Recent Economic Developments 1. The Presidential elections outcome in May has generated high hopes for reform, especially in the anti-corruption and governance areas. Mr. Benigno Simeon Noynoy Aquino III of the Liberal Party won with a large majority and took office as the country s 15th president on June 3,. Mr. Aquino s core electoral platform rested on improving governance and reducing corruption so as to reduce poverty. These elections generate large hope for reforms and tackling well known structural bottlenecks, especially corruption the perception of which has increased steadily over the past years as reported by various international cross country indices. Output and Demand 2. The Philippines economy posted robust growth in early, in part due to one-off factors (Figure 1). After posting its slowest growth since the Asian financial crisis (1.1 in 9), GDP grew by an impressive 7.3 (year-on-year) in the first quarter of, far faster than expected, but in line with equally strong rebounds elsewhere in the region (Singapore at 15.5, Thailand at., China at 11.9, Malaysia at.1, India at., Vietnam at 5., and Indonesia at 5.7). The regional recovery is driven, to a large extent, by a sharp rebound in exports and manufacturing, highlighting the important role that the global recovery plays for the region (Figure 2). In the Philippines, growth was further buoyed by strong election-related spending both private and public. The former is captured in strong growth of recreational services (e.g., advertising) and trade. The latter in government current consumption (as public construction slowed down, reflecting a pre-election ban on starting projects). 3. The sharp expansion in the manufacturing sector brought production above the pre-crisis level and contributed.3 age points to overall growth (Figure 3). Manufacturing production grew by.7 year-on-year in 9, pushing production 11.5 above its pre-crisis peak of. The strong growth reflects both a strong recovery as well as the sector s sharp collapse in 9 (i.e., a base effect). Manufacturing of petroleum products, food, and electrical machinery (mainly for exports) were the top drivers of growth (Figure ). 1 The gains in manufacturing compensated for the 2.5 contraction in agriculture which continued to suffer from the damages brought about by the typhoons of late 9 and the El Niño drought which persisted in the first half of the year. The services sector grew by.1 in driven by strong growth of private services (particularly recreational services, which could be related to elections) and trade, which returned to growth after contracting in 9. To a lesser extent, finance and real estate services improved as the economic recovery firmed up. 1 The closure of Petron s refinery in 9 for preventive maintenance mostly explain the surge in petroleum manufacturing which contributed 1.5 age points to the 7.3 GDP growth. This surge took place amid a sharp contraction (over the past three quarters) in imports of "mineral fuels, lubricants and related materials (NIA data). Food manufacturing growth also occurred despite a contraction in the agricultural sector. On the consumption side, the strong production of food was for exports.
Figure 1. Investment posted record contribution to growth age pt / 15 5 5 15 Contribution to YoY GDP growth QQQQ 7 9 Discrepancy Net Exports Investment Govt Cons Private Consumption GDP growth Source: National Statistical Coordination Board (NSCB). Figure 2. The sharpest rebounds occurred in countries buoyed by manufacturing growth 1/ YoY GDP growth, in 1 1 2 EAP Region: GDP Growth and Contribution of Manufacturing THA MYS PHL VNM IDN Source: CEIC. 1/ The size of the bubble indicates the contribution of manufacturing to GDP growth. In particular:tha.5ppt, MYS.ppt, PHL.3 ppt, VNM 1.7 ppt, and IDN.9 ppt.. On the demand side, growth was broad-based, with investment particularly strong (Figure 1). After contracting by 5.7 in 9, investment grew by 2.3 in, driven by investments in durable equipment, particularly in transport (1. annual growth) and telecoms (27. growth). Strong increases in large discretionary spending items such as cars 2 reflect improved consumer confidence over the next three to twelve month (though current confidence remains broadly unchanged since 9 Figure 31 page 19) but they could also reflect increased demand from households and businesses to replace damaged assets from typhoons Ondoy and Pepeng. Private consumption continued to recover from its weak 9 performance. An improving labor market and continued remittance inflows contributed to this recovery. 5. The contribution of government spending to overall growth rose in the first quarter, seemingly reflecting pre-election spending (Figure ). With the implementation of the Economic Resiliency Plan (ERP) last year, the contribution of government consumption and public construction to GDP growth was significant in 9. As the ERP was front-loaded to battle the global recession the fiscal stimulus came into full force in and then progressively weakened in and especially Q. Despite the Government s aim for a moderate fiscal consolidation in, NG spending increased sharply in and became a significant contributor to growth at 1. age points. Spending likely grew faster in to amid selective spending ban ahead of the election. Spending growth also reflects the electoral budget cycle (which the Philippines has in common with many other countries).. Corporate profitability registered strong growth in 9, partly due to non-recurring gains (e.g. asset sales) as well as mark-to-market valuation gains (Table 1). The global financial crisis and the ensuing global recession took its toll on the profitability of PSE-listed companies in. Sectors particularly affected included the industrial and the services sectors and, to a lower extent, the properties sector. Despite the slowdown in economic activity in the Philippines, profitability of listed firms surged by 55 in 9 reflecting, to a large extent, non-recurring revenue gains. These 2 Total vehicle sales grew by 3 in and by 37 through May (Figure 5). 7
originate from divestments in a few large corporations that refocused their activity from tradable to non-tradable (see November 9 Philippines Quarterly Update for details). thousands Figure 3. Manufacturing as the key engine to the rapid recovery 2 1 Q Q Q Q 7 9 Source: National Statistical Coordination Board (NSCB). Figure 5. Car sales are growing briskly and are noticeably higher than their pre-crisis level 1 1 2 Source: CAMPI. YoY GDP Growth (Supply side) Agriculture Services Manufacturing Levels Car Sales Growth (rhs) Industry GDP Growth Jan Mar May Jul Sep Nov Jan 9 Mar 9 May 9 Jul 9 Sep 9 Nov 9 Jan Mar May 5 3 3 Figure. Manufacturing growth came almost exclusively from petroleum, food, and electronics Products of petroleum & coal Food manufactures Electrical machinery Chemical & chemical prod. Miscellaneous manufactures Furniture and fixtures Transport equipment Basic metal industries Footwear wearing apparel age point Source: NSCB Figure. Government spending strongly contributed to growth 1. 1. 1.2 1.....2..2.. Source: NSCB Manufacturing Sector: Top & Least Contributor GDP Growth 9 2. 1.. 1. 2. age points Contribution to Growth of Govt Spending Government Consumption Public Construction Q Q 9 Table 1. Philippines: Profitability of Listed Companies (by Sectors), 7-9 Net Income Revenues 7 9 7 9 Levels, in billion PhP PSEi 19.9 155.3 2. 1,.5 1,52.1 115.5 Financials Sector.2 27.5.2 29.7 27.5 313.1 Industrial Sector 57.3 9.1. 1,7.9 1,21.1 32. Holding Firms Sector 2. 37.2 7.9 39.3 59. 57.3 Property Sector 2.7 25.7 2.. 119.7 3.1 Services Sector 2. 55.1. 32.3 33. 32. Mining & Oil Sector.9. 3.1 31.5 33. 3.5 Small and Medium Enterprises....1.1.1 Total 21.5 199.2 357. 2,39.5 2,15.5 271.1 Total Non-financial 235. 171. 313. 2,79.9 2,337. 23. Growth Rate PSEi - -1. 5.9 - -.5 7. Financials Sector - -.5 1. - -3.9. Industrial Sector - -1.3 15.3-1.2 -.7 Holding Firms Sector - -. 9.7-15.9 13.2 Property Sector - -3. 11. -. 2. Services Sector - -33.1 52. -.3 -.3 Mining & Oil Sector - -33.2-33. -.7 1. Small and Medium Enterprises - -5.3 111.5 -.9 25.1 Total - -29.2 79. -. 3. Total Non-financial - -27. 2. -. 2. Source: Philippine Stock Exchange.
Employment and Poverty 7. The quality of jobs improved in the formal labor market, but employment was insufficient to keep track with the rapid demographic growth. In 9, as companies reduced working hours during the global recession, labor force participation increased as almost the entire potential labor force entered the labor market; seeking to stabilize household incomes (Figure 7). As economic growth revived in, labor entrants declined in April. Unemployment, however, increased to. (or 3.1 million people) from 7.5 (or 2. million people) Figure. The sharp decrease in job creation from April 9 to April can be partly explained by the phasing out of the CLEEP job creation program that was introduced as part of the ERP. Part of the drop in the under-employment rate in April is expected to be reversed as many temporary jobs were election-related. The El Niño drought had a large negative impact on agricultural employment, with more than, net jobs lost (Figure 9). This offset jobs created in the manufacturing and services sectors. Despite rising unemployment, the improving economy led to lower underemployment and a higher share of salary and wage workers. Figure 7. The quality of jobs is improving (full time jobs rose; underemployment declined) but job creation lags population growth thousands million 2, 1, 1, () Source: National Statistics Office (NSO). Figure 9. Services continue to drive job creation; agriculture is suffering from El Nino 1. 1.1..1 (.) Labor Force Survey (April Sweeps) Source: Source: National Statistics Office (NSO). 5 55 5 7 9 Change in potential labor force (pop 15 years and over) Change in actual labor force Job Creation Share of full time jobs (RHS) Service Manuf Total Net Job Creation Agri Non manuf Industry.5. 7.5 7. Figure. Less people fully-employed, more without jobs Labor Force Survey (April Sweeps).5 Unemployment Rate (%) Underemployment Rate (% of Employed) RHS. 7 9 Source: National Statistics Office (NSO). Figure. Self-rated poverty is reaching historical lows, possibly due to the CCT/Ps program 55 5 5 Poverty and Hunger Incidence Mar May Jul Sep Nov Jan 7 Mar 7 May 7 Jul 7 Sep 7 Nov 7 Jan Mar May Jul Sep Nov Jan 9 Mar 9 May 9 Jul 9 Sep 9 Nov 9 Jan Mar Self rated Poverty Hunger: Moderate Source: Social Weather Station. Hunger: Overall Hunger: Severe 3 25 15 5 27. 25. 23. 21. 19. 17. 15. 9
. Self-rated poverty and hunger decreased noticeably in March, despite substantial job losses in the agricultural sector which accounts for a large share of the poor (Figure ). According to Social Weather Stations surveys, after peaking in November 9, self-rated poverty steadily decreased to reach its lowest level since March 197 (though still affecting 3 of households). Similarly, hunger incidence decreased by three points from the record-high incidence (2. ) reached in December 9. The welcome improvement in these indicators is noticeable given the poor performance of the agricultural sector in Q 9 and 9. Strong growth in likely provided opportunities to the poor, especially the urban poor, to earn more income. The general election also generated many temporary low-skill jobs to assist the campaigns. The Ps conditional cash transfer program is also likely to have played a role as it was scaled up from 52,91 households in April 9 to over 77, households in April. Other programs, such as the NFA rice program may also have been increased during that period, as the larger budgetary subsidies transferred to the NFA suggest. The DSWD has also been running other social safety net programs during the SWS survey period (March 19-22, ), including ones aimed at assisting the poor affected by Ondoy, Pepeng, and El Niño, 3 which is likely to have contributed to the improved poverty and hunger indicators. Balance of Payments and External Debt 9. The balance of payments (BoP) weakened but remained in surplus (Figure 11). The overall BoP surplus of 3.2 of GDP in is notably lower than the. (.3) surplus achieved in 9 (Q 9). The negative year-on-year growth in net inflows of unclassified items in explains most of this decrease. A smaller current account surplus. of GDP in against 5.1 (5.7) in (Q) 9 also contributed to the decline in the BOP surplus. Increasing demand for imports as the economy recovers along with higher prices for key commodity imports (oil in particular) worsened the trade deficit by 1.2 age points of GDP compared to Q 9. A deterioration in the trade balance (based on preliminary trade data) also occurred in April (Figure ). On the other hand, the financial account registered a significantly smaller net outflow this compared to 9 but this was a reversal from the positive inflows witnessed in Q 9. The renewed turbulence in global financial markets due to the debt problems in the Euro zone along with a potential waitand-see attitude ahead of the May general elections explain most of this reversal.. Exports and imports continue to rebound, but remain below their precrisis levels (Figure ). After shrinking continuously from October to October 9, exports and imports started recovering in November. Through April, exports grew by 39.1. Export levels, nonetheless, remain 1.2 lower than prior to the crisis (August ). Electronics and semi-conductors exports, which 3 These are: First, a Food-for-work program, which gives 25kg of rice per effected family for every 2 weeks of disaster-related work (e.g., road clean-up and rehabilitation). About 1.5 metric tons of rice has been allocated for this program, which is still ongoing (http://www.dswd.gov.ph/index.php/component/ content/article/1-latest-news/-dswd-un-wfp-award-food-packages-for-typhoon-ondoy-victims-inrizal). Second is the Core Shelter program, which is funded out of the Calamity Fund. The program also provides rice to families whose houses have been totally/severely damaged by the typhoons. Third is assistance to El Niño affected families mainly in Regions 2,, and.
contracted sharply and rapidly during the global trade collapse, led the export recovery. The United States and Japan remain the Philippines top export destinations. Figure 11. The balance of payments remains firmly in surplus Balance of Payments mln US$ 2 2 Others Financial Account Current Account Q Q Q Q 7 9 Source: Bangko Sentral ng Pilipinas. Figure. The export rebound is softening while imports keep growing 5 3 Balance of Trade, 3 mma Exports Imports Trade Balance Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb Apr Jun Aug Oct Dec Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb Apr Source: National Statistics Office (NSO)..5 (.5) (1.) (1.5) 11. As the effects of the global crisis and end-9 typhoons recede, remittance growth slowed down in (Figure 1). Remittances in nominal dollar terms grew briskly by more than 11 in the last two months of 9 in part due to OFWs sending money to typhoons-affected relatives (See Box 1, November 9 Philippines Quarterly Update). As the insurance motives for sending money decreased, remittance growth slowed down to 5. in April. While, the year-to-date growth of. in US dollar terms is stronger than last year, remittances have been steadily declining in real peso terms due to the strength of the Peso and the moderate increase in inflation. Figure 13. Merchandise exports remain below precrisis levels 5..5. 3.5 3. 2.5 2. 1.5 1..5. Merchandise Exports Others Electronics Total Jan 7 Apr 7 Jul 7 Oct 7 Jan Apr Jul Oct Jan 9 Apr 9 Jul 9 Oct 9 Jan Apr Source: North American Semiconductor Equipment Industry in Figure 1. Remittance growth is decelerating, as the crisis and natural disasters fade 35. 3. 25.. 15.. 5.. 5.. 15. Apr 7 Jul 7 Remittance Growth, 3 mma Oct 7 Nominal USD Real Php Jan Apr Jul Oct Jan 9 Source: Bangko Sentral ng Pilipinas Nominal Php Apr 9 Jul 9 Oct 9 Jan Apr Yang, Dean, and HwaJung Choi, 7, Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines, World Bank Economic Review, Vol. 21(2), pp. 219-. 11
Figure 15. Reserves continue to accumulate at a robust pace Foreign Currency Liquidity 7 5 3 NIR Forward Book QQQQ 7 9 Source: Bangko Sentral ng Pilipinas bln US$ 57 55 53 51 9 7 5 3 Figure 1. External debt cover, already comfortable, continues to increase External Debt Q Q Q Q 7 9 Long Term Short Term GIR, ST External Debt Cover (rhs) Source: Bangko Sentral ng Pilipinas 5 3. External debt rose in but reserves continue to strengthen and point to a robust external position. As of March, the country s external debt stood at 33.2 of GDP,. age points higher than in March 9 (Figure 1). While short-term loans have contracted since 9, medium- and long-term loans have been rising since 9. Public external debt, which accounts for 71 of total external debt, has been rising since 9, following several global bond issuances. While the non-banking private sector s debt remained broadly stable, the banking system s external debt continued to decline since early, thereby limiting the impact of the global financial crisis on the sector. Reserves, including forward contracts, have surged to new record-highs and provide strong coverage of both shortterm external debt (by residual maturity) and imports (Figure 15). Financial Markets 13. One year into the financial markets rebound, European fiscal concerns generated increased volatility in the Philippines but the overall impact has been limited. After bottoming out in March 9, the PSEi stock market index recovered strongly but not entirely through April. In May, heightened concerns about debt sustainability in some European countries sparked a global financial asset sell-off which the PSEi did not escape. Foreign purchases have mostly been neutral (Figure 17). Renewed global risk aversion led to a strengthening of the dollar vis-à-vis the peso, while the peso appreciated noticeably against the euro (Figure 1). Overall, the nominal (real) effective exchange rate was broadly unchanged in (Figure 19). With policy rates unchanged and ample domestic liquidity, domestic interest rates have remained broadly unchanged (Figure ). Policies Monetary Policy 1. The central bank has started to tighten monetary policy though, with a rapidly closing output gap, the stance remains accommodative. Monetary conditions tightened in thanks to the withdrawal of liquidity-enhancing measures in January (see February Philippines Quarterly Update) and an appreciation of the