Philippines Monthly Economic Developments November 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • Amidst a volatile foreign exchange market, the Philippine peso dropped to an 11-year low in October. • Both export and import growth slowed in September. • Manufacturing activities contracted again in September, following a temporary recovery in August. • The Philippine Stock Exchange index (PSEi) surged to a new record high in October as it tracked the strong performance of global financial markets. • Rising energy prices pushed headline inflation to its highest level in three years. • In September, government revenues increased sharply while expenditures contracted. • In the World Bank 2018 Doing Business report, the Philippines ranks 113th out of 190 economies in the ease of doing business. Amidst a more volatile foreign exchange market, the year-on-year in September, compared to the 6.7 percent Philippine peso dropped to an 11-year low in October. The growth registered in August. peso closed at Php/US$51.80 in October, its weakest level Manufacturing activities contracted again in September, since July 2006. On an annual basis, this marked a 6.9 percent following a temporary recovery in August. The volume of depreciation from the closing in October 2016. On a monthly production index (VoPI) contracted once again in September, basis, the peso also depreciated, by 1.4 percent. The Php/US$ by 3.7 percent year-on-year, following a short-lived recovery exchange rate market moved within a much wider range than of 2.8 percent in August and a similar contraction of 3.5 in previous months, between Php/US$50.83-51.80. Relative to percent in July. This contraction also compares to a 11.2 the peso, the US dollar strengthened as data for the US percent expansion in September a year ago. The reasons for economy improved (reflected in better-than-expected US this contraction were growth weaknesses in the chemical services and manufacturing output), magnifying market sector, and the textile, footwear and apparel sectors. expectation for a possible US Federal Reserve rate hike in Nonetheless, the Nikkei Philippines Manufacturing Purchasing December. At the same time, the peso remained one of the Managers’ Index (PMI) showed renewed optimism, increasing weakest performers among the regional currencies and to 53.7 in October from 50.8 in September, based on reports depreciated in nominal terms most since January. In October, of increases in new orders, input purchases and hiring in the Philippines’ international reserves declined slightly to anticipation of the fourth quarter holiday period. In US$80.6 billion from US$81.0 in September as the central bank September, the average capacity utilization rate remained engaged in foreign exchange operations, including for unchanged to August, at 83.8 percent with 11 of 20 major payments on maturing foreign exchange obligations. industries operating at an capacity of 80 percent and above. International reserves covered in October 8.4 months’ worth of import goods and payments of services and primary income, The Philippine Stock Exchange index (PSEi) surged to a new compared to 10.0 months in October 2016. record high in October as it tracked the strong performance of global financial markets. The PSEi rose past the 8,500 mark Both export and import growth slowed in September. Export in trading sessions throughout October, before closing at 8,365 growth weakened significantly in September: it fell by more by end-October, a 2.4 percent month-on-month gain than half, from 9.3 percent in August to 4.3 percent year-on- compared to end-September. On a yearly basis, the PSEi year. This was the result of a much weaker expansion of expanded by 13.0 percent, compared to the 3.8 percent year- manufactured goods exports, which account for over 85 on-year growth registered in October 2016. Since the percent of the total export bill. Manufactured goods exports beginning of the year, the PSEi expanded 22.3 percent, which increased by 1.8 percent year-on-year in September compared is comparable to the top performing major stock indices in the to 5.4 percent in August. At the same time, import growth also region. Domestically, the strong performance of the PSEi was slowed to 1.7 percent year-on-year compared to 10.5 percent fueled by positive third quarter corporate earnings reports, growth in August. The import of capital goods, and raw and continued market optimism over important anticipated materials and intermediate goods contracted by 6.1 percent domestic policy reforms, such as the immanent approval of the and 0.7 percent year-on-year, respectively. Consumer goods government’s first tax reforms package which could boost the imports expanded, but at a much slower pace, by 2.1 percent Philippines’ medium-term prospects. PHILIPPINES Monthly Economic Developments | November 2017 Figure 1: The Philippine peso dropped to an 11-year low in Figure 2: Export and import growth slowed in September. October. Sep-17 Jul-17 May-17 In percent Mar-17 Jan-17 Nov-16 Sep-16 -50 -40 -30 -20 -10 0 10 20 30 40 50 Exports Imports Source: Philippine Statistics Authority (PSA) Source: PSA Rising energy prices pushed headline inflation to its highest Bank lending continued to grow at a robust rate while level in three years. In October, the 12-month Consumer Price domestic liquidity growth slowed in September. Domestic Index rose to 3.5 percent year-on-year from 3.4 percent in liquidity (M3) grew in September at a slightly slower rate, at September. This is the highest level recorded since November 14.5 percent year-on-year to Php10.1 trillion, compared to a 2014 when headline inflation reached 3.7 percent. The key 15.4 percent expansion in the previous month. Credit to the driver of this increase was the surge in energy prices resulting private sector continued to expand at a vigorous pace. from upward adjustments in electricity rates and higher prices Outstanding loans of commercial banks, net of reverse of domestic petroleum products, in line with the recovery in repurchase placements, grew by 21.1 percent in September global oil prices. Food inflation also rose due to higher market from 20.4 percent in August, and compared to 17.7 percent in prices for meat, fish and vegetables. Excluding volatile food September last year. Firm loans, which comprise nearly 90 and energy items, core inflation slowed to 3.2 percent year-on- percent of banks’ aggregate loan portfolio, grew in September year in October from 3.3 percent in September. The year-to- by 20.7 percent year-on-year, driven primarily by increased date average headline inflation rate of 3.2 percent, and the lending to electricity, gas, steam and air-conditioning supply average core inflation rate of 2.9 percent remained within the (24.1 percent), financial and insurance activities (20.4 Bangko Sentral ng Pilipinas (BSP) 2017 target range of 2-4 percent), and the information and communication sector (38.8 percent. At its meeting on November 9th, the Monetary Board percent). Household loans grew in September by 20.0 percent decided to maintain its key policy rate at 3.0 percent. on an annual basis (similar to the 21.7 percent in September 2016), driven by an expansion in credit card loans. Figure 3: Manufacturing activities contracted for the second Figure 4: The local stock market tracked the rally in global time this year. markets. 9,000 35 30 8,500 25 8,000 20 7,500 15 PHP billion Index 7,000 10 5 6,500 0 6,000 Net Foreign Buy (RHS) -5 PSEi 5,500 -10 Source: PSA Source: Philippine Stock Exchange PHILIPPINES Monthly Economic Developments | November 2017 Figure 5: Inflation rose in October to its highest level in three Figure 6: The government’s fiscal deficit shrunk in September. years. Metro Manila Outside Metro Manila 120 Core Inflation Headline Inflation 9.0 100 Food & Non-alcoholic beverage 8.0 80 60 7.0 40 In Billion Pesos 6.0 IN PERCENT 20 5.0 - 4.0 (20) Jan Jul Jan July Jan July 3.0 (40) 2015 2016 2017 2.0 (60) 1.0 (80) 0.0 (100) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-14 Apr-15 Apr-16 Apr-17 (120) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: PSA Source: Bureau of the Treasury In September, government revenues increased sharply while The World Bank Group released on October 31 its 2018 Doing expenditures contracted. Government revenues reached Business report where the Philippines ranks 113th out of 190 Php200.1 billion in September, as revenues accelerated in economies in the ease of doing business. The Philippines nominal terms by 20.6 percent year-on-year compared to the implemented two key reforms during the past year to improve relative small growth of 1.1 percent a year ago. This surge in the business climate for small and medium enterprises. The revenues was fueled by a strong expansion in tax revenues, country has improved its business regulations as captured by which grew in September in nominal terms by 24.1 percent the Doing Business indicators in absolute terms—meaning the year-on-year, as tax collection by both the Bureau of Internal country is narrowing the gap with the global regulatory Revenue and the Bureau of Customs expanded by more than frontier. On the distance to frontier metric, the Philippines’ twenty percent year-on-year. Meanwhile, government score went from 58.32 in Doing Business 2017 to 58.74 in spending contracted in nominal terms on an annual basis by Doing Business 2018, using a comparable methodology. 1.8 percent, reaching Php237.0 billion. This was a sharp Despite the continued reforms in the Philippines, small and reversal from the 29.5 percent growth registered a year ago. medium-sized businesses still face significant regulatory The decline in government expenditures in September was burdens, leaving room for further improvements especially in driven by a contraction in recurrent expenditures. In the areas of Starting a Business, Enforcing Contracts and particular, interest payments and expenditure for Protecting Minority Investors. In comparison, the pace of maintenance and operation fell by double digits, contracting reforms is higher in many other countries, including in several by 19.0 percent and 12.2 percent year-on-year in nominal regional neighbors, such as Brunei and Thailand. terms, respectively. In addition, the government’s public infrastructure spending slowed in September, expanding by a more moderate 6.2 percent year-on-year in nominal terms, after four consecutive months of double digit growth. As a result, the fiscal deficit narrowed in September to Php36.9 billion, about half the level of the Php75.3 fiscal deficit recorded a year ago. 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 | November 2017