Philippines Monthly Economic Developments November 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  The Philippine economy grew by over six percent in Q3 2019.  Trade contracted for the sixth consecutive month in September.  Public spending growth surged in September, driven by a significant uptick in public infrastructure growth. The Philippine economy recovered in Q3 2019, growing by from the 1.3 percent growth a year ago, but an improvement over six percent. Economic growth rebounded in Q3 2019, as to the 9.7 percent contraction in August. Eight of the 20 major growth accelerated to 6.2 percent year-on-year (yoy) from 6.0 manufacturing industries posted declines led by the double- percent in the previous year, fueled by robust growth of digit decreases in the growth of electrical machinery, private consumption. Private consumption grew by 5.9 petroleum products, and miscellaneous manufactures. The percent in the third quarter of 2019, compared to 5.3 percent manufacturing sector may build on the modest improvement a year ago, as consumer confidence continued to improve, in September as the Nikkei Purchasing Managers’ Index driven by the continuing moderation in inflation, steady reached 52.1 percent in October from 51.8 percent in the remittance growth, and sustained performance in the labor previous month. Meanwhile, the average capacity utilization market. Investment growth contracted for the second rate marginally improved to 84.4 percent in September, as 13 consecutive quarter despite strong growth in investments in of the 20 major industries reported at least 80 percent capacity the construction sector, as durable equipment investments, utilization rates. which account for over 50 percent of total investment activity, Trade contracted for the sixth consecutive month in contracted by 9.1 percent yoy (a sharp reversal from the 18.5 September. Merchandise imports further contracted by 10.5 percent growth a year ago). Meanwhile, exports grew by its percent in September, yoy, from the 8.8 percent drop in the slowest pace in six years as weaker external demand was previous month and a sharp reversal from the 30.2 percent driven by the slowdown in global growth and trade activity. growth in the same period last year. This was led by the 23.1 Import growth remained subdued, as overall investment percent decline in raw materials and intermediate goods activity remained weak and as the manufacturing sector purchases, which accounted for 35.4 percent of imports, while struggled in the third quarter of 2019. imports of capital goods registered almost flat growth and Manufacturing output contracted for the tenth consecutive contributed to 32.5 percent of total importation. On the other month in September, while leading indicators point to a hand, merchandise exports contracted as well by 2.6 percent, modest recovery in October. Factory output in the Philippines ending a streak of modest growth rates ranging 1.0 to 3.5 continued to struggle, as the volume of production index percent that started in April 2019. Seven out of the country’s (VoPI) contracted by 3.0 percent yoy in September, a reversal top ten commodity export groups experienced contractions Figure 1: Private consumption drove growth in the third Figure 2: Manufacturing Output contracted for the tenth quarter of 2019. consecutive month in September. 30.0 84.6 Demand side: Contribution to GDP growth VoPI VaPI Average Capacity Utilization Rate 15 Capacity Utilization (in percentage) 25.0 84.4 10 20.0 5 15.0 84.2 Percentage point 0 10.0 In percentage 84 -5 5.0 0.0 83.8 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -5.0 83.6 2015 2016 2017 2018 2019 -10.0 Private consumption Govt consumption Investments Discrepancy Net exports GDP Growth -15.0 83.4 Source: Philippine Statistics Jan-19 Mar-19 Jul-19 Nov-18 Sep-18 May-19 Sep-19 Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | November 2019 while electronic products, which accounted for 61.0 percent of percent yoy. Transport prices likewise declined while housing export sales, only grew by 3.8 percent. As a result, the trade and utilities inflation slowed driven by lower international gap narrowed by 22.5 percent from US$4.0 billion in the same price of oil. Core inflation also slowed from 4.9 percent in period last year to US$3.1 billion, albeit expanding from the October 2018 to 2.6 percent in October 2019. In this context, US$2.7 billion deficit in the previous month. the BSP announced another reduction of 100 basis points in the reserve requirements for universal/commercial banks, Amid higher net foreign buying, the Philippine Stock thrift banks, and non-bank financial institutions with quasi- Exchange index (PSEi) rebounded in October. The PSEi rose by banking to 14 percent, 4 percent, and 14 percent, respectively, 2.5 percent month-on-month in October closing at 7,977. The effective December 2019. local market tracked the upswing in the regional markets, bolstered by news of market rallies in Wall Street. Towards the Public spending growth surged in September, driven by a end of October, the announced decrease in the U.S. Federal significant uptick in public infrastructure growth. Public Reserve rate also supported the local stocks. Foreign buying spending continued to gain steam in September as raked in Php3.7 billion in October, reversing the net foreign expenditure growth accelerated to 39.0 percent yoy in selling of Php7.5 billion in September. Similarly, the foreign nominal terms from 26.0 percent a year ago, as the exchange market improved with the peso appreciating by 2.0 government continues to implement its catch-up spending percent month-on-month to Php/US$51.03 in October. On an program for the rest of the year. The increase was driven by annual basis, the peso has appreciated by 5.0 percent. Foreign the robust growth in public infrastructure expenditures, which reserves marginally rose to US$85.7 billion in October from expanded by 53.9 percent yoy in September compared to 21.6 US$85.6 billion in September, with the import coverage at 7.5 percent over the same period in 2018. Yet, infrastructure months, the same level in September. spending remained below programmed target through three quarters by Php48.3 billion (8.1 percent short relative to the The central bank announced another reduction in reserve program). Meanwhile, public revenue growth remained requirements as inflation maintained its downtrend. In robust, as revenue growth rose to 16.9 percent yoy in nominal October, the consumer price index (CPI) inflation recorded its terms in September compared to 1.1 percent a year ago. slowest since May 2016 at 0.8 percent yoy from 0.9 percent in Strong revenue growth was supported by healthy growth in tax September. Year-to-date inflation declined to 2.6 percent, revenues, which expanded by 15.0 percent yoy in nominal compared to 5.1 percent last year over the same period, within terms compared to flat growth a year ago largely due to higher the Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4 revenue collection derived from TRAIN and import duties from percent. Base effects contributed to the low inflation alongside implementation of the Rice Tariffication law. As a result of a the continuing drop in the food prices, particularly rice with faster growth in public expenditure relative to revenue, the palay declining by 14 percent yoy as of October. On average, national government posted a wider fiscal deficit of Php178.6 the price of palay (unhusked rice) has declined by 14.0 percent billion in September 2019, nearly twice the size of the Php96.2 yoy by October year-to-date, while the price of rice by 5.0 billion deficit from a year ago. Figure 3: Inflation eased further in October. Figure 4: The budget gap widened in September on the back of surge in public spending growth. 340 Core Inflation Headline Inflation 320 12 Food & Non-alcoholic beverage BSP Key policy rate 300 280 260 10 240 220 200 180 8 160 In Billion Pesos 140 120 Percent YOY 6 100 80 60 40 4 20 - (20) 2 (40) July Jan July Jan July (60) (80) 0 (100) 2018 2019 (120) (140) (160) -2 (180) (200) Apr-17 Aug-17 Apr-18 Aug-18 Apr-19 Aug-19 Jun-17 Jun-18 Oct-16 Feb-17 Oct-17 Feb-18 Oct-18 Feb-19 Jun-19 Dec-16 Dec-17 Dec-18 Oct-19 (220) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: Bangko Sentral ng Pilipinas Source: Bureau of the Treasury (BTr) PHILIPPINES Monthly Economic Developments | November 2019 Developments to Watch  Manufacturing output: will it start to expand next month?  Exports performance: will it improve in the coming months?  Public expenditure: will the spending momentum continued through the holiday season? Selected Economic and Financial Indicators 2017 2018 Q1 2019 Q2 2019 Q3 2019 Aug-19 Sep-19 Oct-19 Real GDP growth, at constant market prices 6.7 6.2 5.6 5.5 6.2 Private consumption 5.9 5.6 6.1 5.5 5.9 Government consumption 7.0 12.8 7.4 7.3 9.6 Capital formation 9.4 13.7 8.0 -8.5 -2.1 Exports, goods and services 19.5 11.5 5.7 4.8 0.2 Imports, goods and services 18.1 14.5 8.6 -0.1 0.0 Industry Performance Value of Production Index -1.4 8.0 -3.7 -7.5 -5.8 -7.9 -2.3 Volume of Production Index -0.5 7.2 -7.3 -9.5 -6.8 -9.3 -3.0 Capacity Utilization 83.8 84.2 84.3 84.3 84.3 84.3 84.4 Nikkei Philippines Purchasing Managers' Index 53.2 52.5 51.9 51.1 51.9 51.9 51.8 52.1 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 3.8 3.0 1.7 1.7 0.9 0.8 Core Consumer Price Index 2.5 4.1 3.6 3.4 2.9 2.9 2.7 2.6 Domestic liquidity (M3) 13.3 11.6 7.1 6.6 6.9 6.2 7.7 Credit growth 17.8 16.4 11.9 10.7 9.3 9.1 8.8 Business loans 17.4 17.2 13.3 10.7 8.2 8.0 8.0 Consumer loans 20.5 15.1 10.0 11.3 13.7 14.1 14.6 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -2.1 1.0 -5.8 -2.5 -178.6 Total Revenue (% of GDP) 15.7 16.4 16.3 18.6 17.3 279.7 236.5 Tax Revenue (% of GDP) 14.2 14.7 14.6 16.5 15.8 261.8 211.0 Total Expenditure (% of GDP) 17.9 19.6 18.5 17.6 23.1 282.2 415.1 National government debt (% of GDP) 42.1 41.9 44.0 43.7 43.3 7,939 7,908 Stock market PSEi (month-end value) 8,558 7,466 7,921 7,974 7,779 7,980 7,779 7,977 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 0.6 0.8 -2.6 Imports of merchandise goods (growth rate) 13.6 9.4 4.7 -5.9 -7.8 -8.8 -10.5 Net foreign direct investment (in million US$) 10,057 9,802 1,941 1,633 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 85,596 86,031 85,581 85,702 Import cover 8.4 7.1 7.4 7.4 7.4 7.5 7.4 7.5 Nominal exchange rate 50.40 52.68 52.36 52.06 51.8 52.1 52.1 51.5 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 Ndiame Diop. Monthly Economic Developments | November 2019 PHILIPPINES Contact Rong Qian (rqian@worldbank.org) for questions.