Philippines Monthly Economic Developments September 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) declined significantly in the first week of September. • Headline inflation surged to 6.4 percent in August, driven by higher food and energy prices. • The Balance of payment deficit widened in the first half of 2018, reaching 2.1 percent of GDP. • Consumer confidence turned negative for the first time in two years and business confidence reached its lowest level since 2009. The Philippine Stock Exchange index (PSEi) declined billion in August from US$76.7 billion in July but remained significantly in the first week of September. The PSEi fell 3.3 lower than the US$81.7 billion in August last year. They cover percent in the first week of September 2018, wiping out a 2.4 7.5 months’ worth of imports of goods and payment of percent month-on-month gain posted in August, to close at services and primary income compared to 8.5 months’ worth 7,598.6. The drop was driven by both domestic and external in August 2017. factors. Domestic factors included a 9-year-high inflation in Headline inflation surged in August with further increase in August which raised investors risk aversion to local equities. food and energy prices. The year-on-year consumer price This was compounded by external factors, including increasing index accelerated to 6.4 percent in August from 5.7 percent in US-China trade tensions, and a build-up of financial risks in a July and 2.6 percent in August 2017. Year-to-date inflation number of emerging economies. As a result of these trends, reached to 4.8 percent, remaining beyond the Bangko Sentral net-foreign selling amounted to PHP4.4 billion in the week of ng Pilipinas’s (BSP) target range of 2-4 percent. Primary causes September 7, 2018. were higher oil prices which raised transport and power prices, The Philippine peso depreciated in August after and higher food prices stemming from market supply strengthening in July. The Philippine peso closed at constraints, particularly for rice and fish. Excluding the volatile PHP/US$53.43 in August, a 0.3 percent month-on-month food and energy items, core inflation rose to 4.8 percent in depreciation since July and a 4.2 percent year-on-year August from 4.5 percent in July and 2.2 percent in August 2017. depreciation compared to August 2017. The August The balance of payment deficit increased in the first half of depreciation marked a reversal from a 0.5 percent month-on- 2018, reaching 2.1 percent of GDP from 0.5 percent of GDP month appreciation in July. The peso weakening was partly during the same period in 2017. This was driven by a larger driven by increased demand for dollars as import grew rapidly current account deficit of 1.9 percent of GDP in the first half of while export growth moderated. In addition, emerging 2018 which increased substantially from the 0.1 percent of economies’ currencies softened , influenced by the Turkish GDP deficit in the first half of 2017. This was the result of the currency crisis. International reserves increased to US$77.8 trade deficit expanding since early 2018, driven by a Figure 1: The PSEi declined in the first week of September, Figure 2: The Philippine peso weakened in August. wiping out the gains registered in August 2018. 54.0 53.0 52.0 PHP/US$ 51.0 50.0 49.0 48.0 47.0 Source: Philippine Stock Exchange Source: Bangko Sentral ng Pilipinas (BSP) PHILIPPINES Monthly Economic Developments | September 2018 moderation in export growth while import growth remained creation of 0.5 million contributed to the unemployment rate robust. Meanwhile, the surplus in the country’s capital and sliding to 5.4 percent in July from 5.6 percent a year ago and financial accounts softened in the first half of 2018 to 0.2 5.5 percent in April. Underemployment reached 17.2 percent percent of GDP from a surplus of 0.5 percent of GDP in the first in July, increasing from 16.3 percent a year ago and 17.0 half of 2017 and could not outbalance the increasing current percent since the last survey round in April. account deficit. While net inflows of foreign direct investment Consumer confidence turned negative for the first time in rose to 3.6 percent of GDP in the first half of 2018 from 2.7 two years while business confidence fell to its lowest since percent of GDP in the same period in 2017, net foreign 2009. After eight consecutive quarters of positive sentiment, portfolio and other investments registered outflows due to the consumers turned more pessimistic in the third quarter of ongoing policy normalization by the U.S. Federal Reserve, 2018 by falling to -7.1 percent from 3.8 percent in the second coupled with global trade uncertainties. quarter, its lowest level since the second quarter of 2016, The government posted a fiscal deficit in July as public according to the BSP’s Consumer Expectations Survey. The spending growth outpaced revenue growth. Expenditures pessimism stemmed from expectation of continued price expanded by 33.8 percent year-on-year in nominal terms in increases and the impact these would have on households’ July, more than three times the 11.0 percent growth in July a incomes. Likewise, in the third quarter, the BSP Business year ago, and substantially higher than the 2.9 percent a Expectations Survey showed that the business confidence month ago. The acceleration in public spending growth was index dropped to 30.1 percent in the third quarter from 39.3 primarily driven by a rapid expansion in wage bill (31.6 percent in the second quarter, lowest level since 2009 (22.0 percent), infrastructure outlays (74.6 percent), and subsidies percent). Weaker sentiment was attributed to rising prices of to government-owned and government-controlled commodities, supply constraints for raw materials and the corporations (92.5 percent). Revenues expanded by double- weakening peso. digits for the eleventh consecutive month in July by 24.2 Manufacturing activities continued to expand rapidly in July. percent year-on-year in nominal terms, at a similar level as in The volume of production index (VoPI) expanded by 11.8 June but faster than the 14.3 percent a year ago . Tax revenue percent year-on-year in July, the seventh consecutive month growth reached 24.8 percent year-on-year in July, more than of double-digit growth since January, and a sharp reversal from doubling the 11.9 percent growth in June and accelerating the -5.1 percent contraction in July 2017. Meanwhile, the from 16.4 percent a year ago. As a result, the national Nikkei Philippines Manufacturing Purchasing Managers’ Index government’s fiscal deficit expanded by 71.0 percent year-on- (PMI) increased to 51.9 in August from 50.9 percent in July, as year to reach PHP86.4 billion in July compared to PHP50.5 new order and output growth increased. Average capacity billion in July 2017. utilization inched up to 84.2 percent in July from 83.7 percent Unemployment declined further in July, but in July last year, with 11 of the 20 sectors registering utilization underemployment continued to worsen. Increased net-job rates of at least 80.0 percent. Figure 3: Unemployment improved marginally, while Figure 4: Consumer and business sentiment weakened in the underemployment increased in July 2018. third quarter of 2018. Overall Consumer Confidence Index (Current quarter) 80 Overall Business Confidence Index (All Sectors) 60 40 Percent 20 0 -20 -40 -60 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 Source: PSA Source: BSP PHILIPPINES Monthly Economic Developments | September 2018 Selected Economic and Financial Indicators 2016 2017 Q4 2017 Q1 2018 Q2 2018 Jun-18 Jul-18 Aug-18 Real GDP growth, at constant market prices 6.9 6.7 6.5 6.6 6.0 Private consumption 7.2 5.9 6.2 5.7 5.6 Government consumption 8.8 7.1 12.2 13.6 11.9 Gross fixed capital investment 26.6 9.5 9.4 8.8 21.2 Exports, goods and services 11.7 19.6 20.6 6.5 13.0 Imports, goods and services 20.5 18.2 18.1 9.6 19.7 Industry Performance Value of Production Index 6.2 -0.7 -7.9 17.8 24.0 18.9 12.2 Volume of Production Index 11.5 0.3 -7.6 18.7 23.0 18.0 11.8 Capacity Utilization 83.5 83.8 84.0 84.2 84.3 84.3 84.2 Nikkei ASEAN Purchasing Managers' Index 53.2 54.2 51.3 53.1 52.9 50.9 51.9 Monetary and Banking sector Headline Consumer Price Index 1.3 2.9 3.0 3.8 4.8 5.2 5.7 6.4 Core Consumer Price Index 1.5 2.5 2.4 3.0 3.8 4.3 4.5 4.8 Domestic liquidity (M3) 12.5 13.3 13.7 13.7 13.4 11.8 11.0 Credit growth 16.6 17.8 17.6 17.2 17.9 17.7 18.0 Business loans 13.5 17.4 17.4 17.0 18.1 18.0 18.5 Consumer loans 20.5 20.5 19.4 19.1 16.5 15.5 14.5 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.4 -2.2 -3.1 -3.9 -0.9 -54.3 -86.4 Total Revenue (% of GDP) 15.2 15.7 15.0 15.8 18.3 224 242 Tax Revenue (% of GDP) 13.7 14.2 13.7 14.3 16.1 188 218 Total Expenditure (% of GDP) 17.6 17.9 18.1 19.7 19.2 279 328 National government debt (% of GDP) 42.1 42.1 42.1 42.6 42.5 4,579 4,600 Stock market PSEi (month-end value) 6,841 8,558 8,558 7,980 7,194 7,194 7,672 7,856 External accounts Current account balance (% of GDP) -0.4 -0.7 -3.6 -0.2 -3.6 Exports of merchandise goods (growth rate) -2.5 18.4 13.3 -5.4 -1.3 2.8 0.3 Imports of merchandise goods (growth rate) 18.4 13.6 21.0 7.2 20.0 24.2 31.6 Net foreign direct investment (in million US$) 8,279 10,057 3,585 2,227 3,528 831 Balance of payment (% of GDP) -0.1 -0.3 0.6 -1.6 -2.5 International reserves (in million US$) 83,515 81,273 80,766 80,722 78,779 77,525 76,722 77,829 Import cover 9.7 8.4 8.0 7.8 7.6 7.5 7.4 7.5 Nominal exchange rate 47.49 50.40 50.93 51.45 52.45 53.05 53.43 53.27 Labor Market Unemployment rate 5.5 5.7 5 5.3 5.5 5.4 Underemployment rate 18.4 16.2 15.9 18 17 17.2 Sentiments Consumer confidence index (end of period) 9.2 9.5 9.5 1.7 3.8 -7.1 Business confidence index (end of period) 39.8 43.3 43.3 39.5 39.3 30.1 Prepared by a World Bank team consisting of Kevin Chua, Kevin Thomas Cruz, Isaku Endo, Rong Qian and Birgit Hansl, under the guidance of Ndiame Diop. Contact Rong Qian (rqian@worldbank.org) for questions. PHILIPPINES Monthly Economic Developments | September 2018