Philippines Monthly Economic Developments December 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  Inflation rose in November, halting its five-month downtrend.  Labor market outcomes improved with lower unemployment and underemployment rates in October, mainly driven by job generation in the services sector.  Poverty rates declined and the income gap narrowed in 2018. The tepid performance of the manufacturing sector risking further tension in the US-China trade war. Nonetheless, continued in October. The Philippines’ manufacturing sector the foreign exchange market improved yoy with the Philippine output remained weak, as the volume of production index peso appreciating by 3.6 percent month-on-month to contracted for the eleventh consecutive month. It fell by 3.7 Php/US$50.80 in November from Php/US$52.61 in end- percent year-on-year (yoy) in October, a reversal from the 2.9 November 2018. On a monthly basis, the peso appreciated by percent growth a year ago, and similar to the 3.6 percent 0.5 percent from the October 2019 closing of Php/US$51.03. contraction in September. The contraction in manufacturing Foreign reserves rose to US$86.4 billion in November from output was largely driven by the 17.3 percent contraction in US$85.8 billion in October, due to higher net foreign currency electrical machinery, coinciding with the muted performance deposits and higher central bank’s income from its investment of the country’s electronics exports, and significant double- abroad. The reserves can cover 7.5 months’ worth of import digit declines in petroleum manufactures, furniture and at its current level from the same level in October. fixtures manufactures, and other miscellaneous manufactures. Inflation rose in November, halting its five-month Leading indicator of sector production suggests a similar downtrend. The Consumer Price Index headline inflation rose performance in November, as the Nikkei Purchasing to 1.3 percent yoy in November, faster than the 0.8 percent in Managers’ Index reached 51.4, its lowest level since June October although still slower than 6.0 percent in November (51.3), and significantly weaker than the 52.1 figure posted in 2018. Year-to-date inflation stood at 2.5 percent, well within October. the Bangko Sentral ng Pilipinas’ (BSP) 2-4 percent target. The Philippine Stock Exchange index (PSEi) weakened in Inflation gathered speed mainly due to the annual increase in November. The PSEi declined by 3.0 percent month-on-month the price index of alcoholic beverage and tobacco products, in November to close at 7,739, lower than the closing of 7,977 housing utilities, health, and communication services. The in October. The decline was driven by foreign selling of heavily weighted food and non-alcoholic beverage inflation Php13.2 billion, which reversed the net foreign buying of steadied overall, yet the price of rice continued to drop. Php3.7 billion in October. Bulk of the foreign selling happened Removing highly volatile food and energy items, the core in the last week of November, coinciding with news of the U.S. inflation remained stable at 2.6 percent. president’s signing of a bill backing protestors in Hong Kong, Figure 1: Manufacturing output contracted for the eleventh Figure 2: The government posted a narrower fiscal deficit in consecutive month in October 2019. October. 30.0 VoPI 84.6 340 320 Capacity Utilization (in percentage) 25.0 VaPI 300 280 Average Capacity Utilization Rate 84.4 260 20.0 240 220 200 180 15.0 84.2 160 In Billion Pesos 140 In percentage 120 10.0 100 84 80 60 5.0 40 20 - 0.0 83.8 (20) (40) (60) July Jan July Jan July -5.0 (80) (100) 83.6 (120) 2018 2019 -10.0 (140) (160) (180) (200) -15.0 83.4 (220) Net Foreign Financing Net Domestic Financing Feb-19 Dec-18 Apr-19 Aug-19 Jun-19 Oct-18 Oct-19 Budget Surplus/Deficit Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | December 2019 Domestic liquidity expands at a faster pace with double digit payments, subsidies, allotment to LGUs, and equity spending growth in bank lending for household consumption. contracted by 11.3 percent year-on-year in nominal terms. As a result, the government posted a narrower budget deficit of Domestic liquidity (M3) grew by 8.5 percent yoy to about Php49.3 billion in October, or nearly one-fifth less than the Php12.1 trillion in October, faster than the 7.7 percent growth Php59.9 billion deficit posted a year ago. in September. Demand for credit remained the principal driver of money supply growth. Domestic claims grew by 6.7 percent Labor market outcomes improved in October. in October from 7.5 percent in the previous month due to the Unemployment and underemployment rates went down to sustained growth in credit to the private sector. Growth in 4.5 percent and 13.0 percent in October from 5.1 percent and outstanding loans of universal and commercial banks, net of 13.3 percent in October 2018, respectively. Jobs created in reverse repurchase (RRP) placements with the BSP, was slower October reached 1.8 million, a sizable recovery from last year’s at 9.3 percent in October, from 10.5 percent in the previous 0.2 million net job loss. The new 1.4 million service sector jobs month. Loans for production activities—which comprised 87.2 contributed to the annual net jobs created. Likewise, the percent of banks’ aggregate loan portfolio, net of RRPs— industry sector added 237,000 workers, mostly in expanded at a rate of 7.5 percent in October, lower than the construction. Despite job losses in land-based farming, the reported growth in September at 9.0 percent, consistent with agriculture sector still gained a total of 165,000 net jobs thanks manufacturing sector performance. Meanwhile, loans for to more fishing and aquaculture jobs. On average, net jobs household consumption grew by 26.7 percent in October from generated in 2019 reached 1.3 million, topping the 26.2 percent in September, due to faster growth in motor government’s annual target of 0.9-1.1 million. vehicle, credit card, and salary-based general purpose Poverty rates declined and the income gap narrowed in 2018. consumption loans during the month. Full year poverty incidence among Filipinos dropped to 16.6 The government posted a narrower budget deficit in October. percent in 2018 from 23.3 percent in 2015, adjusted in 2012 Public revenue grew at a more moderate pace of 6.0 percent prices. This translates to 5.9 million fewer poor Filipinos yoy in nominal terms in October after two consecutive years between 2015-18, more than doubling the estimated 2.5 of expanding by nearly 20 percent. Revenue generation million reduction in 2012-15. Among families, poverty continued to be driven by steady growth in tax collections. The incidence fell from 17.9 percent in 2015 to 12.1 percent in Bureau of Internal Revenue (BIR), which accounted for three- 2018. Moreover, the estimated Gini score in 2018 was 0.4267, fourths of total tax collections, drove tax revenue growth, as lower than 0.4438 in 2015, indicating a narrower rich-poor collections grew by 8.1 percent yoy, while the Bureau of income gap. Poverty and income inequality reduction Customs (BOC) posted a 3.0 percent expansion in its accelerated largely due to rising family incomes, with the collections. Meanwhile, public spending momentum slowed in poorest families’ income growing faster than the rich, owing to October, expanding by 1.4 percent yoy in nominal terms, as stabilizing inflation, and improving labor market conditions, national government disbursements excluding interest supported by government transfers. Figure 3: The unemployment rate went down along with the Figure 4: Income of the bottom deciles rose faster than that of underemployment rate in October 2019. the top deciles. 25 Average Family Income and Growth 20 800 0.4% 25% In thousand pesos (in 2012 prices) 2015 2018 20% 15 600 Percent 15% 10 4% 400 6% 10% 8% 5 12% 9% 200 15% 14% 20% 15% 5% 0 Oct 2009 Oct 2010 Oct 2011 Oct 2012 Oct 2013 Oct 2014 Oct 2015 Oct 2016 Oct 2017 Oct 2018 Oct 2019 Apr 2010 Apr 2011 Apr 2012 Apr 2013 Apr 2014 Apr 2015 Apr 2016 Apr 2017 Apr 2018 Apr 2019 - 0% 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Unemployment rate Underemployment rate Income Decile Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | December 2019 Developments to Watch  Manufacturing output: when will it return back to expansion?  Public expenditure: will the spending pick up through the holiday season? Selected Economic and Financial Indicators 2017 2018 Q1 2019 Q2 2019 Q3 2019 Sep-19 Oct-19 Nov-19 Real GDP growth, at constant market prices 6.7 6.2 5.6 5.5 6.2 Private consumption 5.9 5.6 6.1 5.5 5.9 Government consumption 7.0 12.8 7.4 7.3 9.6 Capital formation 9.4 13.7 8.0 -8.5 -2.1 Exports, goods and services 19.5 11.5 5.7 4.8 0.2 Imports, goods and services 18.1 14.5 8.6 -0.1 0.0 Industry Performance Value of Production Index -1.4 8.0 -3.7 -7.5 -5.8 -2.3 -4.3 Volume of Production Index -0.5 7.2 -7.4 -10.2 -6.6 -3.6 -3.7 Capacity Utilization 83.8 84.2 84.3 84.3 84.3 84.4 84.5 Nikkei Philippines Purchasing Managers' Index 53.2 52.5 51.9 51.1 51.9 51.8 52.1 51.4 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 3.8 3.0 1.7 0.9 0.8 1.3 Core Consumer Price Index 2.5 4.1 3.6 3.4 2.9 2.7 2.6 2.6 Domestic liquidity (M3) 13.3 11.6 7.1 6.6 6.9 7.7 8.5 Credit growth 17.8 16.4 11.9 10.7 9.3 8.8 7.5 Business loans 17.4 17.2 13.3 10.7 8.2 8.0 6.5 Consumer loans 20.5 15.1 10.0 11.3 13.7 14.6 14.9 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -2.1 1.0 -5.8 -178.6 -49.3 Total Revenue (% of GDP) 15.7 16.4 16.3 18.6 17.3 236.5 261.6 Tax Revenue (% of GDP) 14.2 14.7 14.6 16.5 15.8 211.0 237.5 Total Expenditure (% of GDP) 17.9 19.6 18.5 17.6 23.1 415.1 310.8 National government debt (% of GDP) 42.1 41.9 44.0 43.7 43.3 7,908 7,906 Stock market PSEi (month-end value) 8,558 7,466 7,921 7,974 7,779 7,779 7,977 7,739 External accounts Current account balance (% of GDP) -0.7 -2.4 -2.0 -0.2 Exports of merchandise goods (growth rate) 18.4 -0.3 -3.1 1.2 0.6 -2.6 0.1 Imports of merchandise goods (growth rate) 13.6 9.4 4.7 -5.9 -7.8 -10.5 -10.8 Net foreign direct investment (in million US$) 10,057 9,802 1,933 1,653 1,533 566 Balance of payment (% of GDP) -0.3 -0.7 4.7 1.1 International reserves (in million US$) 81,273 78,140 83,613 84,722 85,596 85,581 85,702 86,393 Import cover 8.4 7.1 7.4 7.4 7.4 7.4 7.5 7.5 Nominal exchange rate 50.40 52.68 52.36 52.06 51.8 52.1 51.5 50.7 Labor Market Unemployment rate 5.7 5.3 5.2 5.1 5.4 4.5 Underemployment rate 16.2 16.4 15.6 13.5 13.9 13.0 Sentiments Consumer confidence index (end of period) 9.5 -22.5 -0.5 -1.3 4.6 Business confidence index (end of period) 43.3 27.2 35.2 40.5 37.3 Prepared by a World Bank team consisting of Rong Qian, Kevin Chua, Kevin Thomas Cruz, Karen Lazaro, Jiyoung Song and Isaku Endo, PHILIPPINES under the guidance of Ndiame Diop. Monthly Economic Developments | December 2019 Contact Rong Qian (rqian@worldbank.org) for questions.