Angelo Taningco
Economist, Treasury Group

We estimate Philippine real gross domestic product (GDP) to have expanded by 6.4% year-on-year (yoy) in H1 2017-with our Q2 2017 forecast at 6.5% yoy. We conjecture the country’s economic growth in the first half of the year was influenced by merchandise trade, foreign direct investments (FDIs), manufacturing, and monetary policy, among others.

Merchandise trade slipped 1.2% yoy to $12.0 billion in June as exports of goods posted sluggish growth of 0.8% yoy, reaching $4.9 billion and imports of goods fell 2.5% yoy to $7.1 billion, according to the Philippine Statistics Authority’s (PSA) latest trade data released on 10 August. Growth rates of both exports and imports were below market participants’ expectations. Because of positive export growth and negative import growth, the merchandise trade deficit narrowed 9.4% yoy to $2.1 billion for the month (Figure 1). On a cumulative basis, the merchandise trade deficit edged up by 1.3% yoy to $13.2 billion in H1 2017.

Figure 1: Merchandise Trade Indicators
Jan. 2016 – Jul. 2017

 
Notably, the widening of the trade deficit has largely contributed to the balance of payments (BOP) deficit in June, which amounted to $569 million, and the H1 2017 BOP deficit that totaled $706 million. This in turn has weighed on the value of the Philippine peso, which we calculated to have depreciated by 1.5% in H1 2017. Also, a bigger trade-in-goods deficit has a negative influence over aggregate demand and GDP, and we think this was the case for H1 2017.

Foreign direct investment (FDI) net inflows into the Philippines expanded 57% yoy to $572 million in May, which according to the Bangko Sentral ng Pilipinas (BSP) was driven by foreign investors’ positive economic outlook supported by the country’s “solid macroeconomic fundamentals”. (Latest FDI data of the BSP was released on 10 August.) By instrument, foreign net debt investments propelled the FDI yoy surge with a 108.3% yoy jump-leveling off at $459 million-outweighing the 21.3% yoy decline in foreign investments in equity and investment fund shares, which stood at $113 million for the month (Figure 2).

Figure 2: FDI Net Inflows
Jan. 2016 – Jun. 2017
(S million)

 
In January-May, FDI net inflows valued $3.0 billion, which is lower by 23.8% from the first five months of 2016. This is mainly brought about by smaller foreign investments in equity and investment fund shares (−68.6% yoy) that more than offset the increase in foreign net debt investments (+12.8% yoy). Note that FDIs have a positive impact on GDP growth given its ability to provide financing for capital formation and to promote technological progress and human capital development. And in the Philippine experience where FDIs continued to post net inflows, we think this has a positive bearing on GDP growth.

The country’s manufacturing sector has performed relatively well in the first six months of the year, on average. As per PSA’s manufacturing data released on 10 August, the sector’s Value of Production Index (VaPI) and Volume of Production Index (VoPI) grew 5.1% yoy and 8.1% yoy, respectively (Figure 3). In H1 2017, the average growth of VaPI and VoPI were 7.8% yoy and 9.5% yoy, respectively, suggesting robust manufacturing output growth, which in turn bodes well for GDP growth.

Figure 3: Manufacturing Output Indicators
Jan. 2016 – Jun. 2017

 
Accommodative monetary policy is essential in boosting the aggregate demand of an economy as this allows for credit and liquidity growth that in turn fuels economic activity. On 10 August, the BSP’s Monetary Board has decided to keep its key interest rates and reserve requirement ratios steady. This was the fifth time in the year that the BSP’s monetary policy settings were left unchanged. Its latest monetary policy decision was based on its assessment of the current inflation environment remaining manageable and the future inflation path still within its target range of 2.0% – 4.0%. [The BSP revised upward its inflation forecasts for 2017, 2018, and 2019 to 3.2% (from 3.1%), 3.2% (from 3.0%), and 3.1% (from 3.0%), respectively.] We posit the monetary policy settings in H1 2017 and at present have been accommodative and supportive of GDP growth.

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