Philippines Monthly Economic Developments March 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) fell in February, impacted by higher global financial market volatility. • The central bank intervened in the market to manage excessive volatility as the Philippine peso value slid to above the US$52.00 mark in February. • Exports recovered in January from their December contraction, while import growth continued in the double-digits. • Manufacturing activities also rebounded in January following a nearly continuous contraction in the second half of 2017. • Despite the introduction of a new rebased index, February headline inflation surged to its highest level in more than three years. • In 2017, expenditures grew slower than revenues, slightly narrowing the fiscal deficit level. • Business confidence weakened in the first quarter of 2018. • Underemployment increased in January and underemployment rose significantly. The Philippine Stock Exchange index (PSEi) fell in February, Exports of electronics products, which accounted for half of impacted by higher global financial market volatility. The PSEi the total export bill, grew by 10.8 percent year-on-year in dropped by 3.3 percent month-on-month as of end-February, January, compared to a 15.0 percent in December 2017 and a when rising inflation expectations in the US and the prospect 7.8 percent contraction recorded in January a year ago. of faster normalization in US monetary policy caused increased However, the growth of the country’s other main exports global financial market volatility. The decline in the PSEi was goods and commodities experienced sharp contractions in accompanied by large net-foreign selling, which totaled January. In particular, exports of agriculture products and non- Php15.3 billion in February 2018 − the largest since November electronics manufacturing, which cumulatively accounted for 2016 (when it registered Php18.8 billion). As a result, the PSEi nearly two-fifths of the total export bill, contracted by 11.2 contracted by 1.0 percent since end-2017, but kept its value percent and 20.2 percent year-on-year, respectively. still 17.5 percent higher compared to end-February a year ago. Meanwhile, import growth continued in the double-digits for the fourth consecutive month. Imports expanded by 11.4 The central bank intervened in the market to manage percent year-on-year in January, although less than the 17.6 excessive volatility as the Philippine peso value slid to above percent growth in December, and similar to the 12.2 percent the US$52.00 mark in February. The peso closed in February growth recorded in January 2017. This was driven by robust at Php/US$52.03 which represents a 3.5 percent year-on-year growth in capital goods imports and raw materials and depreciation compared to end-February a year ago, and a 1.2 intermediate goods imports, which expanded by 16.9 percent percent month-on-month depreciation from Php/US$51.42 and 14.9 percent year-on-year, respectively. this January. The weaker peso has been linked to the widening current account deficit, higher net portfolio outflows, and Manufacturing activities also rebounded in January following concerns of accelerating domestic inflation. The central bank a nearly continuous contraction in the second half of 2017. sold dollar reserves to manage excessive volatility in the The volume of production index (VoPI) grew at 21.9 percent market. The Gross International Reserves (GIR) dropped to year-on-year in January 2018 − for the first time since August US$80.6 billion in February from US$81.2 billion in the 2017 − which is stronger than the 14.9 percent expansion in preceding month and US$81.4 billion in February 2017. At its January a year ago, and a turn-around from the 9.7 percent current level, the GIR can cover 8.2 months’ worth of imports contraction in December. The expansion was driven by strong of goods and payments of services and primary income, down activities in the petroleum product production, machinery from 8.7 months in February a year ago. production, and the food manufacturing sectors. However, the Nikkei Philippines Purchasing Managers’ Index (PMI) softened Exports recovered in January from their December further in February to 50.8 from 51.7 in January, and compared contraction, while import growth continued in the double- to 53.6 in February a year ago. Despite the weakening, the digits. The country’s total export revenue grew marginally by index remained in expansion territory, supported by growth in 0.5 percent year-on-year in January, reversing the 4.9 percent output and new orders. contraction of December, but remaining significantly below the 22.0 percent growth registered in January a year ago. PHILIPPINES Monthly Economic Developments | March 2018 Figure 1: The PSEi fell in February, impacted by higher global Figure 2: … while the peso value slid to above the market volatility ... Php/US$52.00 mark in February. 9,500 35 9,000 30 8,500 25 20 8,000 15 PHP billion 7,500 Index 10 7,000 5 6,500 0 6,000 Net Foreign Buy (RHS) PSEi -5 5,500 -10 Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Despite the introduction of a new rebased index, February inflation was driven by faster price increases in food items such headline inflation surged to its highest level in more than as fish, meat and corn. Transport prices rose particularly fast three years. The Philippines Statistics Agency (PSA) rebased in February, by 14.5 percent year-on-year, partly due to the the Consumer Price index (CPI) series from the previous base increase in excise taxes, and the increase in global crude oil year of 2006 to the new base year 2012, changed the weights prices. The core inflation remains tracked under the old 2006 of the inflation basket using expenditure data from the 2012 base and rose to 4.4 percent year-on-year in February from 3.9 Family Income and Expenditure Survey, and adopted other percent in January (and compared to 2.7 percent in February a methodological changes. The new series assigns less weight to year ago), partly due to pass through effect from a weaker food (except rice and other cereals) and energy items, and peso. The newly based headline inflation rate falls within the shifted more weight to non-food items such as health and central bank’s 2-4 percent target range; however, its sustained communication. With the new base year, the January year-on- rise is raising expectations of potential rate hikes in the near year inflation was revised from 4.0 to 3.4 percent. Using the future. old 2006-based series, headline inflation rose to 4.5 percent In January, credit growth slowed. Domestic liquidity (M3) year-on-year in February. Based on the new 2012-based CPI grew by 12.8 percent year-on-year to about Php10.6 trillion in series, the 12-month CPI climbed in February further to 3.9 January, faster than the 11.9 percent year-on-year growth in percent year-on-year, compared to 3.1 percent in February December and compared to a similar growth of 12.5 percent last year. This is also the highest level since September 2014 in January last year. However, domestic sources growth was when the country endured a domestic rice shortage. Higher slightly slower (13.5 percent year-on-year) in January Figure 3: Export growth recovered after a December Figure 4: … and manufacturing activities also rebounded. contraction ... Jan-18 Nov-17 Sep-17 In percent Jul-17 May-17 Mar-17 Jan-17 -50 -40 -30 -20 -10 0 10 20 30 40 50 Exports Imports Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | March 2018 Figure 5: A newly rebased CPI series showed headline inflation Figure 6: In 2017, expenditures grew slower than revenues, spiking at a three-year high. slightly narrowing the fiscal deficit level. Headline Inflation Metro Manila Outside Metro Manila 20.0 Revenues Expenditure Fiscal Balance 17.6 17.9 6.0 16.8 16.7 16.3 (2012=100) 15.1 15.7 15.8 15.2 15.7 14.5 14.9 5.0 15.0 4.0 In percent, YOY 3.0 10.0 Percent of GDP 2.0 1.0 5.0 0.0 -1.0 0.0 -0.6 -0.9 -2.0 -1.4 -2.3 -2.4 -2.2 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Aug-14 Aug-15 Aug-16 Aug-17 May-14 May-15 May-16 May-17 Nov-14 Nov-15 Nov-17 Nov-16 -5.0 2012 2013 2014 2015 2016 2017 Source: PSA Source: Bureau of the Treasury compared to December (13.7 percent), as credit grew at a Business confidence weakened in the first quarter of 2018. slower rate. On an annual basis, bank lending expanded at 19.1 According to the Bangko Sentral ng Pilipinas’ business percent in January from an upward-revised 19.4 percent expectations survey, firms’ overall confidence index declined growth in December. However, this is still higher compared to to 39.5 percent in the first quarter of 2018 compared to 43.3 the 17.1 percent of January last year. Business loans which percent in the fourth quarter of 2017. The dip in confidence is comprise 88.4 percent of banks’ aggregate loan portfolio grew attributed to the seasonal slowdown in business activity, by 18.1 percent in January, slower than the revised 18.6 following the peak demand season during the December percent growth in the previous month, and largely went to real holidays and rising input costs driven by higher fuel prices estate, utilities, and wholesale and retail trade. Meanwhile, which increases competition. Across sectors, the outlook of the growth of household loans also slowed slightly to 20.3 industry firms was most optimistic, due to expected percent in January from the revised 20.8 percent in December, improvements in the construction sector as a result of new with declines in the growth of motor vehicle and salary loans. projects under the government’s infrastructure programs. In 2017, expenditures grew slower than revenues, slightly Unemployment increased in January and underemployment narrowing the fiscal deficit level. Public expenditure reached rose significantly. The unemployment rate increased to 5.3 17.9 percent of GDP in 2017 slightly up from 17.6 percent in percent in January 2018 from 5.0 percent in October 2017, but 2016. However, the government still fell short of its was comparably lower than the 6.6 percent of January 2017. programmed spending for 2017 by three percent, as recurrent Comparing unemployment levels to January 2017 rather than expenditures failed to reach its target. Expenditure growth October due to strong seasonality of the series, net-job was driven by infrastructure outlays, which exceeded its creation increased in January, amounting to 2.4 million new programmed target, reaching 3.6 percent of GDP. Despite the jobs. These new jobs spread evenly among the three major Bureau of Customs and Bureau of Internal Revenue missing sectors: agriculture and services each accounting for 35.0 narrowly their collection targets, revenues reached 15.7 percent, and industry accounting for 30.0 percent of new jobs. percent of GDP in 2017 compared to 15.2 percent in 2016, Underemployment also increased in January compared to driven by an increase in tax revenues. As a result, the fiscal October 2017 and January 2017. The underemployment rate deficit shrank slightly to 2.2 percent of GDP in 2017 from 2.4 increased to 18.0 percent from 15.9 percent in October and percent in 2016. The deficit was largely financed through 16.3 percent in January 2017, suggesting continued quality of domestic resources, with net domestic borrowing accounting jobs concerns. for 96.4 percent of total financing, more than doubling to Php731.4 billion in 2017 from Php355.0 billion in 2016. At the same time, the national government increased financing from external sources which reached Php27.6 billion in 2017. Please contact Birgit Hansl: bhansl@worldbank.org PHILIPPINES Monthly Economic Developments | March 2018 Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of Kevin Chua, Kevin Thomas Cruz and Isaku Endo.