Philippines Monthly Economic Developments January 2018 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • The Philippine Stock Exchange index (PSEi) ended 2017 on a new record high. • The Philippine peso strengthened in December, ending the year below the Php/US$50 mark. • Export growth slowed to its lowest rate of the year while import growth continued to accelerate. • Manufacturing activities contracted for the third consecutive month. • Inflation steadied in December at 3.3. percent, bringing the full-year inflation rate close to the mid-point of the Central Bank’s target range. • Government revenues continued to grow in the double-digits while expenditure growth slowed. • The president signed the first tax reform package into law on December 19, 2017. • Consumer and business confidence remained positive for the fourth quarter of 2017, although consumer sentiment declined for the second consecutive quarter. The Philippine Stock Exchange index (PSEi) ended 2017 on a 2016 when exports contracted by 4.5 percent. Electronics new record high. The PSEi closed at a new record of 8,558 in exports which accounted for nearly sixty percent of total December, ending the year on a high note. This was fueled by exports in November continued to expand at a strong pace, an improving global environment and strong corporate growing by 12.7 percent year-on-year, and reversing the 7.9 earnings reports. On an annual basis, the PSEi grew by 25.1 percent contraction registered a year ago. However, this was percent in 2017, reversing the 1.6 percent contraction not enough to compensate for the contraction in other major registered in 2016. The PSEi’s performance for 2017 was in line goods export, such as the contraction in manufacturing with the top-performing stock indices in the region. Overall, exports (1.5 percent year-on-year) and agricultural exports foreign investors remained bullish on the Philippines’ (28.5 percent year-on-year). Meanwhile, import growth prospects during 2017 with net-foreign buying amounting to continued to accelerate in November, expanding by 18.5 Php54.8 billion in 2017, a significant pick-up from the Php2.2 percent year-on-year, higher than the 13.1 percent growth in billion net-foreign buying registered in the previous year. October, but slightly lower than the 21.0 percent growth a year ago. This was fueled by strong annual growth in imports across The Philippine peso strengthened in December, ending the all major categories: raw materials and intermediate goods year below the Php/US$50 mark. The Philippine peso closed (18.9 percent), capital goods (16.1 percent), and consumer at Php/US$49.93 in December which represents a 0.9 percent goods (14.4 percent), reflecting robust domestic demand. month-on-month appreciation from the Php/US$50.37 closing in end-November. This was the strongest reported value for Manufacturing activities contracted for the third consecutive the peso since its 11-year low in October. However, on an month. The volume of production index (VoPI) contracted by annual basis the peso depreciated by 0.2 percent from the 8.1 percent year-on-year in November, a reversal from the Php/US$49.81 closing at end-2016. The relative strong 15.1 percent year-on-year expansion in November 2016. This December performance was due a seasonal boost in marked the third-month of output contraction since remittances during the holiday season and strong inflows of September, with the overall decline driven by chemical foreign funds to the local stock market. Gross international production, tobacco production and textiles production. reserves remained stable in December, at US$81.5 billion However, the Nikkei Philippines Manufacturing Purchasing compared to US$80.3 billion in November (and US$80.7 billion Managers’ index (PMI) remained in December in expansion in December 2016). At its current level, foreign exchange territory at 54.2, just marginally lower than the 54.8 reported reserves could cover 8.3 months’ worth of imports and in November. Growth in new orders arising from strong payments of services and primary income, which is smaller domestic demand remains a key driver of optimism in the than the 8.8 months’ coverage at end-2016. manufacturing sector. Export growth slowed to its lowest rate of the year while import growth continued to accelerate. Export growth decelerated to 1.6 percent year-on-year in November from 7.1 percent in October, the lowest growth rate since November PHILIPPINES Monthly Economic Developments | January 2018 Figure 1: The Philippine Stock Exchange index ended 2017 on Figure 2: The peso strengthened to just below the Php/US$50 a high note. mark. 53.0 52.0 51.0 50.0 PHP/US$ 49.0 48.0 47.0 46.0 Source: Philippine Stock Exchange Source: Philippine Statistics Authority (PSA) Inflation steadied in December at 3.3 percent, bringing the Domestic liquidity and credit growth remained strong in full-year inflation rate close to the mid-point of the Central November. Domestic liquidity (M3) grew by 14.0 percent year- Bank’s target range. The 12-month Consumer Price Index on-year to Php10.4 trillion in November, slightly slower than stabilized at 3.3 percent year-on-year in December, registering the 14.8 percent expansion in October, but remained higher the same rate as in November, but higher than the 2.6 percent than the 12.7 percent growth registered in November 2016. recorded in December 2016. This brought the 2017 full-year The growth in M3 remained broadly consistent with the BSP’s inflation to 3.2 percent, significantly higher than the 1.8 outlook for inflation and economic activity. On an annual basis, percent of 2016, but still close to the mid-point of the Bangko growth in bank lending, net of reverse repurchase placements, Sentral ng Pilipinas’ (BSP) target range of 2-4 percent for 2017. slightly slowed to 19.2 percent in November from 19.9 percent In December, strong demand for food products during the in October, yet was still faster than the 18.6 percent growth holiday season resulted in higher food inflation, but was offset from November 2016. Business loans, which comprised nearly by downward price adjustment for most non-food items, 90.0 percent of banks’ aggregate loan portfolio, grew at 18.5 especially for electricity and fuel. Core inflation, which percent year-on-year in November, and largely went to the excludes food and energy items, softened to 3.0 percent year- utilities, real estate, and information and communication on-year in December from 3.3 percent in the previous month sectors, while household loans grew 20.6 percent year-on-year (and 2.5 percent in December 2016). However, full-year core with growth accelerating mainly for credit card loans. inflation rose to 2.9 percent in 2017 from 1.9 percent in 2016. Figure 3: Export growth slowed to its lowest rate of the year. Figure 4: Manufacturing activities contracted once again in November. 25 VoPI VaPI Average Capacity Utilization Rate 84 83.9 20 83.8 Capacity Utilization (in percentage) 15 83.7 83.6 In percentage 10 83.5 5 83.4 0 83.3 Sep-17 Jan-17 Jul-17 Mar-17 May-17 Nov-16 Nov-17 83.2 -5 83.1 -10 83 Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | January 2018 Figure 5: Inflation steadied and ended the year at 3.3 percent. Figure 6: The government registered a narrower fiscal deficit in November. Core Inflation Headline Inflation Food & Non-alcoholic beverage 9.0 8.0 7.0 In percent, YOY 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Mar-17 Mar-13 Mar-14 Mar-15 Mar-16 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Bangko Sentral ng Pilipinas (BSP) Source: Bureau of the Treasury Government revenues continued to grow in the double-digits Reform for Acceleration and Inclusion (TRAIN), was signed into while expenditure growth slowed. Government expenditures law just before the end of 2017. The law is referred to as totaled Php252.1 billion in November, expanding in nominal package 1A of the government’s tax reform initiative and is terms by 10.4 percent year-on-year, at a much slower pace expected to bring in an additional Php90 billion in revenues compared to 28.2 percent in October and 33.2 percent in during its first year of implementation in 2018. The additional November 2016. Disbursements increased due to a sustained revenues is planned to be used for the government’s Build, pick-up in infrastructure spending for the completion of Build, Build program (70 percent) and spending on social several road and flood control projects, the purchase of services (30 percent). Congress is targeting the passage of a equipment for the Philippine National Police, and maintenance supplemental tax package 1B within the first quarter of 2018, of Coast Guard vessels. Infrastructure spending grew by 44.8 which is expected to include a real estate tax amnesty, a percent year-on-year in November, similar to the 49.3 percent general tax amnesty, amendments to the bank-secrecy law, growth registered in the previous year. Meanwhile, revenues and adjustments in the Motor Vehicle Users Charge. Package expanded at a strong pace in November, continuing to 1B is estimated to bring in Php38.9 billion in additional increase in the double-digits, by 16.4 percent year-on-year in revenues, according to the Department of Finance. nominal terms to reach Php243.5 billion, slightly lower than Consumer and business confidence remained positive for the the 17.9 percent growth reported in November 2016. The fourth quarter of 2017, although consumer sentiment revenue growth was driven by a continued expansion in tax declined for the second consecutive quarter. Business collection by 15.4 percent year-on-year compared to 19.2 sentiment strengthened in the fourth quarter of 2017 as the percent in the previous year. As revenue growth outpaced business confidence index increased to 43.3 percent from 37.9 expenditure growth, the government registered a narrower percent in the third quarter (and 39.8 in the fourth quarter of fiscal deficit of Php8.6 billion in November, a contraction of 2016). However, consumer expectations continued to weaken 55.1 percent year-on-year in nominal terms compared to the while remaining in positive territory. The consumer confidence Php19.1 billion deficit of November 2016. index fell to 9.5 percent in the fourth quarter of 2017 from 10.2 in the previous quarter, but stood slightly higher than the 9.2 percent registered a year ago, according to the BSP Business and Consumer Expectations Survey. Please contact Birgit Hansl: bhansl@worldbank.org Preparedsigned The president by a World the Bank team first tax under the reform guidance package intooflaw Birgit on Hansl, consisting of Kevin Chua, Kevin Thomas Cruz and Griselda Santos. December 19, 2017. Republic Act 10963, also known as the Tax PHILIPPINES Monthly Economic Developments | January 2018