Summary. PHILIPPINE QUARTERLY UPDATE - June 2010

Transcription

1 PHILIPPINE QUARTERLY UPDATE - June Summary The Philippines economy posted robust growth in early, in part due to large one-off factors. As did many countries in the region, the Philippines benefited from a strong rebound in global trade. Manufacturing and investment ac vity expanded briskly as a result. Private consump on con nued to expand, as consumer confidence improved. Growth also benefited from elec on-related spending. Expansionary (and now pro-cyclical) fiscal policy con nued to support growth. Despite a withdrawal of liquidity-enhancing measures and a stronger peso, a closing output gap meant that monetary policy remained accommoda ve. Led by emerging markets, the global recovery is under way, but signs of fragility remain; domes c reforms would be a catalyst to higher growth. While large fiscal risks in some European countries have dampened growth prospects in that region, the global growth outlook remains favorable, especially for emerging markets. In the Philippines, while growth surged in early, it is projected to ease as both monetary and fiscal policies normalize. We project GDP growth of. for and. for 11, with risks being equally distributed on the downside, these are primarily external (linked to developments in Europe), while on the upside they are internal (e.g., progress by the new Aquino government in achieving quick gains against corrup on, the introduc on of a strong reform program, and fiscal consolida on). Consump on is projected to benefit from be er labor market performance, but to receive less support from remi ances as their real peso value is projected to be broadly flat (against growth in 9). The infla on outlook is benign given the rela vely so labor market due to a rapid increase in the poten al labor force and a stable outlook for key imported commodity prices (e.g., petroleum products and rice). Remi ances are projected to grow by 8 in following the large deployment of emigrants in 9. A World Bank study of Philippines migra on pa ern during the global recession reveals that deployment of overseas foreign workers (OFWs) actually accelerated during the crisis. Partly this reflected the fact that the top OFW des na ons were not as affected as the rest of the world. The most affected OFWs were males, produc on workers (especially construc on workers) and new hires. By contrast, females, services workers, seafarers and rehires proved resilient to the crisis or even benefited from it (e.g., demand for Filipino seafarers expanded sharply despite a sharp contrac on in the shipping industry). Globally, less tolerance towards weak public finances is expected, raising the need to introduce a credible mediumterm fiscal consolida on plan for the Philippines. Running a pro-cyclical fiscal policy with rela vely high debt and limited fiscal space as undertaken in the first-half of raises risks and should be reverted. Credibility towards such a goal could be achieved, for example, by designing a comprehensive mul -year reform package. The Aquino government s focus on crea ng fiscal space through higher revenue and expenditure efficiency is welcome and should generate notable gains given the poli cal capital invested in figh ng corrup on. To further strengthen the government s goal of reducing the fiscal deficit to of GDP within three years, con ngency measures could usefully be iden fied and adopted as part of a comprehensive package. Stronger public finances including by reducing overall fiscal risks would enable the Philippines to (1) regain policy flexibility to tackle both downside risks (such as a deepening of the European sovereign debt crisis) and upside risks (such as the a rac on of large capital inflows into the region), and () create more fiscal space for priority programs. Sound public finances would also provide the BSP with more flexibility in se ng policies, as well as in managing such capital flows. As the output gap closes, the accommoda ve monetary policy introduced in 8 would need to be gradually unwound, star ng by reaching a broadly neutral stance in. An increase in policy rates currently nega ve or slightly posi ve could achieve such a goal. iv

2 The Recovery Con nues Despite Global Financial Turbulence Recent Economic Developments 1. The Presiden al elec ons outcome in May has generated high hopes for reform, especially in the an -corrup on 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 pla orm rested on improving governance and reducing corrup on so as to reduce poverty. These elec ons generate large hope for reforms and tackling well known structural bo lenecks, especially corrup on the percep on of which has increased steadily over the past years as reported by various interna onal cross country indices. Output and Demand. The Philippines economy posted robust growth in early, in part due to one-off factors (Figure 1). A er pos ng its slowest growth since the Asian financial crisis (1.1 in 9), GDP grew by an impressive 7.3 (yearon-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 1., China at 11.9, Malaysia at.1, India at 8.6, Vietnam at 5.8, and Indonesia at 5.7). The regional recovery is driven, to a large extent, by a sharp rebound in exports and manufacturing, highligh ng the important role that the global recovery plays for the region (Figure ). In the Philippines, growth was further buoyed by strong elec on-related spending both private and public. The former is captured in strong growth of recrea onal services (e.g., adver sing) and trade. The la er in government current consump on (as public construc on slowed down, reflec ng a pre-elec on ban on star ng projects). Figure 1. Investment posted record contribu on to growth age pt / Contribution to YoY GDP growth QQQQQQQQ Discrepancy Net Exports Investment Govt Cons Private Consumption GDP growth Source: Na onal Sta s cal Coordina on Board (NSCB). Figure. The sharpest rebounds occurred in countries buoyed by manufacturing growth 1/ YoY GDP growth, in EAP Region: GDP Growth and THA MYS PHL VNM IDN Source: CEIC. 1/ The size of the bubble indicates the contribu on of manufacturing to GDP growth. Inpar cular:tha 8.5ppt, MYS.ppt, PHL.3 ppt, VNM 1.7 ppt, and IDN.9 ppt. 3. The sharp expansion in the manufacturing sector brought produc on above the pre-crisis level and contributed.3 age points to overall growth (Figure 3). Manufacturing produc on grew by.7 year-on-year in 9, pushing produc on 11.5 above its pre-crisis peak of 8. 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 1 The closure of Petron s refinery in 9 for preven ve 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 contrac on (over the past three quarters) in imports of mineral fuels, lubricants and related materials (NIA data). Food manufacturing growth also occurred despite a contrac on in the agricultural sector. On the consump on side, the strong produc on of food was for exports. 1

3 PHILIPPINE QUARTERLY UPDATE - June Figure 3. Manufacturing as the key engine to the rapid recovery YoY GDP Growth (Supply side) Agriculture Services Manufacturing Industry GDP Growth Q Q Q Q Q Q Q Q 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 Manufacturing Sector: Top & Least Contributor GDP Growth age points Source: Na onal Sta s cal Coordina on Board (NSCB). Source: Na onal Sta s cal Coordina on Board (NSCB) compensated for the.5 contrac on in agriculture which con nued 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 6.1 in driven by strong growth of private services (par cularly recrea onal services, which could be related to elec ons) and trade, which returned to growth a er contrac ng in 9. To a lesser extent, finance and real estate services improved as the economic recovery firmed up.. On the demand side, growth was broad-based, with investment par cularly strong (Figure 1). A er contrac ng by 5.7 in 9, investment grew by.3 in, driven by investments in durable equipment, par cularly in transport (81.6 annual growth) and telecoms (7. growth). Strong increases in large discre onary spending items such as cars 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 consump on con nued to recover from its weak 9 performance. An improving labor market and con nued remi ance inflows contributed to this recovery The contribu on of government spending to overall growth rose in the first quarter, seemingly reflec ng pre-elec on spending (Figure 6). With the implementa on of the Economic Resiliency Plan (ERP) last year, the contribu on of government consump on and public construc on to GDP growth was significant in 9. As the ERP was front-loaded to ba le the global recession the fiscal s mulus came into full force in Q and then progressively weakened in and especially Q. Despite the Government s aim for a moderate fiscal consolida on in, NG spending increased sharply in and became a significant contributor to growth at 1.6 age points. Spending likely grew faster in to amid selec ve spending ban ahead of the elec on. 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 valua on gains (Table 1). The global financial crisis and the ensuing global recession took its toll on the profitability of PSE-listed companies in 8. Sectors par cularly affected included the industrial and the services sectors and, to a lower extent, the proper es sector. Despite the slowdown in economic ac vity in the Philippines, profitability of listed firms surged by 55 in 9 reflec ng, to a large extent, non-recurring revenue gains. These originate from divestments in a few large corpora ons that refocused their ac vity from tradable to non-tradable (see November 9 Philippines Quarterly Update for details). Total vehicle sales grew by 36 in and by 37 through May (Figure 5).

4 The Recovery Con nues Despite Global Financial Turbulence Figure 5. Car sales are growing briskly and are no ceably higher than their pre-crisis level Figure 6. Government spending strongly contributed to growth thousands Levels Car Sales Growth (rhs) Jan-8 Mar-8 May-8 Jul-8 Sep-8 8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 9 Jan- Mar- May age point Contribution to Growth of Govt Spending Government Consumption Public Construction Q Q Q Q 8 9 Source: Chamber of Automo ve Manufacturers in the Philippines, Inc. (CAMPI) Source: Na onal Sta s cal Coordina on Board (NSCB) Table 1. Philippines: Profitability of Listed Companies (by Sectors), 7-9 Levels, in billion PhP Net Income Revenues PSEi ,66.5 1, Financials Sector Industrial Sector ,67.9 1, Holding Firms Sector Property Sector Services Sector Mining & Oil Sector Small and Medium Enterprises Total ,369.5, Total Non-financial ,79.9, Growth Rate PSEi Financials Sector Industrial Sector Holding Firms Sector Property Sector Services Sector Mining & Oil Sector Small and Medium Enterprises Total Total Non-financial Source: Philippine Stock Exchange. 3

5 PHILIPPINE QUARTERLY UPDATE - June 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 par cipa on increased as almost the en re poten al 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 8. (or 3.1 million people) from 7.5 (or.8 million people) Figure 8. The sharp decrease in job crea on from April 9 to April can be partly explained by the phasing out of the CLEEP job crea on 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 elec on-related. The El Niño drought had a large nega ve impact on agricultural employment, with more than 8, 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 me jobs rose; underemployment declined) but job crea on lags popula on growth Figure 8. Less people fully-employed, more without jobs thousands, 1,6 1, 6 () Labor Force Survey (April Sweeps) Change in potential labor force (pop 15 years and over) Change in actual labor force Job Creation Share of full time jobs (RHS) Source: Na onal Sta s cs Office (NSO) Labor Force Survey (April Sweeps) Unemployment Rate (%) Underemployment Rate (% of Employed)--RHS Source: Na onal Sta s cs Office (NSO) Figure 9. Services con nue to drive job crea on; agriculture is suffering from El Nino Figure. Self-rated poverty is reaching historical lows, possibly due to the CCT/Ps program million Service Manuf Total Agri Non-manuf Industry Poverty and Hunger Incidence Mar-6 May-6 Jul-6 Sep-6 6 Jan-7 Mar-7 May-7 Jul-7 Sep-7 7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 9 Jan- Mar- (.) Apr 7 Jul 7 Oct 7 Jan 8 Apr 8 Jul 8 Oct 8 Jan 9 Apr 9 Jul 9 Oct 9 Jan Apr Self-rated Poverty Hunger: Moderate Hunger: Overall Hunger: Severe Source: Na onal Sta s cs Office (NSO). Source: Social Weather Sta on (SWS)

6 The Recovery Con nues Despite Global Financial Turbulence 8. Self-rated poverty and hunger decreased no ceably in March, despite substan al job losses in the agricultural sector which accounts for a large share of the poor (Figure ). According to Social Weather Sta ons surveys, a er peaking in November 9, self-rated poverty steadily decreased to reach its lowest level since March 1987 (though s ll affec ng 3 of households). Similarly, hunger incidence decreased by three points from the record-high incidence (. ) reached in December 9. The welcome improvement in these indicators is no ceable given the poor performance of the agricultural sector in Q 9 and 9. Strong growth in likely provided opportuni es to the poor, especially the urban poor, to earn more income. The general elec on also generated many temporary lowskill jobs to assist the campaigns. The Ps condi onal cash transfer program is also likely to have played a role as it was scaled up from 5,961 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-, ), including ones aimed at assis ng 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. of GDP in is notably lower than the.8 (.3) surplus achieved in 9 (Q 9). The nega ve 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 par cular) worsened the trade deficit by 1. age points of GDP compared to Q 9. A deteriora on in the trade balance (based on preliminary trade data) also occurred in April (Figure 1). On the other hand, the financial account registered a significantly smaller net ou low this compared to 9 but this was a reversal from the posi ve inflows witnessed in Q 9. The renewed turbulence in global financial markets due to the debt problems in the Euro zone along with a poten al wait-and-see a tude ahead of the May general elec ons explain most of this reversal. Figure 11. The balance of payments remains firmly in surplus Figure 1. The export rebound is so ening while imports keep growing mln US$ Balance of Payments Others Financial Account Current Account Q Q Q Q Q Q Q Q in bln US$ Balance of Trade, 3 mma Exports Imports Trade Balance.5 - (.5) (1.) (1.5) in bln US$ Feb-7 Apr-7 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb- Apr- Sources: Bangko Sentral ng Pilipinas (BSP) Source: Na onal Sta s cs Office (NSO). 3 These are: First, a Food-for-work program, which gives 5kg of rice per effected family for every weeks of disaster-related work (e.g., road clean-up and rehabilita on). About 1.5 metric tons of rice has been allocated for this program, which is s ll ongoing (h p:// content/ ar cle/1-latest-news/6-dswd-un-wfp-award-food-packages-for-typhoon-ondoy-vic ms-in-rizal). 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, 6, and 1. 5

7 PHILIPPINE QUARTERLY UPDATE - June. Exports and imports con nue to rebound, but remain below their pre-crisis levels (Figure 1). A er shrinking con nuously from October 8 to October 9, exports and imports started recovering in November. Through April, exports grew by Export levels, nonetheless, remain 18. lower than prior to the crisis (August 8). Electronics and semi-conductors exports, which contracted sharply and rapidly during the global trade collapse, led the export recovery. The United States and Japan remain the Philippines top export des na ons. 11. As the effects of the global crisis and end-9 typhoons recede, remi ance growth slowed down in (Figure 1). Remi ances 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 rela ves (See Box 1, November 9 Philippines Quarterly Update). As the insurance mo ves for sending money decreased, remi ance growth slowed down to 5. in April. While, the year-to-date growth of 6.6 in US dollar terms is stronger than last year, remi ances have been steadily declining in real peso terms due to the strength of the Peso and the moderate increase in infla on. Figure 13. Merchandise exports remain below pre-crisis levels Figure 1. Remi ance growth is decelera ng, as the crisis and natural disasters fade in bln US$ Merchandise Exports Others Electronics Total in Remittance Growth, 3 mma Nominal USD Nominal Php Real Php Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan- Apr- Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan- Apr- Source: Na onal Sta s cs Office (NSO) Figure 15. Reserves con nue to accumulate at a robust pace Source: Bangko Sentral ng Pilipinas (BSP) Figure 16. External debt cover, already comfortable, con nues to increase in bln US$ Foreign Currency Liquidity NIR Forward Book QQQQQQQQ bln US$ External Debt Q Q Q Q Q Q Q Q Long-Term Short-Term GIR, ST External Debt Cover (rhs) Source: Bangko Sentral ng Pilipinas (BSP) Source: Bangko Sentral ng Pilipinas (BSP) Yang, Dean, and HwaJung Choi, 7, Are Remi ances Insurance? Evidence from Rainfall Shocks in the Philippines, World Bank Economic Review, Vol. 1(), pp

8 The Recovery Con nues Despite Global Financial Turbulence 1. External debt rose in but reserves con nue to strengthen and point to a robust external posi on. As of March, the country s external debt stood at 33. of GDP,.8 age points higher than in March 9 (Figure 16). While short-term loans have contracted since 9, medium- and long-term loans have been rising since Q 9. Public external debt, which accounts for 71 of total external debt, has been rising since Q 9, following several global bond issuances. While the non-banking private sector s debt remained broadly stable, the banking system s external debt con nued to decline since early 8, thereby limi ng 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 short-term external debt (by residual maturity) and imports (Figure 15). Financial Markets 13. One year into the financial markets rebound, European fiscal concerns generated increased vola lity in the Philippines but the overall impact has been limited. A er bo oming out in March 9, the PSEi stock market index recovered strongly but not en rely 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 no ceably against the euro (Figure 18). Overall, the nominal (real) effec ve exchange rate was broadly unchanged in (Figure 19). With policy rates unchanged and ample domes c liquidity, domes c interest rates have remained broadly unchanged (Figure ). Figure 17. The Greek crisis led to a pause in the PSEi rally (with foreigners non-commi al) Figure 18. a strong apprecia on of the peso against the euro but a pause against the dollar 5-5 Philippine Stock Exchange Exchange Rate PSEi: Cumulative change from peak in 7 Stocks: Net Foreign Buy (million US$) Oct7 Dec7 Feb8 Apr8 Jun8 Aug8 Oct8 Dec8 Feb9 Apr9 Jun9 Aug9 Oct9 Dec9 Feb Apr Jun Php/US$ Php/Euro (rhs) Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb- Apr- Jun Source: CEIC. Figure 19. leading to a broadly stable effec ve exchange rates 1/ Real and Nominal Effective Exchange Rate Indices (198=) Jan-8 Mar-8 May-8 Jul-8 Sep-8 Real Effective Exchange Rate (lhs) Nominal effective Exchange Rate Index (rhs) 8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 9 Jan- Mar- May Source: Bangko Sentral ng Pilipinas. 1/ Against major trading partners (US, Japan, European Monetary Union, United Kingdom). Source: Bangko Sentral ng Pilipinas (BSP) Figure. but had limited impact on the sovereign yield curve in Yield Curve (Treasury Reference Rates) Jul-8 Feb-9 Aug-9 Mar- Jun- 1M 3M 6M 1Y Y 3Y Y 5Y 7Y Y Y 5Y Source: Philippine Dealing and Exchange Corpora on (PDEX) 7