Philippines Monthly Economic Developments April 2018 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The Philippine Stock Exchange index (PSEi) continued its decline in March as global financial markets experienced renewed volatility. • Heightened policy uncertainty in the global markets and a hike in the U.S. Federal Reserve rate contributed to a weakening of the Philippine peso. • Exports contracted for the first time since November 2016, while import growth continued to grow in double-digits. • Manufacturing activities sustained their rapid growth from February. • Inflation overshot the upper bound of the central bank’s target range in March. • Domestic credit growth increased further in February. • The government registered a fiscal surplus in January as revenue expanded faster than expenditure. • Consumer sentiment dropped heavily in the first quarter of 2017. The Philippine Stock Exchange index (PSEi) continued its reversal from the 3.5 percent growth in January, and compares decline in March as global financial markets experienced to the 8.7 percent growth in February 2017. This represents renewed volatility. The PSEi lost 5.8 percent month-on-month the weakest performance of the country’s merchandise in March 2018, following a 3.3 percent drop in February 2018. exports since its contraction of 4.5 percent year-on-year in It reached its lowest level in six months while tracking the November 2016. The decline was driven by a contraction in performance of global financial markets. Global financial agriculture exports, which shrank by 31.0 percent in February. markets reported losses in March amid fears of rising trade Electronics exports, which accounted for 55.4 percent of the protectionism. The loss of the PSEi coincided with significant total export bill, expanded by 4.6 percent, but slower than the net-foreign selling amounting to Php19.3 billion in March, up 10.8 percent growth in January and the 14.4 percent growth a from the Php15.3 billion in February. Since end-2017, the PSEi year ago. Meanwhile, import growth remained robust, has contracted by 6.8 percent, although it is still 9.1 percent accelerating to 18.6 percent year-on-year in February, from higher than its value as of end-March 2017. 11.4 percent in January, and compared to 15.2 percent growth in February 2017. This surge in imports was driven by strong Heightened policy uncertainty in global markets and a hike in annual growth in capital goods imports (24.5 percent), the U.S. Federal Reserve rate contributed to a weakening of consumer goods imports (20.3 percent), and raw materials and the Philippine peso in March. The peso closed in March at intermediate goods imports (19.2 percent). Php/US$52.21, representing a 4.0 percent year-on-year depreciation from the closing of Php/US$50.19 in March 2017, Manufacturing activities sustained their rapid growth from and a 0.3 percent month-on-month deprecation from the February. For the second month in a row, the volume of Php/US$52.03 closing in February. The weaker peso has been production index (VoPI) grew in February by double-digits, linked to a widening current account deficit given strong reaching 24.8 percent year-on-year from a downward-revised import demand for capital and intermediate goods. However, 18.5 percent in January, compared to 9.8 percent in February in March, the peso depreciation was also driven by the effects 2017. This represents a strong break from the nearly of the 25 basis points hike of the U.S. Federal Reserve and the consecutive monthly contractions since May last year. ongoing global trade tariff debate. The gross international Stronger factory activities were recorded in printing services, reserves dropped slightly in March to US$80.1 billion from food manufacturing, and electrical machinery production. The US$80.9 billion in March 2017, while the import coverage Nikkei Philippines Purchasing Managers’ Index (PMI) also decreased to 7.8 months from 8.6 months in March a year ago. showed an uptick in March to 51.5 from 50.8 in February, but Personal remittances grew by 10.8 percent year-on-year to lower than the 53.8 in March last year. Survey respondents reach US$2.7 billion in January, compared to the 8.5 percent cited greater client demand, resulting in higher outputs. In growth registered in January 2017. February, the average capacity utilization rates remained elevated and inched up to 84.2 percent from 83.7 percent in Exports contracted for the first time since November 2016, February last year. Eleven of the 20 major industries are while import growth continued to grow in double-digits. operating at 80 percent and above capacity. Exports contracted by 1.8 percent year-on-year in February, a PHILIPPINES Monthly Economic Developments | April 2018 Figure 1: As a result of renewed global market volatility, the Figure 2: … and the Philippine peso depreciated further. PSEi dropped by 5.8 percent month-on-month in March… Source: Philippine Stock Exchange Source: Bangko Sentral ng Pilipinas (BSP) Inflation overshot the upper bound of the central bank’s important to evaluate the appropriateness of a measured target range in March. The 12-month Consumer Price Index policy response to anchor inflation expectations during the (CPI) inflation reached 4.3 percent year-on-year in March, next monetary board meeting on May 10th. breaking the upper bound of the central bank’s 2 -4 percent Domestic credit growth increased further in February. target range. This compared to the 3.1 percent inflation in Domestic liquidity (M3) grew by 13.5 percent year-on-year to March 2017 and the downward-revised 3.8 percent of about Php10.7 trillion in February, faster than the 12.8 percent February. It was also the highest inflation level registered since expansion in the previous month. On a month-on-month August 2014, when the country suffered from high food seasonally-adjusted basis, M3 increased by 1.5 percent. inflation due to a domestic rice shortage. The March price Outstanding loans, net of reverse repurchase placements increase was driven by food inflation brought on by higher (RRP) with the BSP, expanded at a faster rate of 19.5 percent prices for corn, fish and rice. Faster price increases were also in February from a revised 19.0 percent in January, and reported for alcoholic beverage and tobacco products, while compared to 17.3 percent in February 2017. Firm credits— upward adjustments in electricity rates contributed to energy which comprised 88.4 percent of banks’ aggregate loan inflation. The year-to-date headline inflation averaged 3.8 portfolio—grew by 18.6 percent in February, compared to 16.5 percent in the first three months of 2018, falling within the percent in February last year, while credit to households central bank’s target range. Measured with the old 2006-base slowed to 19.9 percent in February, compared to 22.9 percent numbers, core inflation accelerated to 4.7 percent year-on- in February last year due to a slower increase in motor vehicle year in March from 2.9 percent in March 2017. It will be loans and other types of household loans. Figure 3: Manufacturing activities registered another month of Figure 4: In March, inflation surpassed the upper bound of the double-digit growth. central bank’s target range. Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | April 2018 Figure 5: The government registered a fiscal surplus in January Figure 6: Consumer confidence fell to its lowest level since the as revenue growth outpaced expenditure growth. third quarter of 2016. Source: Bureau of the Treasury Source: BSP The government registered a fiscal surplus in January as Consumer sentiment dropped heavily in the first quarter of revenue expanded faster than expenditure. Revenue growth 2017. According to the Bangko Sentral ng Pilipinas’ consumer accelerated significantly in January, expanding in nominal expectations survey, the overall consumer confidence index terms by 19.3 percent year-on-year, compared to the 9.9 dropped to 1.7 percent in the first quarter of 2018 from 9.5 percent growth in January 2017, reaching Php238.9 billion. The percent in the fourth quarter of 2017, and compared to 8.1 surge in revenues was fueled by robust tax revenue growth, percent in the first quarter of 2017. This represents the lowest which increased in nominal terms by 17.9 percent in January level of the consumer confidence index since it reached 2.5 compared to 14.0 percent growth in the same month a year percent in the third quarter of 2016. The less optimistic ago. Meanwhile, government expenditures also grew in the outlook from consumers was primarily driven by expectations double-digits in nominal terms for the fourth consecutive of rising prices of goods and household expenses. Dampened month, expanding in January by 15.5 percent year-on-year, consumer sentiment is consistently recorded across income more than double the 6.7 percent growth in January a year groups, as all three income groups registered a lower ago, to reach Php228.7 billion. The government attributes the consumer confidence index compared to the previous quarter. growth in public expenditures to higher infrastructure Low-income households registered the lowest overall spending and the release of the third tranche of adjustments consumer confidence index at -8.5 percent, while middle- to the government’s Salary Standardization Law. As revenue income and high-income households registered 8.3 percent growth outpaced expenditure growth, the national and 23.8 percent overall consumer confidence index, government registered a Php10.2 billion surplus in January respectively. Business confidence also declined in the first 2018, compared to the Php2.2 billion surplus a year ago. quarter of 2018 to 39.5 percent from 43.3 percent in quarter three of 2017. The Department of Finance targets the approval of the tax reform package 1-B in both Houses of Congress by June. Package 1-B is a follow-up to the first December 2017 Tax Reform for Acceleration and Inclusion (TRAIN) law, and proposes an estate and general tax amnesty, an easing of the Bank Secrecy law, and an increase in the motor vehicle use charge. It is intended to generate an estimated revenue of Php40 billion in 2018, in addition to the estimated Php82.3 billion from the TRAIN law. 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 Isaku Endo. PHILIPPINES Monthly Economic Developments | April 2018