The Philippines Monthly Economic Developments year August 2018 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 6.0 percent year-on-year in the second quarter of 2018, driven by capital formation. • Growth in services and industry sectors, albeit strong, moderated in the second quarter of 2018 relative to the first quarter. • The Bangko Sentral ng Pilipinas raised its key policy rate for the third consecutive time in 2018 as inflation continued to accelerate in July. The Philippine economy grew by 6.0 percent year-on-year in contraction in the mining and quarrying sub-sectors. the second quarter of 2018, driven by capital formation. This Agriculture growth continued to disappoint in the second represented a slowdown from the 6.6 percent in the first quarter of 2018, registering 0.2 percent year-on-year growth, quarter of 2018 and 6.6 percent the second quarter of 2017. much weaker than the 6.3 percent in the second quarter of Capital formation was the principal engine of growth, 2017 and the downward-revised 1.1 percent in the first expanding by 20.7 percent year-on-year in the second quarter quarter of 2018. of 2018, higher than the 12.4 percent growth in the first Manufacturing activities remained robust in June, with quarter of 2018 and nearly three times the 7.6 percent growth output growing at double-digits but indicating further signs registered a year ago. The acceleration of capital formation of moderation in July. The volume of production index was driven by investment growth in durable equipment and expanded by 18.0 percent year-on-year in June, sustaining its construction. Public consumption growth accelerated from 7.6 double-digit growth since January 2018. Strong activities were percent year-on-year in the second quarter of 2017 to 11.9 recorded in printing, petroleum, and textiles, manufactures. percent in the second quarter of 2018, consistent with the However, the manufacturing sector expanded at a weaker government’s expansionary fiscal policy stance. Private pace in July compared to a year ago, according to the Nikkei consumption growth remained strong at 5.6 percent year-on- Philippines Manufacturing Purchasing Managers’ Index. The year in the second quarter of 2018, lower than the 6.0 percent index dropped from 52.8 in July 2017 to 50.9 in July 2018 as and 5.7 percent in the second quarter of 2017 and the first output and new orders slowed down. Average capacity quarter of 2018, respectively. Meanwhile, net-exports dragged utilization inched up from 83.8 percent in June 2017 to 84.3 growth, as import growth outweighed export growth. Import percent in June 2018, similar to 84.2 percent in May 2018. growth accelerated in the second quarter of 2018 to reach 19.7 percent year-on-year from 9.6 percent in the first quarter of Merchandise exports contracted for the sixth consecutive 2018 and higher than the 18.6 percent in the second quarter month in June. The 0.1 percent year-on-year contraction in of 2017, driven by durable goods import growth June reversed the strong growth of 17.1 percent a year ago. (telecommunication equipment mainly). Meanwhile, exports The contraction in merchandise exports in June was primarily grew by 13.0 percent year-on-year in the second quarter of the result of the year-on-year decline in mineral (-37.5 2018, an improvement from the 6.5 percent in the first quarter percent) and agriculture (-4.9 percent) exports. Manufactured of 2018 but substantially slower than the 21.4 percent a year goods, representing more than 80.0 percent of the total export ago. bill, grew by 3.2 percent year-on-year in June, recovering from the 2.7 percent contraction in May 2018 and flat growth in Growth in services and industry sectors, albeit strong, June 2017. In addition, electronics exports grew at an annual moderated in the second quarter of 2018 relative to the first rate of 13.5 percent year on-year in June, more than three quarter. The services sector grew by 6.6 percent year-on-year times the growth registered a year ago. The slow recovery in in the second quarter of 2018, slightly less than the 6.8 percent export growth is partly related to the softening of global trade in the first quarter but higher than the 6.4 percent in the same activity and rising global trade tensions. Meanwhile, import period in 2017, driven by growth in trade, finance, and growth accelerated strongly in June, expanding by 24.2 transportation services. Growth in the industry sector fell from percent year-on-year from 0.6 percent a year ago. Robust 7.1 percent year-on-year in the second quarter of 2017 and 7.7 import was driven by the healthy expansion of imports of percent in the first quarter of 2018 to 6.3 percent in the second capital goods (30.1 percent), raw materials and intermediate quarter of 2018, driven by slower manufacturing growth and a THE PHILIPPINES Monthly Economic Developments | August 2018 Figure 1: Economic growth moderated in the second quarter Figure 2: Manufacturing output growth remains strong. of 2018 to the lowest level in three years. 15 10 5 Percentage point 0 -5 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 Private consumption Govt consumption Investments Discrepancy Net exports GDP Growth Source: Philippine Statistics Authority (PSA). Source: PSA. goods (21.0 percent), and consumer goods (15.6 percent). As The Philippine peso appreciated slightly in July but fear of a result, the trade deficit more than doubled in June, contagion reversed the trend in August. Peso traded between increasing to US$3.4 billion from US$1.6 billion a year ago. a narrow range of Php/US$53.26-53.52 closing rates in July. At end-July the peso stood at Php/US$53.26, which represented The Philippine Stock Exchange Index’ (PSEi) recovery over the a 0.5 percent month-on-month appreciation from the June past month and a half was cut short due to fear of contagion closing. The strengthening of the peso coincided with the from the financial and currency crisis in Turkey. The main PSE rebound in the Philippines stock market. Nonetheless, the index fell by a total of 3.6 percent to 7,528 at the end of the peso depreciated by 5.0 percent year-on-year in July from trading session on August 14 from 7,805 on August 10 as Php/US$50.58 in July 2017, in part due to the country’s investors digested the potential impact of the Turkish crisis on widening trade deficit. Given recent development in Turkey, the global market. This put a temporary halt on the ongoing peso depreciated 0.7 percent between August 13 and August recovery of the PSEi, which rose by 8.0 percent since July 2, 16 wiping out the July gain. As a result, gross international 2018. The market response was stronger compared to the reserves declined from US$81.1 billion in July 2017 to US$76.9 response at the start of the US-China trade war, when the PSEi billion in July 2018. At its current level, the reserves can cover contracted by 1.5 percent on June 18, 2018 as the US 7.4 months’ worth of imports of goods and payment of government announcement on imposing US$50 billion in services and primary income, a decline from 8.4 months’ worth tariffs on Chinese products on June 15, 2018. in July 2017. Figure 3: Merchandise exports contracted slightly in 2Q2018 Figure 4: The PSEi recovered in July, posting a month-on- while import growth rose sharply. month gain for the first time in six months. Source: PSA. Source: Philippine Stock Exchange. THE PHILIPPINES Monthly Economic Developments | August 2018 Figure 5: The Philippine peso appreciated month-on-month in Figure 6: The BSP raised its key policy rate by 50 basis points as July. inflation continued to accelerate in July. Metro Manila Outside Metro Manila Core Inflation Headline Inflation 7.0 6.0 5.0 IN PERCENT, YOY 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 Jan-18 Jan-15 Jan-16 Jan-17 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Source: PSA. Source: PSA. The Bangko Sentral ng Pilipinas (BSP) raised its key policy 88.6 percent of the banks’ total loan portfolio, eased slightly rate for the third consecutive time in 2018 as inflation to 19.2 percent in June from 19.3 percent in May but still continued to accelerate in July. The 12-month consumer price higher than the 17.9 percent in June 2017. Most of the lending index increased 5.7 percent year-on-year in July 2018, faster went to the wholesale and retail trade and financial and than the 5.2 percent rate in June, and more than twice the 2.4 insurance activities. Lending to households’ growth eased to percent increase a year ago. The acceleration of inflation was 17.7 percent year-on-year in June from 18.4 percent in May driven by an increase in food prices, which soared from 2.8 and 22.5 percent in June 2017 due to slower growth in the percent year-on-year in July 2017 to 7.1 percent in July 2018. motor vehicle industry and the contraction of other types of The spike in food prices was driven by lower supply caused by household loans. typhoons and heavy rains in the northern part of the country The government posted a narrower budget gap in June, as resulting in double-digit price increases in vegetables (16.0 the surge in revenue growth outpaced expenditure growth. percent), corn (13.0 percent), and fish (11.4 percent) while rice National government revenues reached Php224.2 billion in inflation remained elevated (5.0 percent). In addition, a rise in June 2018 after expanding by double-digits for the tenth electricity, gas, and other fuel prices reached 9.4 percent year- consecutive month, from an annual nominal rate of 2.4 on-year in July, in part due to rising global crude oil prices. percent in June 2017 to 24.7 percent in June. Tax revenue Year-to-date headline inflation rose to 4.5 percent in July, growth remained robust and reached Php188.2 billion in June, beyond the BSP’s 2-4 percent inflation target range. Core growing by 11.9 percent year-on-year in nominal terms, more inflation, which excludes volatile food and energy items, than twice the 4.6 percent growth registered in the previous reached 4.5 percent year-on-year in July, an uptick from the year. In addition, non-tax revenue more than tripled in the 4.3 percent rate in June, and more than double the 2.1 percent same month, driven by a surge in privatization proceeds. in July 2017, indicating demand-driven pressures. In order to Meanwhile, growth in public expenditures, which totaled manage inflation expectations, the BSP raised its key policy Php278.5 billion in June, decelerated from 22.6 percent year- rate by 50 basis points to 4.0 percent in August 10, the third on-year in nominal terms in June 2017 to 2.9 percent in June consecutive rate increase this year. 2018—the slowest pace since September 2017. Yet, public Domestic liquidity and bank lending grew at a slower rate in spending on infrastructure and other capital outlays remained June. Domestic liquidity (M3) reached an approximate strong and grew by 38.6 percent year-on-year in nominal Php11.1 trillion in June 2018, growing by 11.7 percent year-on- terms in June, driven by construction and maintenance of road year, slower than the 14.3 percent growth in May and 13.4 networks. As a result, the government’s budget deficit percent in June 2017. Outstanding loans, net of reverse narrowed from Php90.9 billion in June 2017 to Php54.3 billion repurchases, expanded by 19.1 percent year-on-year in June in June 2018. 2018, similar to the 19.3 percent in May and 19.0 percent in June 2017. The growth of lending to firms, which constitutes THE PHILIPPINES Monthly Economic Developments | August 2018