Philippines Monthly Economic Developments August 2022 a The Philippine economy expanded by 7.4 percent in the second quarter of 2022, anchored on robust domestic activity. The strong domestic environment stood in contrast with the weak external conditions which led to the modest growth in manufacturing and exports. In July, headline inflation further accelerated due to rising food and energy prices, and second-round effects from high fuel cost. To address inflation, the authorities have raised its key policy rates, rolled out fuel subsidy to vulnerable groups including public utility jeepney drivers and operators, farmers and fisherfolks, and provided cash transfers to poor households. The Philippine economy grew by 7.4 percent in the second benefitted key industries such as wholesale and retail trade, quarter of 2022 from 12.1 percent in Q2 2021.1 Growth was transportation, accommodation and food services. fueled by private consumption (8.6 percent) as the relaxation Accelerating food and transport prices pushed inflation to 6.4 of movement restrictions, the improvement in consumer percent in July. Food and non-alcoholic beverages inflation confidence, and election-related activities buoyed domestic quickened to 6.9 percent from 6.0 percent in June. Most food activity. However, on a seasonally-adjusted quarter-on- groups saw upticks in prices, particularly, cereals, meat, fish, quarter basis, private consumption declined by 2.7 percent and sugar. Fuel inflation remained at double-digit high (56.0 compared to Q1, tempered by rising inflation. Investment percent y-o-y) but slowed from the previous month. Transport spending also fueled growth, as increased optimism from the prices also rose amid the approved fare hikes, suggesting the private sector led to double-digit growth in construction and second-round effects of elevated fuel costs. The core inflation durable investment spending. Meanwhile, global headwinds is estimated to have accelerated, suggesting rising demand- led to a slowdown in merchandise export growth to 2.1 side price pressures. The authorities rolled out a fuel subsidy percent in Q2 2022. Import growth remained robust at 13.6 to vulnerable groups including public utility jeepney drivers percent (40.3 percent in Q2 2021) to support the strong and operators, farmers and fisherfolks, and distributed cash expansion of private domestic demand. transfers to low-income families. The central bank raised the Industry and services sector drove growth, while the benchmark interest rate to 3.25 percent in July. performance of the agriculture sector remained tepid. The Manufacturing activity maintained its modest growth last industry sector drove growth despite a moderation to 6.3 June. The volume of production index (VoPI) grew by 2.4 percent in Q2 2022 (21.3 percent in Q2 2021). The slowdown percent, compared to 0.9 percent the month before. Eleven in industry output was due to the contraction in mining out of 22 industry divisions reported output expansion by activities and softer manufacturing growth (2.1 percent in Q2 volume. The machinery and equipment industry division 2022) amid the contraction in exports and in part due to base posted the largest growth rate (45.3 percent), while the effects. Services expanded by 9.1 percent, as the reopening printing, metals, and pharmaceutical industry divisions posted Figure 1: The economy expanded in Q2 2022 fueled by domestic Figure 2: The trade deficit further widened in June. demand. Net exports 20 Investments Government Consumption Trade balance (RHS) 135 Household Final Consumption Expenditure Export growth 13 10 GDP Growth FOB value in billion US$ ) Import growth 95 8 Percentage point 0 Percent 55 -10 3 15 -20 -2 -25 -30 -65 -7 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 Source: Philippine Statistics Authority (PSA) Source: PSA q PHILIPPINES Monthly Economic Developments | August 2022 1 All growth numbers are year-on-year unless otherwise stated. the largest declines. Meanwhile, the average capacity The fiscal deficit narrowed to 6.6 percent of GDP in Q2 2022 utilization rate stood at 71.1 percent, up from 70.9 percent. (-8.3 percent of GDP in Q2 2021). Public Revenues increased High input prices and declining export orders caused a decline by 0.8 percentage points (ppt) of GDP in Q2 2022 compared to in the latest IHS Markit Purchasing Managers’ Index (PMI) a year ago to reach 17.5 percent of GDP, fueled by the 0.5 ppt reading for the Philippines (50.8 in July compared to 53.8 in increase in tax revenues. Tax collections benefitted from June). In ASEAN, Singapore and Thailand registered higher PMI robust growth in the quarter, and the windfall from oil excise readings last July, due to stronger purchasing activity. taxes amid the rise in global oil prices. Meanwhile, public expenditures declined by 0.8 ppt of GDP in Q2 to reach 24.1 The goods trade deficit widened in June amid a sharp percent of GDP. This resulted from the slowdown in capital slowdown in exports growth. Exports grew by 1.0 percent in spending due to the spending ban during the election June, slower than the 6.4 percent growth in May. Disruptions campaign period. in global supply chains weighed heavily on electronic products, which contracted by 5.2 percent and accounted for 53 percent Banking sector liquidity remains strong. Domestic liquidity of total exports. Other top exports posted declines such as (M3) increased by 6.9 percent in June 2022, and continued to cathodes, ignition wiring set, and electronic equipment parts. improve relative to April and May, with the liquid assets to Meanwhile, imports expanded at 26.0 percent in June from deposits ratio of 53.2 percent in June. Claims on the private 30.2 percent in May. Growth in imported capital goods and sector grew by 8.7 percent, with increased bank lending to raw materials slowed while consumer goods accelerated. Nine non-financial private corporations and households. of the top ten imported goods increased led by mineral fuels, Outstanding loans for production activities increased, with the lubricants and related materials as global oil prices remained biggest share going to real estate, wholesale and retail trade, elevated. As a result, the trade deficit widened to US$5.8 and manufacturing. Household consumption loans increased, billion in June, from US$5.6 billion in May. led by credit card and motor vehicle loans. The Philippine Stock Exchange Index (PSEi) rebounded in the COVID-19 cases rose in early August as Omicron subvariants past month. The PSEi recovered by 4.6 percent month-on- spread. The national number of daily cases averaged around month (m-o-m) to close at 6,680 on August 11 th. The 3,951 from August 1-14, higher than 2,330 average cases in expansion followed regional trend with expansions in the stock July. Despite the rise in cases, the low-risk classification of the indices of neighboring ASEAN peers. Regional stocks rallied on country is maintained due to the slow increase in average daily news of potential US inflation peaking that may slow the pace attack rate, and the manageable hospital bed occupancy rate. of US Federal Reserve rate hikes. Meanwhile, the Philippine The administration kept the alert level system, and most peso appreciated by 0.9 percent m-o-m, closing at localities remained under alert level 1. Nationwide, over 72.1 Php/US$55.47 on August 12th. The regional experience was million Filipinos have received their complete doses of vaccine, mixed with m-o-m appreciation in the Thai Baht and and 17.0 million individuals got their boosters/additional Indonesian Rupiah, but depreciation in the Malaysian Ringgit. doses as of August 14. Figure 3: Higher food and transport prices, and second-round Figure 4: The stock market in the region recovered in the effects pushed inflation up in July. past month. Other non-food commodities PSEi (close) Transport: Fuels and lubricants for personal transport 9,000 Benchmark Average (IDN, MYS, THA, VNM) Utilities: Electricity, gas, and other fuels 8 Alcoholic beverages and tobacco 8,500 Food and non-alcoholic beverages 6.1 6.4 8,000 5.4 6 Headline inflation 4.9 4.1 4.1 4.2 4.2 4.4 4.2 7,500 3.8 3.7 3.7 3.9 3.6 4.0 Percent 4 3.1 3.0 3.0 7,000 Index 6,500 2 6,000 - 5,500 5,000 (2) 4,500 Jan Jan Mar May Mar May Feb Feb Sep Dec Jul Jul Oct Apr Jun Nov Apr Jun Aug 2021 2022 Source: PSA Source: Philippine Stock Exchange, Haver Analytics PHILIPPINES Monthly Economic Developments | August 2022 Developments to Watch • Growth and inflation: will inflationary pressure temper household consumption growth in the next quarters? • Labor: will we see continued improvement in the labor market as many localities maintain the low alert level? • Manufacturing and exports: what is the prospect of exports as weakness persists in the external environment? Selected Economic and Financial Indicators 2020 2021 Q1 2022 Q2 2022 May-22 Jun-22 Jul-22 In percent, unless otherwise indicated Real GDP growth, at constant market prices -9.5 5.7 8.2 7.4 Private consumption -8.0 4.2 10 8.6 Government consumption 10.5 7.1 3.6 11.1 Capital formation -34.2 20.3 20.4 20.5 Exports, goods and services -16.1 8.0 10.4 4.3 Imports, goods and services -21.6 13.0 15.4 13.6 Industry Performance Value of Production Index (growth rate) -40.7 164.1 154.4 8.0 8.0 9.8 Volume of Production Index (growth rate) -38.2 167.3 142.7 1.0 0.9 2.4 Capacity Utilization 56.8 65.8 70.0 70.5 70.9 71.1 Nikkei Philippines Purchasing Managers' Index 42.5 51.3 52.0 54.1 54.1 53.8 50.8 Monetary and Banking sector Headline Consumer Price Index (growth rate) 2.4 3.9 3.7 5.5 5.4 6.1 6.4 Core Consumer Price Index (growth rate) 1/ 3.1 Domestic liquidity (M3) (growth rate) 12.8 7.3 8.6 7.0 6.9 6.9 Credit growth (universal and commercial banks loans to residents) 7.0 0.6 8.7 10.9 10.6 11.9 Business loans 6.0 0.9 9.7 11 10.8 12.0 Consumer loans 20.9 -8.2 1.3 8.6 8.5 10.6 Fiscal sector Fiscal balance (% of GDP) -7.6 -8.6 -6.4 -6.6 Total Revenue (% of GDP) 15.9 15.5 15.9 17.5 Tax Revenue (% of GDP) 13.9 14.1 14.2 15.6 Total Expenditure (% of GDP) 23.5 24.1 22.3 24.1 National government debt (% of GDP, in million Php for monthly [ytd] ) 54.5 60.4 63.5 62.1 12,495 12,791 Stock market PSEi (month-end value) 7,139.7 7,122.6 7,292.1 6,553.8 6,774.7 6,155.4 6315.9 External accounts Current account balance (% of GDP) 3.6 -3.5 -5.0 -3.9 Exports of goods (growth rate) -7.8 17.2 10.2 4.5 6.4 1.0 Imports of goods (growth rate) -19.2 34.0 25.2 28.4 30.2 26.0 Net foreign direct investment (in million US$) 6822 10518 2439 Balance of payment (% of GDP, in million US$ for monthly) 2.2 0.4 0.5 -3.5 -1606 -1574 International reserves (in million US$) 110117 106952 107599 103267 103637.0 100854 98827 Import cover (months) 11.8 10.1 9.2 8.6 8.7 8.4 8.3 Nominal exchange rate (Php/US$1) 49.6 49.3 51.5 53.1 52.2 55.0 55.7 Labor Market Unemployment rate 10.4 7.8 6.2 5.9 6 6 Underemployment rate 16.4 15.9 14.9 13.7 14.5 12.6 Sentiments Consumer confidence index (end of period) -47.9 -24.0 -15.1 -5.2 Business confidence index (end of period) 10.6 39.7 32.9 35.4 1/ No data on core inflation was reported by the PSA after rebasing to 2018. Source: Philippine Statistics Authority, Bangko Sentral ng Pilipinas, and Bureau of the Treasury. Prepared by a World Bank team consisting of Kevin Chua, Kevin Cruz, Karen Lazaro, Eduard Santos, Ludigil Garces, Radu Tatucu, and Ralph van Doorn, Moller. Monthly Economic Developments | August 2022 PHILIPPINES under the guidance of Lars Christian Contact Kevin Chua (kchua1@worldbank.org) for questions.