Philippines Monthly Economic Developments October 2018 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The World Bank revised its economic growth forecast to 6.5 percent for 2018. • The Philippine Stock Exchange index (PSEi) dropped to its lowest level in nearly two years while peso weakened to a 13-year low in September. • Headline inflation increased further, prompting additional policy rate hike in September. The World Bank revises its economic growth forecast to 6.5 and as well as capital outflows from the stock exchange percent for 2018 from 6.7 percent. Growth outlook for 2019 market. Net foreign direct investment, however, rose and 2020 remains strong projected at 6.7 and 6.6 percent, significantly in July to US$0.9 billion from US$0.3 billion a year supported by an expected rise in public investment spending ago. The higher net FDI was driven by intercompany and a robust private demand. borrowings, channeled to the manufacturing, financial, and real estate sectors. International reserves decreased to The Philippine Stock Exchange index (PSEi) dropped to its US$75.2 billion in September from US$81.0 billion in lowest level in nearly two years. In the first two weeks of September last year. At its current level, the reserves can cover October, the PSEi fell by 5.4 percent, to close at 6,884 as of 6.8 months’ worth of imports, while still at comfortable level, October 11, its lowest since January 2017. The contraction was it represents a considerable decline from the 8.1 months’ driven by domestic factors which include rising inflation, worth of imports in September last year. further weakening of the peso, and a softer outlook on the local economy, which raised investors’ risk aversion on local Headline inflation increased further, prompting an additional equities. In addition, externally factors such as rising US bond rate hike by the central bank in September. The 12-month yields, the September increase in the US Fed policy rate, consumer price index reached 6.7 percent in September, increasing US-China trade tensions, and a build-up of financial compared to 3.0 percent in September last year and 6.4 risks in some emerging economies, contributed to investors’ percent in August. This was driven by higher food prices caused risk aversion. As result, the PSE registered net-foreign selling by tight domestic supply partly exacerbated by the impact of amounting to Php3.9 billion month-to-date. Since January, the typhoon Ompong. Energy prices increase slowed down as PSEi has declined by 19.6 percent and is among the worst electricity rates declined. Core inflation moderated slightly to performing major stock indexes in the Asia-Pacific region. 4.7 percent in September from 4.8 percent in August (compared to 2.7 percent in September last year). To address The Philippine peso dropped to a 13-year low in September, rising inflation pressure, the central bank raised its key policy depreciating 5.9 percent year-on-year to close at rate by 50 basis points to 4.5 percent in September. Php/US$54.25, which represents 1.5 percent month-on- month depreciation. The peso weakening was driven by the Merchandise export recovered slightly and import growth strong import growth that increased the demand for dollars moderated in August. Goods exports expanded by 3.1 percent Figure 1: The PSEi continued its retreat as a result of Figure 2: … while the Philippine peso weakened to a 13-year low persistent net foreign selling … in September. Source: Philippine Stock Exchange Source: Bangko Sentral ng Pilipinas (BSP) PHILIPPINES Monthly Economic Developments | October 2018 year-on-year in August, higher than the 0.3 percent growth in The government registered a fiscal deficit in August as July but still significantly lower than the 17.1 percent growth a expenditure growth outpaced revenue growth. Revenue year ago. The export growth recovery in August was a result of growth remained robust, expanding by 11.5 percent year-on- the modest growth of manufacturing goods exports (3.5 year in August, similar to the 9.9 percent growth a year ago, percent year-on-year) while agriculture exports contracted (- but substantially lower than the 24.2 percent growth in July. 19.2 percent year-on-year). Electronics products, which Revenue growth was fueled by the continued expansion of tax account for over half of the country’s merchandise exp ort, revenues by 13.0 percent year-on-year in August, higher than expanded by 7.0 percent year-on-year in August, higher than the 10.6 percent growth in August a year ago, but significantly the 5.2 percent in July, but lower than the 13.2 percent growth lower than the 24.8 percent growth in July. Meanwhile registered a year ago. Meanwhile, merchandise import growth National government expenditures increased by 28.7 percent moderated to 11.0 percent year-on-year in August, compared year-on-year in nominal terms in August, more than double to the 21.6 percent growth a year ago and the 31.6 percent the 13.9 percent growth a year ago, albeit slightly lower than expansion in July. Slower import growth was driven by a the 33.8 percent growth in July. As a result of faster significant deceleration in growth of capital goods (12.9 expenditure growth, the national government posted a fiscal percent in August compared to 24.1 percent in August a year deficit of Php2.6 billion in August, a sharp reversal from the ago), raw materials and intermediate goods (4.3 percent in Php28.8 billion surplus posted in August a year ago, but August compared to 19.8 percent in August a year ago), and substantially lower than Php86.4 billion in July. consumer goods (5.9 percent in August compared to 16.3 Domestic liquidity grew at a slower pace in August. Overall percent in August a year ago). domestic liquidity (M3) still shows double digit growth. Manufacturing activities continued to expand in August. The However, since June 2018, the growth rates of domestic volume of production index (VoPI) grew 8.8 percent in August, liquidity have slowed from 14.3 percent in May to 10.4 percent slower than the 11.8 percent in July but still much faster than in August. Among M3, the growth of securities other than the 0.3 percent growth in August last year. Factory activities shares included in broad money significantly slowed down were strong with indices growing in the double digits in textile, during the same period. These represented all types of money petroleum, and miscellaneous manufactures industries, but market borrowings by banks like promissory notes, repurchase with indices contracting in the tobacco and fabricated metal agreements, commercial papers/securities, and certificates of products industries. The Nikkei Philippines Manufacturing assignment/participation with recourse. This slower growth in Purchasing Managers’ Index (PMI), meanwhile, remained at domestic liquidity is partly driven by the anticipation of policy 52.0 in September similar to the 51.9 in August, but higher rate increase. than the 50.8 in September 2017. The modest rise in the PMI was attributed to the rise of new orders fueled largely by local demand. Figure 3: Both merchandise exports and imports growth Figure 4: Headline inflation rose further in September due to moderated in August. higher food prices. Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | October 2018 Selected Economic and Financial Indicators 2016 2017 Q4 2017 Q1 2018 Q2 2018 Jul-18 Aug-18 Sep-18 Real GDP growth, at constant market prices 6.9 6.7 6.5 6.6 6.0 Private consumption 7.2 5.9 6.2 5.7 5.6 Government consumption 8.8 7.1 12.2 13.6 11.9 Gross fixed capital investment 26.6 9.5 9.4 8.8 21.2 Exports, goods and services 11.7 19.6 20.6 6.5 13.0 Imports, goods and services 20.5 18.2 18.1 9.6 19.7 Industry Performance Value of Production Index 6.2 -0.7 -7.9 17.8 24.0 12.2 8.8 Volume of Production Index 11.5 0.3 -7.6 18.7 23.0 11.8 8.8 Capacity Utilization 83.5 83.8 84.0 84.2 84.3 84.2 84.3 Nikkei ASEAN Purchasing Managers' Index 53.2 54.2 51.3 53.1 50.9 51.9 52.0 Monetary and Banking sector Headline Consumer Price Index 1.3 2.9 3.0 3.8 4.8 5.7 6.4 6.7 Core Consumer Price Index 1.5 2.5 2.4 3.0 3.8 4.5 4.8 4.7 Domestic liquidity (M3) 12.5 13.3 13.7 13.7 13.4 11.0 10.4 Credit growth 16.6 17.8 17.6 17.2 17.9 18.0 17.4 Business loans 13.5 17.4 17.4 17.0 18.1 18.5 17.9 Consumer loans 20.5 20.5 19.4 19.1 16.5 14.5 13.6 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.4 -2.2 -3.1 -3.9 -0.9 -86.4 -2.6 Total Revenue (% of GDP) 15.2 15.7 15.0 15.8 18.3 242 257 Tax Revenue (% of GDP) 13.7 14.2 13.7 14.3 16.1 218 240 Total Expenditure (% of GDP) 17.6 17.9 18.1 19.7 19.2 328 260 National government debt (% of GDP) 42.1 42.1 42.1 42.6 42.5 7,043 7,103 Stock market PSEi (month-end value) 6,841 8,558 8,558 7,980 7,194 7,672 7,856 7,277 External accounts Current account balance (% of GDP) -0.4 -0.7 -3.6 -0.2 -3.6 Exports of merchandise goods (growth rate) -2.5 18.4 13.3 -5.4 -1.3 0.3 3.1 Imports of merchandise goods (growth rate) 18.4 13.6 21.0 7.2 20.0 31.6 11.0 Net foreign direct investment (in million US$) 8,279 10,057 3,585 2,227 3,528 914 Balance of payment (% of GDP) -0.1 -0.3 0.6 -1.6 -2.5 International reserves (in million US$) 83,515 81,273 80,766 80,722 78,779 76,722 77,934 75,161 Import cover 9.7 8.4 8.0 7.8 7.6 7.0 7.1 6.8 Nominal exchange rate 47.49 50.40 50.93 51.45 52.45 53.43 53.27 53.94 Labor Market Unemployment rate 5.5 5.7 5 5.3 5.5 5.4 Underemployment rate 18.4 16.2 15.9 18 17 17.2 Sentiments Consumer confidence index (end of period) 9.2 9.5 9.5 1.7 3.8 -7.1 Business confidence index (end of period) 39.8 43.3 43.3 39.5 39.3 30.1 Prepared by a World Bank team consisting of Kevin Chua, Kevin Thomas Cruz, Isaku Endo, Rong Qian and Birgit Hansl, under the guidance of Ndiame Diop. PHILIPPINES Monthly Economic Developments | October 2018 Contact Rong Qian (rqian@worldbank.org) for questions.