Philippines Monthly Economic Developments h October 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  Due to heightened global uncertainties and slowdown in investment spending, growth will be lower than expected.  Manufacturing output declined for the ninth consecutive month in August.  Inflation easing continued in September, prompting further monetary policy loosening. Due to heightened global uncertainties and slowdown in manufactures of petroleum products, electrical machinery, investment spending, growth will be lower than expected. and transport equipment impacted by slower global demand. The World Bank projects the real GDP growth at 5.8 percent in The outlook for the manufacturing sector remains subdued, as 2019, before recovering to 6.1 percent and 6.2 percent in 2020 reflected by the Nikkei Philippines Purchasing Managers’ Index and 2021, respectively. These projections are lower than the which weakened to 51.8 in September, the lowest in three estimates of 6.4 percent in 2019 and 6.5 percent in 2020 and months. Meanwhile, the average capacity utilization rate 2021 in the Global Economic Prospects June edition. The remained steady at 84.3 for the third consecutive month, with revisions incorporate downside risks that have materialized 13 of the 20 major industries reporting with at least 80 percent since the April 2019 Philippines Economic Update such as weak capacity utilization. global manufacturing and trade, escalating trade tensions, and Trade deficit narrows as import continued to contract while slowdown in domestic public spending. Compared to 2018, exports were flat in August. Merchandise exports slightly private consumption growth is expected to accelerate in the expanded by 0.6 percent, yoy, in August – the slowest pace second half of 2019 with declining inflation and improving since March. Electronic products, which accounts for 58.5 labor market conditions. Net exports will be subdued due to percent of exports, grew at a steady pace of 6.6 percent but weak external environment. Economic growth is expected to was bogged down by contractions in seven out of the country’s surpass 6.0 percent in 2020-21 as global growth is expected to top ten export commodity groups (e.g. machinery, transport moderately improve, the impact of public expenditure equipment, and other manufactures). Meanwhile, slowdown dissipates, and assuming the uncertainty around merchandise imports contracted by 11.8 percent, yoy, faster the passage of the Corporate Income Tax and Incentives than the 4.2 percent contraction in July, a substantial reversal Rationalization bill is resolved. from the 12.6 percent growth in the same period last year. Manufacturing output declined for the ninth consecutive Imports of raw materials and intermediate goods declined by month in August. The manufacturing sector remained weak, 18.7 percent, yoy, along with capital goods which dropped by as the volume of production (VoPI) index contracted by 9.3 9.8 percent. As a result, the trade deficit reached US$2.4 billion percent year-on-year (yoy) in August 2019, a further in August, below the US$3.4 billion deficit in July and the deceleration from the 6.1 percent contraction posted in July. US$3.6 billion trade deficit in the same period last year. The decline was fueled by double-digit contractions in the Figure 1: Real GDP growth is projected to recover to 6.1 Figure 2: Manufacturing Output contracted for the ninth percent and 6.2 percent in 2020 and 2021, respectively. consecutive month in August. 30.0 VoPI 84.6 9.0 Forecast VaPI Capacity Utilization (in percentage) 8.0 25.0 Average Capacity Utilization Rate 84.4 7.0 20.0 6.0 15.0 84.2 5.0 Percent 10.0 4.0 In percentage 84 3.0 5.0 2.0 0.0 83.8 1.0 -5.0 0.0 83.6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -10.0 April 2019 projections October 2019 projections -15.0 83.4 Oct-18 Feb-19 Jun-19 Aug-18 Dec-18 Apr-19 Actual growth Source: Philippine Statistics Authority (PSA) and World Bank staff projections. Source: PSA PHILIPPINES Monthly Economic Developments | October 2019 The Philippine Stock Exchange index (PSEi) declined in /commercial, thrift, and rural banks by 100 bps, which now September due to capital outflow. The PSEi closed at 7,779 in stood at 15 percent, 5 percent, and 3 percent, respectively. September, declining by 2.5 percent month-on-month from Public spending picked up slightly in August, while revenue the closing of 7,979 in August. Local stocks weakened as growth remained healthy. Public spending expanded by 8.8 foreigners dumped local equities on the back of global percent yoy in nominal terms in August, the fastest pace since economic concerns. Net foreign selling reached Php7.5 billion February, although slower than the 28.7 percent growth a year in September, continuing the net selling trend from a month ago. Non-interest spending picked up by 13.7 percent, earlier. Despite the portfolio capital outflow, the peso suggesting that government disbursements is recovering from appreciated 0.6 percent month-on-month to Php/US$52.04 in the slowdown caused by the delayed passage of the 2019 September from Php/US$52.34 in end-August partly in budget. Meanwhile, public revenue growth expanded by 8.9 response to the positive market news of further easing of key percent yoy in nominal terms in August, slightly less than the interest rates by the Bangko Sentral ng Pilipinas (BSP). On an 11.5 percent growth a year ago. Tax revenues grew by 9.2 annual basis, the peso appreciated by 4.2 percent from percent in August (13.0 percent in August 2018), driven by the Php/US$54.25 in end-September 2018. Foreign reserves rose robust growth in tax revenue collections – which continue to to US$86.2 billion in September from US$86.0 billion in August, benefit from the second round of excise tax adjustments due due to higher net foreign currency deposits and income from to the TRAIN law. As a result, the national government posted the BSP’s investment abroad. The reserves can currently cover a deficit of Php2.5 billion in August, slightly lower than the 7.5 months’ worth of import, about the same level in August. Php2.6 billion deficit a year ago. Inflation easing continued in September, prompting further Domestic liquidity growth eased, and bank lending slowed monetary policy loosening. Headline inflation decelerated to in August. Domestic liquidity (M3) grew by 6.2 percent yoy 0.9 percent, yoy, in September from 1.7 percent in August and in August driven by credit demand growth, although 6.7 percent in September 2018. This resulted to 2.8 percent slower than the 6.7 percent growth in July. Domestic claims year-to-date (YTD) inflation, lower than the 5.0 percent YTD in grew by 6.2 percent in August from 5.8 percent (revised) in the September 2018. Base effects and a contraction in the food July due to the growth in private sector credit. Loans for price index held back the headline inflation. Transport price production activities expanded at 9.0 percent in August from contracted while utilities inflation slowed due to improved 9.8 percent in the previous month, driven by lending to real domestic power supply conditions and lower global price of oil. estate activities, financial activities, and construction. Loans Core inflation likewise declined to 2.7 percent in September for household consumption grew by 25.4 percent in August from 2.9 percent in the past month and 4.7 percent a year ago. from 23.0 percent in July, driven by faster growth in motor On the back of sustained inflation easing, on September 27, vehicle, credit card, and salary-based general-purpose loans. the BSP reduced its key policy rate by 25 basis points (bps) to 4 percent and the reserve requirements for universal Figure 3: Net foreign selling lead to a lower PSEi in September. Figure 4: Public spending picked up in August 2019, while revenue growth remained robust. 340 9,500 45 320 300 40 280 9,000 260 35 240 8,500 220 30 200 180 In Billion Pesos 8,000 25 160 140 20 120 PHP billion 7,500 100 15 Index 80 7,000 60 10 40 20 6,500 5 - (20) - (40) July Jan July Jan July 6,000 Net Foreign Buy (RHS) PSEi (close) (5) (60) (80) 2018 2019 (100) 5,500 (10) (120) (140) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: Philippine Stock Exchange (PSE) Source: Bureau of the Treasury (BTr) PHILIPPINES Monthly Economic Developments | October 2019 Developments to Watch  Budget execution: will public spending pick up much faster in the coming months?  Manufacturing output: will the declining trend turn around next month?  GDP: did the economy recover in Q3? Selected Economic and Financial Indicators 2017 2018 Q1 2019 Q2 2019 Q3 2019 Jul-19 Aug-19 Sep-19 Real GDP growth, at constant market prices 6.7 6.2 5.6 5.5 Private consumption 5.9 5.6 6.3 5.6 Government consumption 7.0 12.8 7.4 6.9 Gross fixed capital investment 9.5 14.0 5.7 -4.8 Exports, goods and services 19.5 11.5 5.8 4.4 Imports, goods and services 18.1 14.5 8.3 0.0 Industry Performance Value of Production Index -1.4 8.0 -3.7 -8.9 -5.5 -7.9 Volume of Production Index -0.5 7.2 -7.4 -10.3 -6.1 -9.3 Capacity Utilization 83.8 84.2 84.3 84.3 84.3 84.3 Nikkei Philippines Purchasing Managers' Index 53.2 52.5 51.9 51.1 51.9 52.1 51.9 51.8 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 3.8 3.0 1.7 2.4 1.7 0.9 Core Consumer Price Index 2.5 4.1 3.6 3.4 2.9 3.2 2.9 2.7 Domestic liquidity (M3) 13.3 11.6 7.1 6.6 6.7 6.2 Credit growth 17.8 16.4 11.9 10.7 9.9 8.0 Business loans 17.4 17.2 13.3 10.7 8.7 14.1 Consumer loans 20.5 15.1 10.0 11.3 12.3 9.1 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -2.1 1.0 -75.3 -2.5 Total Revenue (% of GDP) 15.7 16.4 16.3 18.6 264.1 279.7 Tax Revenue (% of GDP) 14.2 14.7 14.6 16.5 236.9 261.8 Total Expenditure (% of GDP) 17.9 19.6 18.5 17.6 339.4 282.2 National government debt (% of GDP) 42.1 41.9 44.0 43.7 7,804 7,939 Stock market PSEi (month-end value) 8,558 7,466 7,921 7,974 7,779 8,046 7,980 7,779 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 3.5 0.6 Imports of merchandise goods (growth rate) 13.6 9.4 4.7 -5.9 -4.2 11.8 Net foreign direct investment (in million US$) 10,057 9,802 1,941 1,633 543 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 85,790 85,176 86,031 86163 Import cover 8.4 7.1 7.4 7.4 7.5 7.4 7.5 7.5 Nominal exchange rate 50.40 52.68 52.36 52.06 51.8 51.1 52.1 52.1 Labor Market Unemployment rate 5.7 5.3 5.2 5.1 5.4 Underemployment rate 16.2 16.4 15.6 13.5 13.9 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, Ray Gomez, Karen Lazaro, Jiyoung Song and Isaku Endo, under the guidance of NdiamePHILIPPINES Diop. Monthly Economic Developments | October 2019 Contact Rong Qian (rqian@worldbank.org) for questions.