Economic Update

Published 11 Jan 2019

Weaker agricultural output and high inflation helped curb growth in the Philippine economy in 2018, though the rate of expansion still outpaced most other countries in the region.

Following a strong first quarter, when growth stood at 6.8% year-on-year (y-o-y) – 0.3 percentage points above the previous year – the economy began to slow, expanding by 6.2% in April-June and by 6.1% in July-September, according to the latest quarterly report from the Philippine Statistics Authority (PSA), compared to 6.7% and 7.2% in the second and third quarters of 2017, respectively.

While the services and industrial sectors both recorded y-o-y growth of more than 6% in each quarter, the overall result was somewhat offset by a subdued performance in agriculture, which expanded by just 0.1% y-o-y over the first nine months of the year.

The trade deficit also widened over the first nine months of the year to $33.9bn due to rising imports of raw and construction materials, and high oil prices. According to the PSA’s latest data for the month of October, the trade deficit reached a record $4.2bn that month as imports surged 21.4% y-o-y to $10.3bn.

The slowdown in the economy led the Asian Development Bank to revise its full-year growth forecast made at the end of September from 6.8% to 6.4%, though it said it expected growth to regain some of its momentum in the latter part of the year and into 2019 on the back of increased public spending on infrastructure and social developments. It said this would be supported by solid showings from key private sector contributors. The bank forecast growth of 6.7% in 2019.

See also: The Report – Philippines 2018

High inflation and interest rates cool capital markets

Inflation ticked up throughout most of 2018, climbing to 6.7% in October before moderating to 6% in November, more than double the 3% posted for the same month in 2017 and well above the government’s target of 2-4%, according to the PSA. Inflation eased to 5.1% in December.

Key drivers for the price increases were transport and food costs, along with utilities expenses in the wake of the Tax Reform for Acceleration and Inclusion (TRAIN) law, which increased the excise tax on fuel products and introduced an excise tax on some consumer goods at the start of 2018.

The development prompted the central bank, Bangko Sentral ng Pilipinas (BSP), to increase its benchmark rate on November 15, lifting its overnight reverse repurchase facility by 25 basis points to 4.75%.

Though the BSP said it expected inflation to fall within its target band of 3%, plus or minus one percentage point, in 2019 and 2020, it based its decision to raise the benchmark rate on supply-side and possible wage pressures, which continue to drive price developments.

The November increase was the fifth time in successive meetings that the BSP’s monetary board raised its benchmark due to inflationary concerns. At its final meeting in mid-December, however, it said the key rate would remain at 4.75%.

The slower pace of growth, combined with rising inflation and a weaker currency – the peso fell from P49.81:$1 in January to P52.42:$1 in early December – also impacted capital markets.

The Philippines Stock Exchange index (PSEi) opened the year at a record high of 8724.13 points on the first day of trading, only to break that barrier again later that month. Since then, however, results have been mixed, with the index trading down in the latter months of the year to 7466.02 on December 28.

Analysts were looking for the PSEi to stage a recovery in the first weeks of 2019, on the back of easing inflation, supported by falling fuel prices.

Bank lending to businesses remains high

Increasing rates did not appear to have a significant impact on bank lending in 2018, though there was a modest cooling of consumer credit demand later in the year.

Bank lending expanded by 17.6% in September and 18.1% in October, according to a PSA report issued in late November. Business loans accounted for 88.7% of banks’ total loan portfolios, with credit to the construction sector climbing 39.1% and manufacturing 20.6%, pointing to higher levels of growth in production and building activities.

However, there was a slowing of loan growth for household consumption, with credit expansion easing from 18.2% in September to 14.6% as a result of lower demand for credit card loans and a reduction in borrowing for motor vehicle purchases.

The higher levels of domestic lending for production capacity were also supported by stronger foreign direct investment (FDI) inflows, with overseas investments totalling $8.5bn for January-October, according to data issued by the BSP in mid-December.

The 10-month total was 1.8% higher than the same period in 2017, with the increase leading the BSI to change its estimates for 2018, stating it now believes FDI will reach a record high $10.4bn for the whole year, up from its original estimate of $8.2bn.

The leading beneficiaries of FDI in 2018 were the financial and insurance, manufacturing, and real estate sectors, with Singapore, Hong Kong and the US being the top-three contributors.