Philippines Monthly Economic Developments February 2018 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • Recent volatility in the US stock market rippled through global markets, impacting also the Philippine stock exchange in the first two weeks of February. • The Philippine peso came under renewed pressure in January. • The Philippine economy expanded by 6.7 percent year-on-year in 2017, fueled by improving external demand. • The balance of payments registered a higher deficit in 2017. • Manufacturing activities continued to contract in December and the Purchasing Managers’ Index dropped sharply in January. • Headline inflation surged, hitting the ceiling of the central bank’s inflation target range in January. • Domestic liquidity and credit growth moderated in December. Recent volatility in the US stock market rippled through the The Philippine economy expanded in 2017 by 6.7 percent global markets, impacting also the Philippine stock exchange year-on-year, fueled by improving external demand. The in the first two weeks of February. After reaching an all-time Philippine economy benefitted from strong global growth, high of 9,058 on January 29, the Philippines Stock Exchange with exports expanding by 19.2 percent year-on-year in 2017, index (PSEi) suffered its biggest single-day drop in more than a nearly doubling the 10.7 percent export growth in 2016. year (by 2.2 percent) on February 5 to 8,611. The PSEi tracked Meanwhile, import growth slowed in 2017, to 10.2 percent the decline in global equity markets as investors weighed the year-on-year, from 18.4 percent growth in 2016. On the impact of a potentially faster pace of the US Federal Reserve’s domestic demand side, private consumption moderated to 5.8 policy rate normalization. As a result, the PSEi experienced net- percent year-on-year growth in 2017, compared to 7.0 percent selling amounting to Php7.0 billion in the first two weeks of in 2016. Rising inflation, weaker consumer sentiments, and a February, which more than reversed the Php2.2 billion net- slightly higher unemployment rate contributed to this foreign buying registered in January. The PSEi closed at 8,487 moderation. In addition, investment growth slowed to 9.0 on February 12, close to the level at end-December. percent year-on-year in 2017, significantly lower compared to the 23.7 percent registered a year ago. The slowdown in The Philippine peso came under renewed pressure in investment growth was driven by the deceleration of growth January. After strengthening to below the Php/US$50.00 mark in durable equipment and construction, from 34.5 to 12.2 in December, pressure on the peso mounted in late January percent year-on-year and from 15.1 to 5.7 percent year-on- and it closed the months at Php/US$51.42. This represented a year in 2017, respectively. 3.0 percent month-on-month depreciation from the Php/US$49.93 closing in end-December of 2017, and a 3.4 The balance of payments registered a higher deficit in 2017. percent year-on-year depreciation from the Php/US$49.72 The 2017 balance of payments (BOP) position registered a closing in end-January 2017. The peso has recently US$863.0 million deficit (0.3 percent of GDP) compared to a underperformed relative to other regional currencies, partly US$420.1 million (0.1 percent of GDP) deficit in 2016. The on concerns on the growing current account deficit of the higher deficit was attributed to a widening trade deficit and Philippines. In addition, foreign sentiments on emerging higher capital outflow, specifically, net outflows of foreign markets have weakened after the US Federal Reserve signified portfolio investments. Meanwhile, personal remittance from a potentially faster pace of rate hikes and inflation overseas Filipinos for the first eleven months of 2017 grew 5.1 expectations increased. Gross international reserves percent year-on-year, reaching US$28.2 billion compared to marginally declined to US$81.2 billion in January from US$81.6 US$26.9 billion during the same period in 2016. Net foreign billion in December 2017. Import coverage in January declined direct investments grew strongly by 20.1 percent year-on- to 8.2 months’ worth of imports of goods and payments of year, reaching US$8.7 billion for the first eleven months of services and primary income from 8.8 months’ in January last 2017, driven by higher intercompany borrowings and net year. investments in equity capital. PHILIPPINES Monthly Economic Developments | February 2018 Figure 1: Recent global financial market volatility impacted also Figure 2: … and the peso encountered renewed pressure. the PSEi after a strong start in January … 9,500 35 9,000 30 8,500 25 20 8,000 15 PHP billion 7,500 Index 10 7,000 5 6,500 0 6,000 Net Foreign Buy (RHS) PSEi -5 5,500 -10 Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Manufacturing activities continued to contract in December The unexpected sharp decline in exports was driven by the and the Purchasing Managers’ Index dropped sharply in contraction of exports of agriculture goods by 61.7 percent. January. The volume of production index (VoPI) contracted in Meanwhile, import growth remained strong in December, December 2017 by 9.7 percent year-on-year, a substantial growing by 17.6 percent year-on-year, but slightly lower than change compared to the 21.7 percent growth in December the 18.5 percent growth in November. Import growth were 2016. The negative VoPI growth represented the fourth primarily driven by raw materials and intermediate goods, and consecutive month of contracting manufacturing activities and consumer goods, which expanded by 17.0 percent (compared was due to weaker activities in major sectors such as chemical to 14.1 percent in December 2016) and 13.3 percent year-on- production, footwear and apparel manufacturing. The Nikkei year (15.8 percent in December 2016), respectively. However, Philippines Purchasing Managers’ Index (PMI) declined sharply 2017 was a year of strong export growth, with merchandise to 51.7 in January from 54.2 in December, but remained in exports expanding at 9.5 percent year-on-year, in contrast to expansion territory. This was due to softer demand and higher the 2.4 percent contraction in 2016. Electronics exports, which input costs, reflected in slower expected growth in output. accounted for more than half of the export bill, fueled this robust performance. Import growth decelerated in 2017 to Contrary to the strong export performance during 2017, in 10.2 percent year-on-year from 18.4 percent growth in 2016, December exports shrank for the first time in over a year. due to weaker imports of capital goods and consumer goods, Export growth contracted by 4.9 percent year-on-year in which expanded by 4.2 percent year-on-year (compared to December, a reversal from the 2.7 percent expansion in 46.6 percent in 2016) and 8.4 percent (30.1 percent in 2016). November and the 6.6 percent growth registered a year ago. Figure 3: Due to improved external demand, the economy Figure 4: Export growth rebounded in 2017, while import grew strongly at 6.7 percent in 2017. growth moderated. Private Consumption Govt Consumption 20 Investments Discrepancy Exports Imports 15 GDP growth 10 Percentage point 5 0 -5 -10 -15 2013 2014 2015 2016 2017 Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | February 2018 Figure 5: Inflation spiked to a three-year high mainly due to Figure 6: The government maintained its debt-to-GDP ratio in higher food and fuel prices. 2017. 60.0 Domestic debt External debt 50.0 22.2 18.6 40.0 21.4 16.9 In percent of GDP 15.2 15.5 14.9 14.0 30.0 20.0 32.8 32.4 30.2 29.6 30.2 29.2 28.1 27.2 10.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bangko Sentral ng Pilipinas (BSP) Source: Bureau of the Treasury Headline inflation surged in January, hitting the ceiling of the portfolio, net of RRP, went primarily to real estate activities, central bank’s inflation target range. The 12-month Consumer utilities, and wholesale and retail trade activities. Growth in Price Index (CPI) picked up to its fastest pace in more than credit to household slowed to 17.2 percent year-on-year from three years, recording a 4.0 percent year-on-year increase in 20.6 percent in November, but credit card loans continued to January. This topped the 3.3 percent year-on-year inflation expand rapidly. The banking system is stable with the share of recorded in December 2017 and compared to 2.7 percent in non-performing loans at 2.0 percent in December, close to the January a year ago. On a month-on-month basis, the increase 2.1 percent of total loan portfolio in December 2016. The latest was 1.0 percent in January, compared with 0.3 percent in available capital adequacy ratio is at 15.3 percent. December. This increase was mainly due to higher prices for The national government maintained its debt-to-GDP ratio in food and fuel. Weather-related production disruptions 2017. For the second consecutive year, the national contributed to food inflation which went up for most government registered in 2017 a 42.1 percent debt-to-GDP commodities including rice, fish, and vegetables. The ratio, as the national government debt stock grew at a similar combination of rising international prices for crude oil and the pace as nominal GDP. The domestic debt-to-GDP ratio new fuel excise tax were responsible for higher transportation increased to 28.1 percent of GDP in 2017, from 27.2 percent a prices. Excluding volatile food and energy prices, core inflation year ago, as the government continues to favor domestic also climbed rapidly from 3.0 percent in December to 3.9 borrowing to finance its fiscal deficit. On an annual basis, the percent year-on-year in January, partly due to the pass- domestic debt stock of the national government expanded by through effect if a weaker peso. The Monetary Board of the 12.9 percent, compared to 1.3 percent a year ago. On the Bangko Sentral ng Pilipinas (BSP) decided on February 8 to other hand, the external debt-to-GDP ratio of the national maintain the key policy rate at 3.0 percent. The BSP revised its government declined to 14.0 percent of GDP in 2017, from full-year inflation forecast to 4.3 percent in 2018 from its 14.9 percent in 2016, as the national government external previous forecast of 3.4 percent in December. debt increased by just 2.6 percent year-on-year compared to Domestic liquidity and credit growth moderated in 4.2 percent in 2016. December. Domestic liquidity (M3) grew by 11.9 percent year- on-year to about Php10.6 trillion in December, slowing from 14.0 percent a month before, in November, and 12.4 percent in December 2016. On an annual basis, growth in bank lending net of reverse repurchase placements (RRP) with the BSP, expanded at a slower rate of 19.0 percent year-on-year in December compared to 19.3 percent in November, but still faster than the 17.2 percent in December 2016. Business loans, which comprised 88.9 percent of banks’ aggregate loan Please contact Birgit Hansl: bhansl@worldbank.org PHILIPPINES Monthly Economic Developments | February 2018 Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of Kevin Chua, Kevin Thomas Cruz and Isaku Endo.