Philippines Monthly Economic Developments May 2019 Manufacturing production has gained momentum since the start of the year, registering strong growth for the first six months, a • Economic growth decelerated sharply to 5.6 percent, year-on-year, in Q1 2019, owing mainly to this year’s budget delay. • Manufacturing output contracted for the fourth consecutive month in March. • Lower food inflation led to further easing in headline inflation in April. • The national government registered a narrower budget deficit in March, as expenditure growth decelerated. The Philippines registered a GDP growth of 5.6 percent, year- since Q4 2011 (2.9 percent). The poor performance of industry on-year, in Q1 2019, lower than the 6.5 percent growth in Q1 was driven by the substantial slowdown in manufacturing and 2018 and the lowest growth rate since Q1 2015 (5.1 percent). the construction sectors. Meanwhile, agriculture continued to This was despite the acceleration of private consumption underperform, growing by 0.8 percent year-on-year in Q1 growth to 6.3 percent (compared to 5.6 in Q1 2018), benefiting 2019 compared to 1.1 percent a year ago, partly due to El Niño, from a deceleration of inflation, sustained remittance inflows, while the sector continues to persistently suffer from low and improvement in employment. Meanwhile, public productivity amid lack of investments in the sector. consumption growth decelerated to 7.4 percent in Q1 2019 Manufacturing output contracted for the fourth consecutive compared to 13.6 percent a year ago due to the delayed month in March. The volume of production index (VoPI) adoption of the 2019 budget. The budget delay also impacted contracted by 9.2 percent in March, larger than the 8.1 percent investment growth as fixed capital formation moderated to 5.7 contraction in February. This is a reversal from the 11.0 percent in Q1 2019 from 8.2 percent a year before. The percent expansion in March last year. The contraction was slowdown was particularly sharp in construction and durable mainly driven by manufacturing output decline in petroleum equipment investments. Lastly, net exports continued to drag products, food, and furniture and fixtures. Meanwhile, the down growth as export growth slowed to its lowest level since Nikkei Philippines Purchasing Managers’ Index (PMI) recorded Q2 2015 at 5.8 percent. Both merchandise and services its lowest reading in eight months, falling to 50.9 in April from exports grew by single digits. 51.5 in the previous month. The decline was driven by slower The services sector drove growth while the agriculture sector output growth and weaker export orders due to lack of remained a drag. On the supply side, the services sector overseas client demand. growth accelerated to 7.0 percent year-on-year in Q1 2019 Merchandise exports also contracted for the fourth from 6.7 percent a year ago, driven by the strong performance consecutive month in March, while merchandise import of the financial intermediation, transport, and trade sub- growth accelerated. Merchandise exports declined by 2.5 sectors. The industry sector growth moderated to 4.4 percent percent year-on-year in March, decelerating further from the in Q1 2019 from 7.7 percent a year ago, the lowest growth rate 0.1 percent contraction in February. The poor performance of Figure 1: Real GDP growth slowed to its lowest rate in four Figure 2: Manufacturing output contracted for the fourth years. straight month. 30 84.6 VoPI VaPI Average Capacity Utilization Rate 25 Capacity Utilization (in percentage) 84.4 20 15 84.2 10 84 In percentage 5 0 83.8 -5 83.6 -10 -15 83.4 Mar-18 Sep-18 Jan-19 Mar-19 May-18 Nov-18 Jul-18 Source: Philippine Statistics Authority (PSA) and WB staff projections Source: PSA PHILIPPINES Monthly Economic Developments | May 2019 exports was driven by the sustained weakness in such as rice, meat and fish. Transport inflation, however, manufacturing exports (83.6 percent of total exports), which further increased in April, driven by the volatile international contracted by 3.8 percent in March from -2.4 percent in oil prices. Excluding the volatile food and energy items, core February. Meanwhile, merchandise imports expanded by its inflation marginally declined to 3.4 percent year-on-year in fastest rate in four months, growing by 7.8 percent in March April from 3.5 percent in March and April 2018. Year-to-date compared to 2.6 percent in February. The import growth 2019 headline inflation dropped to 3.6 percent while the year- acceleration was fueled by the robust growth of both to-date core inflation to 3.8 percent, both within the Central consumption goods (21.4 percent in March from -1.4 percent Bank’s 2-4 percent target range. The Bangko Sentral ng in February) and capital goods (13.2 percent in March from Pilipinas cut its key policy rate by 25 basis points to 4.5 percent 11.5 percent in February) imports. As a result, the Philippines’ effective on May 10, consistent with market expectation of balance of trade deficit widened further to US$3.1 billion in reversing the policy rate increases of 2018 once inflation falls March from US$2.7 billion deficit in February. within target range. The Philippine peso strengthened month-on-month in April. The national government registered a narrower budget The Philippine peso depreciated by 0.3 percent year-on-year deficit in March, as expenditure growth contracted for the from Php/US$51.97 in end-April 2018 to Php/US$52.11 in end- second time in three months. Public expenditures contracted April 2019. Nonetheless, on a month-on-month basis, the by 8.2 percent year-on-year in nominal terms in March, a sharp peso appreciated by 1.3 percent in April, from the reversal from the 21.0 percent expansion in February, as the Php/US$52.78 closing in end-March. The peso performance government continued to operate on a reenacted budget. was encouraged by news of a pause in the Federal Reserve’s Meanwhile, national government revenues expanded by hiking cycle, and indications that the European Central Bank around 13 percent year-on-year for the second consecutive might restart its quantitative easing. The strong peso month, driven by strong growth in both tax (11.6 percent) and performance was accompanied by an increase in the non-tax revenues (24.2 percent). As a result, the government international reserves. Reserves rose to US$84.0 billion in registered a narrower budget deficit in March, contracting by April from US$83.6 billion in March. At its current level, the 18.5 percent year-on-year in nominal terms to reach Php90.2 international reserves can cover 7.4 months’ worth of import billion. Through the first quarter of 2019, the national and payment of services and primary income, maintaining the government budget deficit reached -2.1 percent of GDP which import coverage level of March. is lower than the -3.9 percent deficit posted in the first quarter of 2018. Headline inflation further eased due to slower food inflation in April. The 12-month Consumer Price Index fell to 3.0 percent year-on-year in April from 3.3 percent in March and 4.5 percent in April 2018. The main contributor to the lower inflation is the slower price increases of key food commodities Figure 3: Headline and core inflation rates further declined in Figure 4: The government posted a narrower deficit in March April. as public expenditures fell. 340 Metro Manila Outside Metro Manila Core Inflation Headline Inflation 320 300 8.0 280 260 7.0 240 220 6.0 200 180 In Billion Pesos 5.0 160 In percent, YOY 140 4.0 120 100 3.0 80 60 2.0 40 20 1.0 - (20) 0.0 (40) July Jan July Jan (60) -1.0 (80) (100) 2018 2019 -2.0 (120) Oct-16 Oct-17 Jan-18 Oct-18 Jan-17 Jan-19 Apr-16 Jul-16 Apr-17 Jul-17 Apr-18 Jul-18 Apr-19 (140) Net Foreign Financing Net Domestic Financing Budget Surplus/Deficit Source: PSA Source: PSA PHILIPPINES Monthly Economic Developments | May 2019 Selected Economic and Financial Indicators 2017 2018 Q3 2018 Q4 2018 Q1 2019 Feb-19 Mar-19 Apr-19 Real GDP growth, at constant market prices 6.7 6.2 6.0 6.3 5.6 Private consumption 5.9 5.6 5.2 5.3 6.3 Government consumption 7.0 12.8 14.3 12.6 7.4 Gross fixed capital investment 9.5 14.0 17.4 8.5 5.7 Exports, goods and services 19.5 11.5 13.3 14.4 5.8 Imports, goods and services 18.1 14.5 17.9 12.4 8.3 Industry Performance Value of Production Index -1.4 8.0 6.4 -1.4 -3.7 -5.1 -5.4 Volume of Production Index -0.5 7.2 5.2 -2.3 -7.3 -8.5 -9.2 Capacity Utilization 83.8 84.2 84.2 84.3 84.3 84.3 84.4 Nikkei Philippines Purchasing Managers' Index 53.2 52.5 51.6 53.8 51.9 51.9 51.5 50.9 Monetary and Banking sector Headline Consumer Price Index 2.9 5.2 6.3 5.9 3.8 3.8 3.3 3.0 Core Consumer Price Index 2.5 4.1 4.7 4.9 3.6 3.0 3.5 3.4 Domestic liquidity (M3) 13.3 11.6 10.3 8.7 7.5 7.7 7.1 4.2 Credit growth 17.8 16.4 17.2 15.1 11.9 12.3 11.0 Business loans 17.4 17.2 17.6 16.2 13.3 13.0 12.3 Consumer loans 20.5 15.1 14.2 11.3 10.0 9.9 10.6 Fiscal sector (In billions Php) Fiscal balance (% of GDP) -2.2 -3.2 -4.4 -3.6 -2.1 -76.4 -58.4 Total Revenue (% of GDP) 15.7 16.4 16.6 14.9 16.3 202.1 228.9 Tax Revenue (% of GDP) 14.2 14.7 15.2 13.6 14.6 182.6 198.3 Total Expenditure (% of GDP) 17.9 19.6 21.0 18.6 18.5 278.5 287.3 National government debt (% of GDP) 42.1 41.9 42.3 41.9 44.0 7,451 7,802 Stock market PSEi (month-end value) 8,558 7,466 7,277 7,466 7,921 7,705 7,921 7,953 External accounts Current account balance (% of GDP) -0.7 -2.4 -3.7 -2.6 Exports of merchandise goods (growth rate) 18.4 -0.3 -2.4 -0.7 -3.1 -0.1 -2.5 Imports of merchandise goods (growth rate) 13.6 9.4 6.3 3.1 4.7 2.6 7.8 Net foreign direct investment (in million US$) 10,057 9,802 2,234 1,712 Balance of payment (% of GDP) -0.3 -0.7 -2.4 3.0 International reserves (in million US$) 81,273 78,140 76,531 76,529 83,613 82,781 83,613 83,956 Import cover 8.4 7.1 6.8 6.7 7.4 7.3 7.4 7.4 Nominal exchange rate 50.40 52.68 53.54 53.27 52.36 52.19 52.41 Labor Market Unemployment rate 5.7 5.3 5.4 5.1 Underemployment rate 16.2 16.4 17.2 13.3 Sentiments Consumer confidence index (end of period) 9.5 -22.5 -7.1 -22.5 -0.5 -0.5 Business confidence index (end of period) 43.3 27.2 30.1 27.2 35.2 35.2 Prepared by a World Bank team consisting of Rong Qian, Kevin Chua, Kevin Thomas Cruz, Ray Gomez, and Isaku Endo, PHILIPPINES Monthly Economic Developments | May 2019 under the guidance of Ndiame Diop. Contact Rong Qian (rqian@worldbank.org) for questions.