to 3.1 Credit growth expanded in July with double-digit growth for percent in August. The 12-month Consumer Price Index rose both business and household loans. Domestic liquidity (M3) again to 3.1 percent year-on-year in August from 2.8 percent grew by 13.5 percent year-on-year to about Php10.0 trillion in in July, moving back towards its peak of 3.4 percent in April. July, higher than the revised 13.3 percent expansion in the The main inflation driver was food inflation. Food prices grew previous month. Demand for credit remained the principal by 3.7 percent due to faster price increases in fish, and fruits driver of money supply growth. Outstanding loans of and vegetables as a result of tight domestic supply caused by commercial banks grew by 19.7 percent year-on-year in July a series of typhoons that hit the country during the previous compared to 17.7 percent in July 2016. Bank lending to month. In addition, a combination of electricity rate households increased by 22.3 percent due to the sustained adjustments and higher prices for domestic petroleum demand in auto loans, credit card loans and salary-based products contributed to higher energy inflation. Core inflation general purpose loans. Meanwhile, lending to businesses rose to 3.0 percent in August from a revised 2.8 percent in July, expanded by 18.9 percent, driven by credit to real estate moving again closer to its peak of 3.0 percent in April. The year- activities, wholesale and retail trade, and manufacturing. The to-date average inflation stood at 3.1 percent, falling within banking system remains stable with a non-performing loans the government target range of 2-4 percent. The central bank’s ratio of 2.0 percent in July (compared to 2.2 percent a year monetary board maintained its key policy rate at 3.0 percent ago). The capital adequacy ratio of 15.3 percent for the whole during its most recent meeting on August 10. banking system remains above the minimum ratio of capital to risk weight assets of 10.5 percent under Basel III. Figure 3: Factory output contracted for the first time in two Figure 4: Headline and core inflation rose again in August. years. Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | September 2017 Figure 5: The government fiscal deficit moderated in July. Figure 6: Consumer and business confidence remain in positive territory. Source: Bureau of the Treasury Source: Bangko Sentral ng Pilipinas (BSP) The government fiscal deficit moderated in July compared to In July, the unemployment rate increased marginally, while June because revenue growth accelerated. Government underemployment improved amidst a decline in labor force expenditures reached Php245.0 billion in July, expanding in participation. The unemployment rate slightly increased to 5.6 nominal terms by 11.0 percent year-on-year, more than percent year-on-year in July, from 5.4 percent a year ago, as double the 4.9 percent growth in July 2016. This represents the the country registered an estimated 0.8 million in net job third consecutive month of double-digit growth in spending, losses. Net job losses occurred in both the agriculture and making up for the slow start in the first four months of 2017. services sectors, with an estimated 1.1 million job losses in Recurrent expenditures and the public infrastructure program July. The industry sector, on the other hand, registered net job fueled this growth in expenditures in July. In particular, creation of around 0.4 million. Meanwhile, the maintenance and operating expenses expanded by 41.1 underemployment rate declined to 16.3 percent in July percent year-on-year, personnel costs by 25.8 percent, and compared to 17.3 percent a year ago. The decline in both infrastructure and other capital outlays by 25.0 percent. employment and underemployment coincided with the exit of Meanwhile, government revenues reached Php195.0 billion in around 0.8 million individuals from the labor force, as the labor July 2017, expanding by 14.3 percent year-on-year in nominal force participation rate declined sharply to 60.6 percent in July terms, reversing the 4.6 percent contraction registered a year compared to 63.3 percent a year ago. ago. Revenue growth was due to the rapid acceleration of tax Consumer and business confidence moderated in the third revenue, which grew by 16.4 percent year-on-year in nominal quarter of 2017, but remained in positive territory. Based on terms. Tax revenues received a boost from the initial Php3.4 the Bangko Sentral ng Pilipinas consumer expectation survey, billion tax settlement paid by Mighty Corporation for penalties the overall consumer confidence index weakened to 10.2 from various tax evasion cases. However, the accelerated percent in the third quarter of 2017 compared to 13.1 percent revenue growth could not outbalance the continued growth in in the second quarter on growing concerns over increasing expenditure. As a result, the fiscal deficit stood at Php50.5 inflation and unemployment, and lack of income rises. billion in July, similar to the Php50.7 billion budget gap a year However, this remains the second highest level of recorded ago, but lower than the June fiscal deficit (Php154.5 billion). consumer confidence since the survey started in 2007. Based The government continued to finance its budget gap through on the business expectations survey, business confidence domestic sources, as net-domestic financing increased by 44.0 declined to 37.9 percent in the third quarter of 2017 compared percent year-on-year. to 43.0 percent a quarter ago due to the weaker peso, and higher inflation and geopolitical tension. 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 | September 2017