Philippines Monthly Economic Developments February 2020 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a  Economic growth accelerated to its fastest pace in nearly two years in the fourth quarter of 2019.  Total trade expanded in December as exports grew by double digits for the first time in two years.  The novel coronavirus outbreak weighed down on investor confidence, causing a sell-off in the local stock market in end-January. Despite a challenging external environment, economic and retail trade, finance, and government services. However, growth accelerated in the fourth quarter of 2019. Private the manufacturing sector’s sluggish performance during the consumption accelerated to 5.6 percent year-on-year (yoy) in quarter weighed on industry growth, as growth slowed to 5.4 the fourth quarter of 2019 from 5.3 percent a year ago, percent yoy in the fourth quarter of 2019 from 6.6 percent a supported by low inflation and steady remittance inflows. year ago. The agriculture sector’s growth dipped to 1.5 percent Public sector spending continued to rebound in the fourth yoy in the fourth quarter of 2019 from 1.8 percent a year ago. quarter of 2019, with government consumption growing at its Manufacturing output contracted for the thirteenth fastest pace in nearly eight years (18.7 percent yoy) and as consecutive month in December 2019. The sluggish public construction grew by 33.8 percent. However, overall performance of the manufacturing sector worsened in investment growth disappointed, expanding by 0.4 percent, in December 2019, as growth in the volume of production index large part due to tepid private investment activity. Export contracted by 10.1 percent, a further decline from the 9.1 growth slowed to 2.0 percent in the fourth quarter of 2019 percent contraction a year ago. Weak output was fueled by from 14.4 percent a year ago, due to slower global growth, the 47.9 percent decline in petroleum products and basic while import growth moderated to 0.3 percent yoy from 12.4 metals manufacturing, and the double-digit drop in the output percent a year ago, driven by the weakness in capital goods, of furniture and fixtures, and miscellaneous manufactures. and raw materials and intermediate goods import. Stronger Meanwhile, leading indicators point to a moderate growth in the second half of 2019 was not enough to improvement in manufacturing output in January 2020, as the compensate for the slow pace of growth in the first half, as full- IHS Markit Philippines Purchasing Managers’ Index rose to 52.1 year growth fell to 5.9 percent in 2019 from 6.2 percent in in January from 51.7 in December 2019, suggesting an 2018, the slowest in eight years. expansion in manufacturing output for the month driven by On the production side, services fueled growth while industry growth in new orders. and agriculture continued its modest performance. The Total trade expanded in December 2019 as exports grew by services sector grew by its fastest pace in over three years, double digits for the first time in two years. Merchandise expanding by 7.9 percent in the fourth quarter of 2019 from exports grew by 21.6 percent yoy in December 2019 – a sharp 6.8 percent a year ago, driven by robust growth in wholesale Figure 1: In the fourth quarter of 2019, the economy continued Figure 2: Manufacturing has contracted for over a year now. its recovery driven by consumption and public investment. 15 30.0 84.6 25.0 Capacity Utilization (in percentage) 10 84.4 20.0 5 15.0 84.2 VoPI Percentage point 0 10.0 VaPI 84 In percentage 5.0 Average Capacity Utilization Rate -5 0.0 83.8 -10 -5.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 83.6 -10.0 2015 2016 2017 2018 2019 Private consumption Govt consumption -15.0 83.4 Apr-19 Aug-19 Feb-19 Jun-19 Dec-18 Oct-19 Dec-19 Investments Discrepancy Net exports GDP Growth Source: Philippine Statistics Authority (PSA) Source: PSA PHILIPPINES Monthly Economic Developments | February 2020 reversal from the 12.2 percent contraction during the same Inflation increased moderately in January. Headline inflation period last year and a break from the long streak of weak climbed to 2.9 percent yoy in January 2020 from 2.5 percent in growth that started since the end of 2017. Nine out of the December 2019. It is still slower than the 4.4 percent in country’s top ten commodity export groups experienced January 2019 and remains within the Bangko Sentral ng expansions, led by electronic products which grew by 24.9 Pilipinas’ (BSP) 2-4 percent target. The heavily weighted food percent while accounting for 59.9 percent of export sales. price index rose as weather disruptions affected the domestic Meanwhile, the import contraction persisted at 7.6 percent, supply of meat, fish, fruit, and vegetables. Moreover, housing led by a 19.9 percent drop in raw materials and intermediate utilities and transport prices went up driven by higher global goods purchases, which accounted for 31.9 percent of imports, price of oil and the implementation of the third and final wave while imports of capital goods fell by 2.2 percent, representing of excise tax hikes at the start of the year. Excluding volatile 32.5 percent of total importation. As a result, the Philippines’ items, core inflation stood at 3.3 percent yoy in January, trade gap for the month narrowed by 40.6 percent from dropping from 4.4 percent a year ago. On February 6, with a US$4.2 billion in the same period last year to US$2.5 billion. manageable inflation situation, the BSP cut its key policy rate For the full year of 2019, total trade contracted by 2.4 percent, by 25 basis points to 3.75 percent. driven by sluggish export growth (1.5 percent) and a decline in Domestic liquidity growth accelerated and bank lending rose imports (4.8 percent), thereby cutting the annual trade deficit faster in December 2019. Domestic liquidity (M3) expanded from US$ 43.5 billion in 2018 to US$37.0 billion in 2019. by 11.4 percent yoy to about Php13.0 trillion in December The novel coronavirus outbreak weighed down on investor 2019, faster than the 9.8 percent growth in November. confidence, causing a sell-off in the local stock market in end- Demand for credit remained the principal driver of money January. As concerns on the coronavirus outbreak lingered in supply growth. Domestic claims grew by 10.5 percent due the global markets, the Philippine stock exchange index (PSEi) mainly to the sustained growth in credit to the private sector. dropped sharply to 7,200 in end-January from 7,815 in end- Outstanding loans of universal and commercial banks, net of December 2019 and 8,007 in end-January 2019. The decline reverse repurchase (RRP) placements, grew by 10.9 percent in largely tracked the developments in equity markets across December, marginally faster than the 10.1-percent expansion Asia. The index has marginally rebounded in recent days (to in the previous month. Loans for production activities 7,439 on February 11th), but investors’ worries remain on the expanded at a rate of 9.1 percent in December, driven potential impact of a prolonged outbreak. Nonetheless, the primarily by lending to the following sectors: real estate Philippine peso has, so far, remained firm despite the worrying activity; financial and insurance activities; and construction. news on the coronavirus, having depreciated by only 0.3 Meanwhile, loans for household consumption grew by 27.5 percent month-on-month to close at Php/US$50.90 in end- percent in December due to faster growth in credit card and January. On an annual basis, the peso has appreciated by 2.8 salary loans. percent. Figure 3: Inflation accelerated in January 2020. Figure 4: The coronavirus outbreak weighed down on investor confidence on the stock market. 12 9,500 45 Core Inflation Headline Inflation Net Foreign Buy (RHS) PSEi (close) 40 10 Food & Non-alcoholic beverage BSP Key policy rate 9,000 35 8,500 30 8 8,000 25 PHP billion 6 20 7,500 15 Index 4 7,000 10 6,500 5 2 - 6,000 (5) 0 5,500 (10) Apr-17 Aug-17 Apr-18 Aug-18 Apr-19 Aug-19 Feb-17 Jun-17 Feb-18 Jun-18 Feb-19 Jun-19 Oct-17 Oct-18 Feb-20 Dec-17 Dec-18 Oct-19 Dec-19 -2 Source: PSA Source: Philippine Stock Exchange PHILIPPINES Monthly Economic Developments | February 2020 Developments to Watch  Manufacturing activities: when will the continued contraction over the past 13 months turn around?  Novel Coronavirus outbreak: when will the outbreak stabilize, and how will it impact the domestic economy?  Inflation: will inflation continue to rise in the coming months? Selected Economic and Financial Indicators 2018 2019 Q2 2019 Q3 2019 Q4 2019 Nov-19 Dec-19 Jan-20 Real GDP growth, at constant market prices 6.2 5.9 5.5 6.0 6.4 Private consumption 5.6 5.8 5.5 5.9 5.6 Government consumption 12.8 10.5 7.3 9.6 18.7 Capital formation 13.7 -0.6 -8.5 -2.6 0.4 Exports, goods and services 11.5 3.2 4.8 0.7 2.0 Imports, goods and services 14.5 2.1 -0.1 -0.2 0.3 Industry Performance Value of Production Index 8.0 -7.1 -8.8 -8.5 -7.6 -7.4 -9.5 Volume of Production Index 7.2 -8.6 -10.2 -9.2 -7.6 -7.8 -10.1 Capacity Utilization 84.2 84.4 84.3 84.3 84.5 84.5 84.4 Nikkei Philippines Purchasing Managers' Index 52.5 51.7 51.1 51.9 51.7 51.4 51.7 52.1 Monetary and Banking sector Headline Consumer Price Index 5.2 2.5 3.0 1.7 1.5 1.3 2.5 2.9 Core Consumer Price Index 4.1 3.3 3.4 2.9 2.8 2.6 3.1 3.3 Domestic liquidity (M3) 11.6 7.7 6.7 7.0 9.9 9.8 11.4 Credit growth (universal and commercial banks) 17.4 11.1 11.3 10.8 9.5 9.6 10.4 Business loans 18.4 10.7 11.2 9.3 8.2 8.1 9.1 Consumer loans 17.3 20.3 15.0 24.8 26.9 26.6 27.5 Fiscal sector In billions Php Fiscal balance (% of GDP) -3.2 1.0 -5.8 -60.9 Total Revenue (% of GDP) 16.4 18.6 17.3 304.7 Tax Revenue (% of GDP) 14.7 16.5 15.8 284.6 Total Expenditure (% of GDP) 19.6 17.6 23.1 365.6 National government debt (% of GDP) 41.9 43.7 43.3 7,195 Stock market PSEi (month-end value) 7,466 7,815 7,974 7,779 7,815 7,739 7,815 7,201 External accounts Current account balance (% of GDP) -2.4 0.0 0.75 Exports of merchandise goods (growth rate) 0.9 1.5 1.8 1.0 7.1 Imports of merchandise goods (growth rate) 17.4 -4.8 -2.9 -4.5 -3.1 Net foreign direct investment (in million US$) 9,832 1,653 1,533 Balance of payment (% of GDP) -0.7 1.1 0.9 International reserves (in million US$) 79,193 87,839 84,932 85,581 87,840 86,228 87,839 Import cover 6.9 7.7 7.4 7.5 7.7 7.5 7.7 Nominal exchange rate 52.7 51.8 52.06 51.7 51.0 50.7 50.8 50.8 Labor Market Unemployment rate 5.3 5.1 5.1 5.4 4.5 Underemployment rate 16.4 14.0 13.5 13.9 13.0 Sentiments Consumer confidence index (end of period) -22.5 1.3 -1.3 4.6 1.3 Business confidence index (end of period) 27.2 40.2 40.5 37.3 40.2 Prepared by a World Bank team consisting of Rong Qian, Kevin Chua, Kevin Thomas Cruz, Karen Lazaro, Ray Gomez, Jiyoung Song and Isaku Endo, PHILIPPINES under the guidance of Ndiame Diop. Monthly Economic Developments | February 2020 Contact Rong Qian (rqian@worldbank.org) for questions.