Philippines Monthly Economic Developments September 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  Food manufacturing expanded for the first time in nearly a year in July, but overall manufacturing output contracted for the eighth consecutive month.  The trade deficit expanded despite the contraction of imports in July 2019.  Inflation fell below central bank’s target in August 2019. In July, food manufacturing expanded for the first time in needed for infrastructure projects, grew for the first time in nearly a year while overall manufacturing output declined for five months (3.4 percent). Meanwhile, export growth the eighth consecutive month. Food manufactures, which accelerated to 3.5 percent, yoy, from the 2.3 percent growth accounts for the largest share of manufacturing output, in July 2018. Eight out of the country’s top ten export registered growth for the first time in a year, expanding by 8.3 commodity groups registered growth, led by electronic percent year-on-year (yoy) in July from 5.5 percent a year ago. products which grew by 2.9 percent while accounting for 55.9 However, the rebound in food manufacturing was not enough percent of export sales. As a result, the trade deficit widened to offset the declines in the output of manufactures of to US$3.4 billion in July from US$2.4 deficit in June, yet lower petroleum products, furniture and fixtures, and electrical than the US$4.0 billion deficit incurred in the same period last machinery. As a whole, the country’s manufacturing sector year. struggled in July, as the volume of production index (VOPI) Escalation of the US-China trade dispute led to portfolio contracted by 8.1 percent yoy, a slight improvement from the outflow in August, and the Philippine peso weakened. The 11.6 percent contraction in June. The outlook for the sector PSEi closed at 7,979 in August, declining by 0.8 percent month- may show modest growth in the succeeding month, as the on-month from the closing of 8,045 in July. The local stock Nikkei Philippines Purchasing Managers’ index (PMI) market mirrored developments in the regional markets, registered an expansion at 51.9 percent in August 2019, affected by the escalation in the U.S.-China trade disputes, and slightly less than the 52.1 percent in July. fears of recession. Weaker investor confidence was The trade deficit widened in July 2019. Merchandise imports pronounced, evidenced by the high net foreign selling of contracted by 4.2 percent, yoy, an improvement from the 10.4 Php11.8 billion in August from a Php4.1 billion net foreign percent contraction in the previous month but a sharp reversal buying in July. Alongside the weak stock market, the Philippine from the 39.8 percent growth in the same period last year. peso weakened to Php/US$52.34 in August, representing a 2.5 Imports of raw materials and intermediate goods accounting percent month-on-month depreciation. Foreign reserves rose for 39.1 percent of imports, fell by 11.7 percent, continuing the to US$85.6 billion in August from US$85.2 billion in July, due double-digit downward trend that began in April. Capital to higher net foreign currency deposits and central bank’s goods, which represent 31.7 percent of import purchases and income from its investment abroad. The reserves can cover Figure 1: Manufacturing output contracted for the eighth Figure 2: The Philippine peso weakened in July. consecutive month in July 2019. 30 VoPI 84.6 55.0 Capacity Utilization (in percentage) 25 VaPI Average Capacity Utilization Rate 84.4 54.0 20 53.0 15 84.2 52.0 PHP/US$ 10 84 51.0 In percentage 5 50.0 0 83.8 49.0 -5 48.0 83.6 -10 47.0 -15 83.4 Jan-19 Jul-18 Nov-18 Mar-19 Sep-18 May-19 Source: Philippine Statistics Authority (PSA) Source: Bangko Sentral ng Pilipinas (BSP) PHILIPPINES Monthly Economic Developments | September 2019 7.5 months’ worth of import, an improvement from the 7.4 In July, public spending growth continued to struggle, while months’ worth in July. revenue growth remained healthy. National government expenditure growth slowed to 3.4 percent yoy in nominal Inflation fell below the central bank’s target range in August. terms in July, a substantial slowdown from the 33.8 percent The 12-month Consumer Price Index (CPI) inflation moderated growth recorded during the same period last year, driven by to its near three-year low at 1.7 percent, yoy, in August, another contraction in public infrastructure spending by 11.0 breaching the lower bound of the 2-4 percent inflation target percent in nominal terms, a sharp reversal from the 74.6 of the BSP. This is lower than the 2.4 percent inflation in July percent growth in July 2018. This development suggest that and 6.4 percent in August 2018. Year-to-date inflation stood at the government faces challenges to accelerate the 3.1 percent in August. The influx of rice imports led to a implementation of public works programs after the passage of contraction in the price of rice and contributed to a slower rate the 2019 national government budget. Meanwhile, revenue of increase in food and non-alcoholic beverages prices. growth remained robust, as tax collections expanded by 8.8 Housing, water, electricity, and gas inflation decelerated percent in July, although slower compared to the 24.8 percent driven by downward adjustments in domestic electricity prices growth a year ago. As a result, the fiscal deficit shrank by 12.9 while transport prices contracted due to lower international percent yoy to Php75.3 billion. Yet, the government expects energy prices. Core inflation softened in August to 2.9 percent public infrastructure spending to pick up in the second half of from 3.2 percent in July and 4.8 percent in August 2018. The the year, as the revised disbursement programs of the DPWH BSP’s key policy rate was maintained at 4.25 percent in early and DOTr are heavily weighted in the last two quarters of 2019. September. The unemployment rate steadied, and underemployment Domestic liquidity continues to expand. Domestic liquidity rate further declined in July 2019. On an annual basis, the net (M3) grew by 6.7 percent year-on-year to about jobs created totaled 2.3 million in July 2019 driven primarily by Php11.9 trillion in July, faster than the 6.4 percent growth in the 1.4 million jobs generated in the service sector. June, likely influenced by more accommodative monetary Meanwhile, agriculture sector gained a total of 0.7 million jobs policy. Demand for credit remained the principal driver of due to harvest season and weakening impact of El Niño while money supply growth. Outstanding loans of universal and the industrial sector jobs increased by 0.2 million. commercial banks, net of reverse repurchase (RRP), grew at Unemployment rate kept at 5.4 percent in July, same as July 11.1 percent in July from 10.5 percent in June. Loans for 2018 given more entrants to the market, reflected in the production activities were driven by lending to the real estate higher labor force participation rate in July (62.1 percent) activities; financial and insurance activities; and utilities relative to July 2018 (60.1 percent). Underemployment rate, sectors. Meanwhile, loans for household consumption grew by share of employed persons who express the desire to work 23.0 percent in July, due to faster growth in motor vehicle and more, declined further to 13.9 percent in July from 17.2 salary-based general-purpose consumption loans. percent in July 2018 mainly in the agriculture sector, but higher than 13.5 percent in April 2019. Figure 3: The national government posted a smaller fiscal deficit Figure 4: Unemployment remained stable and in July 2019. underemployment declined in July 2019. 340 25 320 300 280 20 260 240 220 200 15 Percent 180 In Billion Pesos 160 140 120 10 100 80 60 5 40 20 - (20) 0 (40) July Jan July Jan July January July January July January July January July January July January July January July January July January July January July January July (60) (80) 2018 2019 (100) (120) (140) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Net Foreign Financing Net Domestic Financing Unemployment rate Underemployment rate Budget Surplus/Deficit Source: Bureau of the Treasury (Btr) Source: PSA PHILIPPINES Monthly Economic Developments | September 2019 Developments to Watch  Manufacturing output: will the contraction continue or will output start to stabilize?  Budget execution: will public infrastructure spending pick up in the second half of the year?  Labor market: will conditions continue to improve to support private consumption growth? Selected Economic and Financial Indicators 2017 2018 Q1 2019 Q2 2019 Q3 2019 Jun-19 Jul-19 Aug-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 -7.5 -9.6 -7.3 Volume of Production Index -0.5 7.2 -7.3 -9.5 -10.5 -8.1 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 51.3 52.1 51.9 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 3.8 3.0 2.7 2.4 1.7 Core Consumer Price Index 2.5 4.1 3.6 3.4 3.3 3.2 2.9 Domestic liquidity (M3) 13.3 11.6 7.1 6.6 6.4 6.7 Credit growth 17.8 16.4 11.9 10.7 10.0 9.9 Business loans 17.4 17.2 13.3 10.7 9.4 8.7 Consumer loans 20.5 15.1 10.0 11.3 11.9 12.3 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -2.1 1.0 -41.8 -75.3 Total Revenue (% of GDP) 15.7 16.4 16.3 18.6 233.9 264.1 Tax Revenue (% of GDP) 14.2 14.7 14.6 16.5 210.5 236.9 Total Expenditure (% of GDP) 17.9 19.6 18.5 17.6 275.7 339.4 National government debt (% of GDP) 42.1 41.9 44.0 43.7 7,869 7,804 Stock market PSEi (month-end value) 8,558 7,466 7,921 7,974 7,999 8,046 7,980 External accounts Current account balance (% of GDP) -0.7 -2.4 -1.5 Exports of merchandise goods (growth rate) 18.4 -0.3 -3.1 1.2 3.3 3.5 Imports of merchandise goods (growth rate) 13.6 9.4 4.7 -5.9 -10.4 -4.2 Net foreign direct investment (in million US$) 10,057 9,802 1,941 Balance of payment (% of GDP) -0.3 -0.7 4.7 International reserves (in million US$) 81,273 78,140 83,613 84,722 84,932 85,176 85,612 Import cover 8.4 7.1 7.4 7.4 7.4 7.4 7.5 Nominal exchange rate 50.40 52.68 52.36 52.06 51.8 51.1 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 -1.3 Business confidence index (end of period) 43.3 27.2 35.2 40.5 40.5 PHILIPPINES Monthly Economic Developments | September 2019 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. Contact Rong Qian (rqian@worldbank.org) for questions. PHILIPPINES Monthly Economic Developments | September 2019