Philippines Monthly Economic Developments October 2017 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The World Bank projects that the Philippine economy will grow at 6.6 percent in 2017, and 6.7 percent in 2018 and 2019. • In September, the Philippine Stock Exchange index reached a new record high while the peso stabilized. • Manufacturing activities rebounded in August and reversed their July contraction. • Export growth slightly slowed in August while imports increased sharply. • In September, inflation increased back to April peak levels. • In August, government spending continued to grow in the double-digits for the fourth consecutive month, while revenues expanded at a slower pace. • The Philippine banking sector remains stable while domestic liquidity continued to expand. The World Bank projects that the Philippine economy will The Philippine peso further stabilized in September and grow at 6.6 percent in 2017, and 6.7 percent in 2018 and benefited from strong peso demand. The peso traded in a 2019. This projection supersedes the World Bank’s July narrow range of Php/US$50.63-51.24 in September and forecast of 6.8 percent for 2017 and 6.9 percent for 2018. The appreciated by 1.2 percent month-on-month to close at Philippines’ medium-term growth trajectory remains positive, Php/US$51.07 at the end of the month. Net foreign buying in with steady consumption growth expected to provide the main the stock market bolstered demand for the peso. In addition, base for growth, sustained by an increase in remittances, an the U.S. Federal Reserve did not raise its benchmark interest expansion of credit, and improved income levels. Exports to rate in September, but announced to start unwinding its the country’s main trading partners are projected to increase quantitative easing program in October. However, on an given a more favorable external environment, while imports annual basis the peso continued to depreciate by 5.8 percent. are estimated to remain elevated due to high demand for Gross international reserves stood at US$81.3 billion in intermediate and capital goods. Higher capital outlays and September, close to the US$81.7 billion recorded in August, construction activities are expected to boost investment but declining from US$86.1 billion in September last year. The growth as the government speeds up the implementation of decline is attributed to the lower international gold price and the infrastructure program. Risks to the outlook include in the payments made by the government on its maturing short-term increasing trade protectionism, the possibility of obligations. At the current level, the gross international financial market disruptions, and elevated policy uncertainty, reserves cover 8.5 months worth of imports of goods and and in the long-term weaker growth potential. payment of services and primary income. The Philippine Stock Exchange index (PSEi) reached a record Manufacturing activities rebounded in August and reversed high in September. The PSEi registered a new all-time high of their July contraction. The volume of production index (VoPI) 8,294 on September 18 as the local stock markets traced the for manufacturing expanded by 2.8 percent in August, strong performance of global markets, particularly as all three reversing the 3.5 percent contraction from July. Factory output major US equity indices notched up to record highs. By end- for key sectors such as metal production, printing, and September, the PSEi grew by 4.4 percent month-on month, furniture production grew in the double-digits. However, this closing at 8,171. On an annual basis, it expanded by 7.1 percent manufacturing activity growth pales the 13.3 percent in September, bolstered by a sharp rise in foreign investor expansion registered in August 2016. The Nikkei Philippines activity. Net-foreign buying reached Php29.0 billion in Manufacturing Purchasing Manager’s index slightly rose to September, a sharp reversal from the Php2.1 billion net- 50.8 in September from 50.6 in August. The index remained foreign selling a year ago, and is the highest level of net-foreign above the 50-mark, signifying that factory activities continued buying since July 2016, when it reached Php19.7 billion. As a to expand. The average capacity utilization rate ticked up to result of the strong performance in September, the PSEi has 83.8 percent in August, from 83.7 percent in July and 83.5 expanded by 19.1 percent since January, higher than the 11.7 percent a year ago, with more than half of major industries percent growth recorded in the same period in 2016. operating at 80 percent and above capacity. PHILIPPINES Monthly Economic Developments | October 2017 Figure 1: The economy is projected to grow at 6.6 percent in Figure 2: The stock exchange index reached a record-high in 2017. September. 9 Foreca st 8 7.6 6.9 6.8 6.9 6.8 7 7.1 6.6 6.7 6.1 6.1 6.6 6.7 6.7 6 In percentage 5.2 5 4 4.2 3.7 3 2 1 1.1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 New forecast Old forecast (July 2017) Actual growth Source: Philippine Statistics Authority (PSA) and World Bank staff calculations Source: Philippine Stock Exchange Export growth slightly slowed in August while imports contraction of 11.5 percent in July). Consumer goods imports, increased sharply. Export growth remained robust but which account for nearly a fifth of total imports, grew by 6.7 decelerated slightly in August, expanding by 9.3 percent year- percent year-on-year compared to 10.7 percent growth in July. on-year, compared to the 10.4 percent growth registered in In September, inflation increased back to April peak levels. July. Slower export growth in August was a result of the lower Headline inflation rose from 3.1 percent in August to 3.4 growth in manufactured goods exports, which account for percent year-on-year in September, matching the peak nearly ninety percent of total goods exports. Manufactured recorded in April. This was mainly due to higher food and goods exports expanded in August by 5.4 percent year-on-year energy prices. Energy prices rose due to upward adjustments compared to 8.7 percent in July. Electronic products exports in electricity charges and higher prices for domestic petroleum grew by 3.5 percent year-on-year in August, which was much products. Food inflation stood at 3.7 percent year-on-year in slower than the 11.9 percent growth registered in the previous September for the second consecutive month. Excluding month. Meanwhile, imports increased by 10.5 percent year- volatile food and energy items, core inflation rose to 3.3 on-year in August, a sharp reversal from the 3.2 percent percent in September from 3.0 percent in August, its highest contraction registered in July. The increase of imports was rate since September 2014 when it reached 3.4 percent. The fueled by a strong rebound in raw materials and intermediate year-to-date headline inflation averaged 3.1 percent and core goods imports which expanded by 10.6 percent (compared to inflation averaged 2.9 percent, falling within the central bank’s a contraction of 8.2 percent in July), and capital goods imports, target range of 2-4 percent. which expanded by 10.5 percent year-on-year (compared to a Figure 3: The peso appreciated in September compared to the Figure 4: Manufacturing activities rebounded in August. month before. Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | October 2017 Figure 5: Exports growth slightly slowed while imports Figure 6: Headline and core inflation rose further in increased sharply. September. Metro Manila Outside Metro Manila Core Inflation Headline Inflation 9.0 Food & Non-alcoholic beverage 8.0 7.0 6.0 IN PERCENT 5.0 4.0 3.0 2.0 1.0 0.0 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Mar-14 Mar-16 Mar-17 Mar-15 Dec-13 Jun-14 Dec-14 Dec-15 Jun-16 Dec-16 Jun-15 Jun-17 Source: PSA Source: PSA In August, government spending continued to grow in the In addition, SB 1592 reduces the removal of value added tax double-digits for the fourth consecutive month, while exemptions to 36 lines from 70 in the DOF version of the bill, revenues expanded at a slower pace. Government revenues and restructured excise taxes on fuel, automobiles, and on reached Php230.4 billion in August, increasing by 9.9 percent sugar-sweetened beverages. Preliminary estimates by the DOF year-on-year in nominal terms, at about half the pace of the reveal that SB 1592 would yield lower additional revenue of 18.6 percent growth registered a year ago. Traditionally, Php59.9 billion (0.3 percent of GDP), compared to Php119.4 August is a key revenue collection month, as in August the billion (0.7 percent of GDP) revenue estimate for HB 5636. filing of the quarterly income tax for self-employed individuals The Philippine banking sector remained stable while is due. Tax revenues expanded in August by an impressive 10.6 domestic liquidity continued to expand. As a result of strong percent year-on-year in nominal terms, as both the Bureau of credit demand, domestic liquidity (M3) grew by 15.4 percent Customs and Bureau of Internal Revenue posted strong growth year-on-year to about Php10.1 trillion in August, faster than in tax revenue collections (expanding by 15.7 percent and 9.0 the 13.5 percent expansion in the previous month and the 11.8 percent year-on-year, respectively). However, growth was percent expansion in August 2016. Domestic claims expanded slower than the 14.9 percent a year ago. Meanwhile, due to sustained credit growth to the private sector. Growth in government spending continued to grow at a healthy rate after bank loans has remained strong on account of lending to firms a slow start to the year, with spending increasing in August by in real estate, electricity and gas, and wholesale and retail 13.9 percent year-on-year in nominal terms, compared to 9.5 trade, and on account of further increasing lending to percent a year ago, and reaching Php201.6 billion. This households with a continued expansion in auto loans and represents the fourth consecutive month of double digit credit card loans. The Philippine banking sector is well growth in government spending. The government recorded a capitalized and stable. The total capital to total assets ratio was fiscal surplus of Php28.8 billion in August. at 12.0 percent in August compared to 12.4 percent a year ago. On September 21, the Senate of the Philippines filed its own In August, the capital adequacy ratio stood at 15.5 percent and version of the tax reform package. Senate Bill No. 1592 (SB the non-performing loan ratio at 2.0 percent. 1592) was filed on September 21. It includes significant differences from the House Bill 5636 (HB 5636). SB 1592 reduces the threshold amount for personal income tax exemption to Php150,000 from Php250,000 in the HB 5636. 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 | October 2017