Philippines Monthly Economic Developments August 2020 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a The Philippine economy plunged into a recession as private consumption and investment contracted sharply in the first half of 2020 as a result of the COVID-19 pandemic and quarantine measures. Monetary policy remained supportive of growth while public spending further accelerated in June. There were emerging signs of improvement in economic activities in June with smaller contractions in the manufacturing sector and merchandise trade. The Philippine economy entered into a recession, following The manufacturing sector showed gradual improvement in two quarters of negative growth in the first half of 2020. The June as quarantine restrictions were loosened and demand economy contracted by 16.5 percent year-on-year (yoy) in Q2 conditions improved. The manufacturing’s volume of 2020 (-0.7 percent in Q1 2020) due to the impact of COVID-19 production index contracted by -19.3 percent yoy in June, an pandemic and stringent measures to contain it. The improvement from the -28.5 percent contraction in May, as implementation of the nearly three-month long Enhanced more industries opened up with the relaxation of quarantine Community Quarantine (ECQ) throughout Luzon put an abrupt restrictions. In addition, the sector benefitted from improved halt to most economic activity. Private consumption fell by demand conditions driven by a slower contraction in new 15.5 percent yoy in Q2 2020 (0.2 percent growth in Q1), as a orders and new export orders, signaling gradual recovery in result of record-high unemployment, declining remittances both domestic and external demand. As a result, the average from overseas Filipinos, and negative consumer confidence. In capacity utilization rate inched up to 73.0 percent in June from addition, fixed investment spending declined by nearly 40 72.4 percent in May despite the muted expansion of the percent yoy in Q2 2020 (-4.4 percent in Q1) as private sector’s workforce to practice social distancing. However, the investment was delayed amid a loss in business confidence recovery in manufacturing may be short lived, as the IHS while public investments fell as resources were shifted away Markit Purchasing Managers’ Index for the Philippines shrank from capital outlays towards government’s COVID -19 to 48.4 in July, from 49.7 in June. response measures. Meanwhile, both exports and imports Goods trade activities sustained gradual recovery in June. The faced record-high contractions, by -37 percent and -40 percent value of imported goods contracted by 24.5 percent, yoy in yoy, respectively, as global trade activity slumped. As a result, June, which was less severe than the 40.6 percent decline in government consumption was the main growth driver in Q2 May. Smaller annual contractions were registered in capital 2020 growing at 22.1 percent yoy (7.0 percent in Q1), as goods (-28.4 percent in June from -37.7 percent in May), and government ramped up support to strengthen its health raw materials and intermediate goods (-10.7 percent in June system and to deliver social safety measures to affected from -31.3 percent in May) which covered 75.5 percent of total households and firms to mitigate the negative impact of the imports. The value of export goods contracted by -13.3 percent COVID-19 pandemic. yoy in June from -35.6 percent in May, attributed to the Figure 1: The Philippines registered its sharpest GDP Figure 2: The manufacturing sector continued its gradual contraction in its post-war history in Q2 2020. improvement in June. Demand side: Contribution to GDP growth 30.0 VoPI 100 20 VaPI Capacity Utilization (in percentage) 95 20.0 Average Capacity Utilization Rate 90 10.0 0 85 0.0 80 Percentage point -10.0 75 In percentage -20 70 -20.0 65 -40 -30.0 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 -40.0 55 2017 2018 2019 2020 -50.0 50 Net exports Discrepancy Feb-20 Dec-19 Apr-20 Jun-19 Aug-19 Oct-19 Jun-20 Investments Government Consumption Household Final Consumption Expenditure GDP Growth Source: Philippine Statistics Authority (PSA) Source: PSA q PHILIPPINES Monthly Economic Developments | August 2020 country’s top export, electronic products export that Domestic liquidity growth eased and bank lending slowed in registered steady increase from May to June. Other top June. Domestic liquidity (M3) grew by 14.9 percent, yoy, to exports products, except for machinery and transport about Php13.6 trillion in June, slower than the 16.7 percent equipment, gold, and banana, likewise recorded increases (revised) expansion in May. Demand for credit remained the from the previous month. Goods trade deficit of US$1.3 billion principal driver of money supply growth. Outstanding loans of in June is similar to the deficit logged in May but significantly universal and commercial banks, net of reverse repurchase lower than the US$2.6 billion deficit in June 2019. placements (RRP), expanded by 9.6 percent in June, slower than the 11.3 percent growth in May. Loans for production The Philippine Stock Exchange (PSE) index weakened in July. activities also decelerated to 8.3 percent in June from 9.8 PSE index dropped to 5,928 in end-July or 4.5 percent lower percent in the previous month, driven by lending to real estate than the closing of 6,207 in June. Throughout much of July, the activities, financial and insurance activities, and information stock market maintained at a steady 6,000 level before and communication. Meanwhile, growth in loans for dropping below that level in the last week of July as investor household consumption also eased due to the slower worries reignited over an unclear pandemic plan and the expansion in credit card, motor vehicle, and salary-based possible reversion of Metro Manila to modified ECQ as local general consumption loans during the month. COVID-19 cases accelerated. Moreover, disappointing economic data from the U.S. including the high jobless claims The fiscal balance swung into a sharp deficit in the second and lower treasury yields have stoked pessimism in the quarter of 2020, as the government accelerated spending regional market including the local stock exchange. amid an erosion in its revenue base. Public expenditures reached 28.1 percent of GDP in Q2 2020 from 16.7 percent a Inflation accelerated in July as transport costs rose. The year ago, driven by the nearly 40 percent increase in recurrent Consumer Price Index (CPI) inflation inched up to 2.7 percent, spending, as the government shifted resources towards its yoy, in July from 2.5 percent June. This brings year-to-date COVID-19 response efforts. MOOE spending, subsidies to inflation to 2.5 percent, well within the 2-4 percent target government owned and controlled corporations, and transfers range of the BSP. Limited public transport services amid the to local government units rose substantially, as funds were community quarantine measures and higher domestic fuel realigned in accordance with the Bayanihan to Heal as One Act. prices driven by increasing global crude prices pushed the Meanwhile, public revenues declined to 16.6 percent of GDP transport inflation to 6.3 percent, yoy, in July from 2.4 percent in Q2 2020 from 17.7 a year ago, as tax revenues shrank by 1.4 in June. Alcohol and tobacco products sustained double-digit percent of GDP amid the pandemic. As a result, the inflation while the heavily weighted food and non-alcoholic government registered a -11.4 percent of GDP deficit in Q2 beverages inflation moderated in June due to smaller 2020, a sharp reversal from the 1.0 percent surplus a year ago. increases in the prices of fruits, vegetables, and fish. Excluding Year-to-date budget deficit reached Php560.4 billion the volatile food and energy items, core inflation climbed to (approximately 6.4 percent of GDP), significantly higher than 3.3 percent, yoy, in July, from 3.0 percent in June. the 0.5 percent deficit a year ago. Figure 3: The stock exchange index weakened in July. Figure 4: Inflation accelerated in July as transport prices rose. 12 9,500 45 10 9,000 40 35 8 8,500 In percent 8,000 30 6 25 7,500 4 20 PHP billion 7,000 2 Index 15 6,500 0 10 6,000 5 -2 5,500 - 5,000 Net Foreign Buy (RHS) PSEi (close) (5) 4,500 (10) Core Inflation Headline Inflation Food & Non-alcoholic beverage BSP Key policy rate Source: Philippine Stock Exchange Source: PSA PHILIPPINES Monthly Economic Developments | August 2020 Developments to Watch • COVID-19: How long will the modified Extended Community Quarantine last in Metro Manila? • Manufacturing and Trade: will the gradual recovery continue? • Domestic Liquidity and Credit: Will credit growth further slow down in the coming months? Selected Economic and Financial Indicators 2018 2019 Q1 2020 Q2 2020 May-20 Jun-20 Jul-20 In percent, unless otherwise indicated Real GDP growth, at constant market prices 6.3 6.0 -0.7 -16.5 Private consumption 5.8 5.9 0.2 -15.5 Government consumption 13.4 9.6 7.0 22.1 Capital formation 11.3 2.5 -17.4 -53.5 Exports, goods and services 11.8 2.4 -4.4 -37.0 Imports, goods and services 14.6 1.8 -8.7 -40.0 Industry Performance Value of Production Index (growth rate) 8.2 -6.9 1.3 -28.9 -28.5 -19.3 Volume of Production Index (growth rate) 7.9 -8.4 -3.7 -31.6 -31.2 -22.5 Capacity Utilization 84.2 84.4 81.3 71.9 72.4 73.0 Nikkei Philippines Purchasing Managers' Index 52.5 51.8 48.0 40.5 40.1 49.7 48.4 Monetary and Banking sector Headline Consumer Price Index (growth rate) 5.2 2.5 2.7 2.3 2.1 2.5 2.7 Core Consumer Price Index (growth rate) 4.1 3.3 3.2 2.9 2.9 3.0 3.3 Domestic liquidity (M3) (growth rate) 11.6 7.6 12.1 16.0 16.7 14.9 Credit growth (universal and commercial banks loans to residents) 18.3 11.5 12.3 11.5 11.6 9.9 Business loans 18.4 10.7 9.9 9.8 9.8 8.3 Consumer loans 17.3 20.3 38.1 30.0 30.2 26.7 Fiscal sector Fiscal balance (% of GDP) -3.2 -3.5 -1.9 -11.4 -202.1 1.8 Total Revenue (% of GDP) 16.4 16.9 17.2 16.6 151.5 351.0 Tax Revenue (% of GDP) 14.7 15.2 14.0 14.3 145.2 325.4 Total Expenditure (% of GDP) 19.6 20.4 19.1 28.1 353.6 349.2 National government debt (% of GDP) 41.9 41.5 43.4 48.1 8,890.7 9,054.1 Stock market PSEi (month-end value) 7,466.0 7,815.0 5,321.2 6,207.7 5,838.8 6,207.7 5,928.5 External accounts Current account balance (% of GDP, in million US$ for monthly data) -2.5 -0.1 0.1 Exports of goods (growth rate) 0.9 2.3 -5.1 -29.5 -26.9 -13.3 Imports of goods (growth rate) 17.4 -1.1 -13.6 -43.8 -40.6 -24.5 Net foreign direct investment (in million US$) 9,948.6 7,647.5 1,668.9 Balance of payment (% of GDP, in million US$ for monthly data) -0.7 2.1 -0.1 5.1 2,431.0 80.0 International reserves (in million US$) 79,193.4 87,839.5 88,861.5 93,469.9 93,288.1 93,469.9 Import cover (months) 6.9 7.7 7.9 8.5 8.4 8.5 Nominal exchange rate (Php/US$1) 52.7 51.8 50.8 50.5 50.6 50.1 49.5 Labor Market Unemployment rate 5.3 5.1 5.3 Underemployment rate 16.4 14.0 14.8 Sentiments Consumer confidence index (end of period) -22.5 1.3 1.3 Business confidence index (end of period) 27.2 40.2 22.3 Prepared by a World Bank team consisting of Rong Qian, Kevin Chua, Kevin Thomas Cruz, Karen Lazaro, Jiyoung Song and Isaku Endo, PHILIPPINES Monthly Economic Developments | August 2020 under the guidance of Lars Moller. Contact Rong Qian (rqian@worldbank.org) for questions.