66
i
i
i
FOREWORD
he primary objective of monetary policy is to promote a low and stable rate of inflation
conducive to a balanced and sustainable economic growth. The adoption in January
2002 of the inflation targeting framework for monetary policy was aimed at helping to fulfill this
objective.
One of the key features of inflation targeting is greater transparency, which means
greater disclosure and communication by the BSP of its policy actions and decisions. This
Inflation Report is published by the BSP as part of its transparency mechanisms under inflation
targeting. The objectives of this Inflation Report are: (i) to identify the risks to price stability and
discuss their implications for monetary policy; and (ii) to document the economic analysis
behind the formulation of monetary policy and convey to the public the overall thinking behind
the BSP’s decisions on monetary policy. The broad aim is to make monetary policy easier for the
public to understand and enable them to better monitor the BSP’s commitment to the inflation
target, thereby helping both in anchoring inflation expectations and encouraging informed
debate on monetary policy issues.
The government’s target for annual headline inflation under the inflation targeting
framework has been set at 4 ± 1 percent for 2012-2014. The shift to a fixed medium-term
inflation target from a variable annual inflation target was announced by the BSP on 15 July
2010 and approved by the Development Budget Coordination Committee (DBCC) on 9 July 2010
under DBCC Resolution No. 2010-3.
The report is published on a quarterly basis, presenting a survey of the various factors
affecting inflation. These include recent price and cost developments, inflation expectations,
prospects for aggregate demand and output, labor market conditions, monetary and financial
market conditions, fiscal developments, and the international environment. A section is
devoted to a discussion of monetary policy developments in the most recent, as well as a
comprehensive analysis of the BSP’s view of the inflation outlook for the policy horizon. This
issue also features a box article on the updated core inflation measure for the Philippines.
The Monetary Board approved this Inflation Report at its meeting on 2 August 2012.
AMANDO M. TETANGCO, JR.
Governor
17 August 2012
T
ii
List of Acronyms, Abbreviations, and Symbols
AE Advanced economy
AFF
AHFF
AMCs
Agriculture, Fishery, and Forestry
Agriculture, Hunting, Forestry and Fishing
Asset Management Companies
AP Asia Pacific
AL Auto Loans
BAS Bureau of Agricultural Statistics
BES
BGC
BIR
Business Expectations Survey
Bonifacio Global City
Bureau of Internal Revenue
BIS Bank for International Settlements
BOC Bureau of Customs
BPO Business Process Outsourcing
BTr Bureau of the Treasury
CAMPI Chamber of Automotive Manufacturers of the Philippines, Inc.
CAR Capital Adequacy Ratio
CBD Central Business District
CCRs Credit Card Receivables
CES Consumer Expectations Survey
CDS Credit Default Swaps
CI Confidence Index
CPI
DAA
DDA
DBCC
DOF
EIA
Consumer Price Index
Deferred Accounting Adjustment
Demand Deposit Account
Development Budget Coordination Committee
Department of Finance
Energy Information Administration
EM Emerging Market
EMBI
ERC
JP Morgan Emerging Market Bond Index
Energy Regulatory Commission
EU European Union
FAO
FPI
Food and Agriculture Organization
Food Price Index
GDP Gross Domestic Product
GNI Gross National Income
GRAM
GS
Generation Rate Adjustment Mechanism
Government Securities
ICERA Incremental Currency Exchange Rate Adjustment
IEA International Energy Agency
IMF International Monetary Fund
IPP Independent Power Producer
LFS Labor Force Survey
LPG Liquefied Petroleum Gas
LTFRB
MB
Land Transportation Franchising and Regulatory Board
Monetary Board
MEM Multi-Equation Model
iii
MENA Middle East and North Africa
Meralco Manila Electric Company
MISSI Monthly Integrated Survey of Selected Industries
MTP
NBQBs
Major Trading Partner
Non-Bank Financial Institutions with Quasi-Banking Functions
NCCP National Council for Commuters’ Protection
NDA
NEDA
NEER
Net Domestic Assets
National Economic and Development Authority
Nominal Effective Exchange Rate
NFA Net Foreign Assets; National Food Authority
NG
NGCP
National Government
National Grid Corporation of the Philippines
NPC National Power Corporation
NPI Net Primary Income
NPLs Non-performing loans
NSO
O&O
National Statistics Office
Offshoring and Outsourcing
OPEC
OF
Organization of the Petroleum Exporting Countries
Overseas Filipinos
PBR
PCE
PMI
PSALM
Performance-Based Rate
Personal Consumption Expenditure
Purchasing Managers’ Index
Power Sector Assets and Liabilities Management Corporation
PSEi Philippine Stock Exchange Composite Index
PSIC Philippine Standard Industrial Classification
RB
RDA
Rural Banks
Reserve Deposit Account
REER Real Effective Exchange Rate
ROP Republic of the Philippines
RP
RR
Repurchase
Reserve Requirement
RREL Residential and Real Estate Loans
RRP
RWA
Reverse Repurchase
Risk Weighted Assets
SEM
SMS
Single-Equation Model
Short Message Service
SDA Special Deposit Account
TCS
TLP
Transportation, Communications, and Storage
Total Loan Portfolio
U/KBs
VAPI
VOP
Universal/commercial banks
Value of production index
Volume of production index
WEO
WESM
World Economic Outlook
Wholesale Electricity Spot Market
iv
THE MONETARY POLICY OF THE
BANGKO SENTRAL NG PILIPINAS
The BSP Mandate
The BSP’s main responsibility is to formulate and implement policy in the areas of money,
banking and credit, with the primary objective of maintaining stable prices conducive to a
balanced and sustainable economic growth in the Philippines. The BSP also aims to promote
and preserve monetary stability and the convertibility of the national currency.
Monetary Policy Instruments
The BSP’s primary monetary policy instrument is its overnight reverse repurchase (RRP) or
borrowing rate. Other instruments to implement the desired monetary policy stance to
achieve the inflation target include (a) increasing/decreasing the reserve requirement;
(b) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks
and trust entities of BSP-supervised financial institutions; (c) adjusting the rediscount rate on
loans extended to banking institutions on a short-term basis against eligible collateral of
banks’ borrowers; and (d) outright sales/purchases of the BSP’s holdings of government
securities.
Policy Target
The BSP’s target for monetary policy uses the Consumer Price Index (CPI) or headline
inflation rate, which is compiled and released to the public by the National Statistics Office
(NSO). The policy target is set by the Development Budget Coordination Committee (DBCC)1
in consultation with the BSP. On 9 July 2010, the BSP announced its shift to a fixed inflation
target for the medium term of 4.0 percent ± 1.0 percentage point for 2012-2014.
BSP’s Explanation Clauses
These are the predefined set of acceptable circumstances under which an inflation-targeting
central bank may fail to achieve its inflation target. These clauses reflect the fact that there
are limits to the effectiveness of monetary policy and that deviations from the inflation
target may sometimes occur because of factors beyond the control of the central bank.
Under the inflation targeting framework of the BSP, these exemptions include inflation
pressures arising from: (a) volatility in the prices of agricultural products; (b) natural
calamities or events that affect a major part of the economy; (c) volatility in the prices of oil
products; and (d) significant government policy changes that directly affect prices such as
changes in the tax structure, incentives, and subsidies.
1 The DBCC, created under Executive Order (E.O.) No. 232 dated 14 May 1970, is an inter-agency committee tasked
primarily to formulate the National Government's fiscal program. It is composed of the Office of the President (OP),
Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the
Department of Finance (DOF). The BSP sits as a resource agency.
v
The Monetary Board
The powers and functions of the BSP, such as the conduct of monetary policy and the
supervision over the banking system, are exercised by its Monetary Board, which has
seven members appointed by the President of the Philippines. Starting in 2012, the
Monetary Board will hold eight (8) monetary policy meetings in a year to review and
decide on the stance of monetary policy. Prior to 2012, monetary policy meetings were
held every six weeks while prior to July 2006, meetings were held every four weeks
during the 2002 – July 2006 period.
Chairman Amando M. Tetangco, Jr.
Members Cesar V. Purisima
Alfredo C. Antonio
Ignacio R. Bunye
Peter B. Favila
Felipe M. Medalla
Armando L. Suratos
The Advisory Committee
The Advisory Committee was established as an integral part of the institutional setting
for inflation targeting. It is tasked to deliberate, discuss, and make recommendations
on monetary policy to the Monetary Board. Like the Monetary Board, the Committee
will meet eight times a year (beginning in January 2012) but may also meet between
regular meetings, whenever it is deemed necessary.
Chairman Amando M. Tetangco, Jr.
Governor
Members2 Diwa C. Guinigundo
Deputy Governor
Monetary Stability Sector
Nestor A. Espenilla, Jr.
Deputy Governor
Supervision and Examination Sector
Ma. Cyd N. Tuaño-Amador
Assistant Governor
Monetary Policy Sub-Sector
Ma. Ramona GDT Santiago
Assistant Governor
Treasury Department
2 The Advisory Committee is supported by a Technical Secretariat composed of officers and staff from the Department of
Economic Research, Center for Monetary and Financial Policy, and the Treasury Department.
vi
2012 SCHEDULE OF MONETARY POLICY MEETINGS, INFLATION REPORT
PRESS CONFERENCE AND PUBLICATION OF MB HIGHLIGHTS
Period
Advisory
Committee (AC)
Meeting
Monetary Board
(MB)
Meeting
MB Highlights
Publication
Inflation Report (IR)
Press Conference
2
0
1
2
Jan 13 (Fri)
(AC Meeting No. 1)
19 (Thu) (MB Meeting No. 1)
Feb 24 (Fri)
(AC Meeting No. 2)
16 (Thu) (19 Jan 2012 MB)
3 (Fri) (Q4 2011 IR)
Mar 1 (Thu)
(MB Meeting No. 2) 29 (Thu)
(1 Mar 2012 MB)
Apr 13 (Fri)
(AC Meeting No. 3)
19 (Thu) (MB Meeting No. 3)
May 17 (Thu)
(19 Apr 2012 MB) 4 (Fri)
(Q1 2012 IR)
Jun 8 (Fri)
(AC Meeting No. 4)
14 (Thu) (MB Meeting No. 4)
Jul 20 (Fri)
(AC Meeting No. 5) 26 (Thu)
(MB Meeting No. 5) 12 (Thu)
(14 Jun 2012 MB)
Aug 23 (Thu)
(26 Jul 2012 MB) 10 (Fri)
(Q2 2012 IR)
Sep 7 (Fri)
(AC Meeting No. 6)
13 (Thu) (MB Meeting No. 6)
Oct 19 (Fri)
(AC Meeting No. 7) 25 (Thu)
(MB Meeting No. 7) 11 (Thu)
(13 Sep 2012 MB)
Nov 22 Nov (Thu)
(25 Oct 2012 MB) 9 (Fri)
(Q3 2012 IR)
Dec 7 (Fri)
(AC Meeting No. 8)
13 (Thu) (MB Meeting No. 8)
10 Jan 2013 (Thu) (13 Dec 2012 MB)
vii
CONTENTS
Overview 1
I. Inflation and Real Sector Developments 3
Prices 3
Box Article: Updated Core Inflation Measure for the Philippines 5
Private Sector Economists’ Inflation Forecasts
9
Aggregate Demand and Supply 12
Aggregate Demand 13
Other Demand Indicators 14
Aggregate Supply 22
Labor Market Conditions 23
II. Monetary and Financial Market Conditions
24
Domestic Liquidity and Credit Conditions 24
Interest Rates 28
Financial Market Conditions
30
Banking System 34
Exchange Rate
36
III. Fiscal Developments
IV. External Developments
39
40
V. Monetary Policy Developments 44
VI. Inflation Outlook 45
BSP Inflation Forecasts
Risks to the Inflation Outlook
VII. Implications for the Monetary Policy Stance
Summary of Monetary Policy Decisions
45
48
51
53
1
OVERVIEW3
Lower food inflation drives down headline inflation. Average inflation, using the 2006-based CPI series,
decelerated to 2.9 percent in Q2 2012 compared to the quarter-ago and year-ago rates of 3.1 percent and
5.0 percent, respectively. This brought the year-to-date (ytd) average inflation rate to 3.0 percent, which is at
the low end of the Government’s inflation target range of 3-5 percent for 2012. The slower price increase in
key food items, notably rice, corn, meat, and oils, due to ample domestic supply helped pull down inflation.
Lower inflation rates for electricity, gas and other fuels as well as transport also supported the decline in
inflation. Meanwhile, core inflation increased to 3.7 percent in Q2 2012 from 3.5 percent in the previous
quarter, but remained in the lower half of the target range for the headline inflation. Two out of three
alternative measures of core inflation estimated by the BSP, particularly, the weighted median and the net of
volatile items measures also rose relative to the rates registered in the previous quarter. The trimmed mean
measure, on the other hand, was stable at 3.0 percent. The number of CPI components showing inflation
rates above the 5.0 percent threshold increased relative to previous quarter, with more non-food items
above the threshold. Nonetheless, the above-threshold items accounted for a lower proportion of the CPI
basket compared to the previous quarter.
Domestic economic activity grows strongly. The Philippine economy posted higher-than-expected growth in
Q1 2012 at 6.4 percent from 4.0 percent (revised) in Q4 2011. The expansion was driven largely by
household consumption and exports on the expenditure side. Government consumption also rebounded,
driven by the increased spending for operating expenditures as well as the continued spending on social
protection programs. Meanwhile, on the production side, GDP growth was led by services. Latest data also
suggest continuing improvements in local demand conditions. Energy sales have expanded further, driven by
increased consumption from all major sectors, while real estate continues to show brisk activity owing
largely to the growing demand from the offshoring and outsourcing (O&O) industry. Vehicle sales also picked
up on higher consumer demand. Likewise, the latest purchasing managers’ index (PMI) points to expanding
economic activity, particularly for manufacturing and the retail and wholesale sector. Expectations survey
results showed mixed trends with business confidence sustaining its uptrend in anticipation of increased
domestic demand while consumer sentiment weakened slightly on perceived high cost of goods and services
and low salary and income. Steady improvements in labor market conditions along with the low inflation
environment, however, are expected to support consumer spending in the periods ahead.
The world economy loses momentum. In the July 2012 World Economic Outlook (WEO) Update, the IMF
downgraded slightly its projections for global economic growth for both 2012 and 2013. The downward
revision reflected the continued weakening of growth prospects in the euro area and its potential adverse
spillovers to the rest of the world through trade and financial channels. The growth momentum also
appeared to have waned in major emerging markets, particularly China and India, due largely to the weak
external environment and the moderation in domestic demand. Similarly, the US has continued to recover
only gradually, while the tax increases and spending cuts set for 2013 could limit the scope for fiscal
stimulus going forward. Insufficient policy response to the deepening sovereign debt and banking crisis in
Europe represents the most pressing downside risk to the global economy. However, softening global
commodity prices due to the weaker demand in both advance and emerging economies could lend support
to global economic activity. On the price front, global headline inflation is expected to moderate in 2012
and 2013 as global demand conditions soften generally. Global commodity prices are also projected to
decline, although the severe dry weather conditions in the US could cause global food prices to rise in the
near-term.
Global financial conditions weaken on financial market strains in Europe and signs of further global
economic slowdown. The failure to form a unity government during the first election in Greece,
uncertainty over the debt reduction plans in Europe, talks of potential exit of Greece from the European
Union, and the credit downgrade of various banks in Europe led to heightened risk aversion. Disappointing
3 The analyses in this report are based on information as of 30 June 2012.
2
economic data for the US, euro area, and China also contributed to growing concerns on the fragility of the
global economic recovery, further dampening investor confidence. Nonetheless, local stocks rallied
strongly during the quarter on expectations of robust corporate earnings and the release of favorable data
on domestic output growth, fiscal performance, and inflation. The peso likewise continued to appreciate,
buoyed by steady forex inflows from OF remittances and portfolio investments. On the other hand, both
the EMBI+ Philippine spread and the Philippine credit default swap (CDS) spread widened relative to their
previous quarter levels, reflecting increased risk aversion. The lower oversubscription in the T-bill auctions
during the quarter relative to Q1 2012 also reflected weaker investor appetite amid heightened market
uncertainty due to the escalation of the sovereign debt and banking crisis in Europe. Meanwhile, the short
end of the yield curve declined on the back of ample market liquidity and the government’s strong fiscal
position. Domestic liquidity growth accelerated, supported by brisk credit activity, thus providing support
to the domestic economy amid continued risks to global economy. This is in line with the results of the Q2
2012 BSP Senior Bank Loan Officers’ Survey, which showed increased demand for loans from enterprises
and households.
Inflation expectations continue to be well anchored. Results of the BSP and private sector surveys indicated
lower inflation expectations for 2012-2013. Analysts were of the view that declining world oil prices, ongoing
strains in the euro area, and the continued strength of the peso could help temper inflationary pressures
going forward. Meanwhile, results of the latest consumer expectations survey showed that consumers
expect a slightly higher inflation over the next 12 months.
The BSP maintains policy rates during the quarter. During monetary policy meetings on 19 April and
14 June, the BSP kept its policy rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP)
facility and 6.0 percent for the overnight lending or repurchase (RP) facility. The Monetary Board’s (MB)
decision was based on its assessment that a benign inflation outlook and robust domestic growth provide
sufficient room to keep policy rates unchanged, especially as the cumulative 50-bp reduction in policy rates
and the operational adjustments in the reserve requirements earlier in the year continue to work their way
through the economy.
The favorable inflation environment provides room for policy support to guard against risks associated
with the continued global slowdown. The latest baseline forecasts indicate a benign inflation path with
risks to the inflation outlook slightly tilted to the downside given weaker global demand conditions and a
lower probability of a significant near-term upturn in commodity prices. Inflation expectations also appear to
be firmly anchored at levels consistent with the inflation target over the policy horizon. While latest data
point to continuing improvements in local demand conditions, it could be a considerable challenge for
domestic consumption to compensate for the fall in external demand should global economic prospects
worsen further. Monetary easing can, therefore, serve as a preemptive move against adverse consequences
of weaker external demand. At the same time, monetary authorities remain watchful over upside risks,
including pass-through of electricity rate hikes and prolonged dry weather conditions in the US, which could
lead to higher global food prices. Measures of underlying core inflation also hint at firm demand-side
pressures in the economy, although core inflation has remained below the mid-point of the inflation target
range. Going forward, the BSP will continue to closely monitor the evolving balance of risks to both inflation
and output to ensure that monetary conditions remain in line with price stability while supportive of non-
inflationary economic growth.
[On 26 July 2012, the MB decided to reduce the BSP's key policy interest rates by 25 basis points to
3.75 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.75 percent for the
overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit
accounts (SDAs) were also reduced accordingly.]
3
I. INFLATION AND REAL SECTOR DEVELOPMENTS
Prices
Inflation decelerates due largely to lower food
inflation.
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012
in p
erc
en
t
Quarterly Headline Inflation (2006=100)
Q2 2012
2.9 pct
Core inflation increases.
Alternative Core Inflation Measures
Quarterly averages of year-on-year change
QuarterOfficial Core
Inflation
Trimmed
Mean 1/
Weighted
Median 2/
Net of Volatile
Items 3/ *
2010
Q1
Q2
Q3
Q4
2011
Q1
Q2
Q3
Q4
2012
Q1
Q2
3.6
3.4
3.7
3.9
3.6
4.3
4.0
4.3
4.4
4.5
3.5
3.7
2.8
3.0
2.6
2.8
2.8
3.8
3.3
4.0
4.0
3.8
3.0
3.0
2.6
2.8
2.4
2.8
2.6
3.1
2.9
3.1
3.2
3.1
2.6
3.2
3.7
3.2
3.8
4.1
3.9
3.6
3.7
3.7
3.5
3.6
3.0
3.31/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest
to-highest ranking of year-on-year inflation rates for all CPI components.
2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50
percent) in a lowest-to-highest ranking of year-on-year inflation rates.
3/ The net of volatile items method excludes the following items: educational services, fruits and vegetables,
personal services, rentals, recreational services, rice, and corn.
r/ Revised.
* The series has been recomputed using a new methodology that is aligned with NSO’s method of
computing the official core inflation, which re-weights remaining items to comprise 100 percent of the
core basket after excluding non-core items. The previous methodology retained the weights of volatile
items in the CPI basket while keeping their indices constant at 100.0 from month to month.
Source: NSO, BSP estimates
0
20
40
60
80
100
120
140
2007 2008 2009 2010 2011 2012
CPI Items with Inflation Rates Above Threshold
Cumulative Weight No. of Items Above Threshold
Headline and Core Inflation
Year-on-year (y-o-y) headline inflation continued
to decelerate in Q2 2012 to 2.9 percent from the
quarter-ago and year-ago rates of 3.1 percent and
5.0 percent, respectively. This brought the ytd
average inflation rate to 3.0 percent, which is at
the low end of the Government’s inflation target
range of 3-5 percent for 2012.
The slowdown in headline inflation was due
largely to slower price increases of key food items,
notably rice, corn, meat, and oils, as supply
remained adequate. Lower non-food inflation,
owing to lower electricity rates and downward
price adjustments for LPG, gasoline and diesel,
was also recorded during the quarter.
Meanwhile, core inflation, which excludes some
food and energy items to measure generalized
price pressures, increased to 3.7 percent in
Q2 2012 from 3.5 percent in the previous quarter,
but was lower than the 4.3 percent posted a year
ago. Two out of three alternative measures of core
inflation estimated by the BSP likewise went up in
Q2 2012 relative to the rates registered in the
previous quarter. In particular, the weighted
median and the net of volatile items measures
rose to 3.2 percent and 3.3 percent, respectively,
from the previous quarter’s 2.6 percent and
3.0 percent. The trimmed mean measure, on the
other hand, was stable at 3.0 percent.
In Q2 2012, the number of items with inflation
rates greater than the threshold of 5.0 percent
(the upper end of the 2012 inflation target)
increased to 52 from 49 in the previous quarter,
but was lower than the 59 items recorded in Q2
2011. However, these items accounted for a lower
proportion of the CPI basket at 20.3 percent
compared to the quarter-ago share of
23.0 percent.
Grouping the CPI basket into food and non-food
components showed that more non-food items
were above the threshold. There were 31 non-
food items with inflation rates above the
4
Lower inflation for rice, corn, meat, and oils
drive down food inflation.
Inflation Rates for Selected Food Items
Quarterly averages in percent (2006=100)
Commodity2011 2012
Q1 Q2 Q1 Q2
Food and Non-alcoholic
Beverages5.6 6.2 2.0 1.9
Food 5.9 6.3 1.9 1.8
Bread and Cereals 4.7 5.6 1.8 1.3
Rice 5.2 5.8 0.1 -0.3
Corn 1.6 5.9 10.2 5.1
Meat 1.7 2.1 1.7 1.0
Fish 5.6 7.1 6.6 7.0
Milk, Cheese and Eggs 2.3 2.7 2.9 3.2
Oils and Fats 24.1 36.1 8.3 -1.6
Fruit 6.7 6.6 5.2 7.0
Vegetables 13.9 11.8 -0.2 -0.1
Sugar, Jam, Honey 24.6 14.0 -23.4 -16.9
Food Products N.E.C. 4.7 4.6 2.8 2.8
Non-alcoholic Beverages 1.8 2.3 2.8 3.4
Source of Basic Data: NSO, BSP
Inflation Rates for Selected Non-Food Items
Quarterly averages in percent (2006=100)
Commodity2011 2012
Q1 Q2 Q1 Q2
Non-Food 3.6 4.0 3.8 3.7
Clothing and Footwear 3.3 3.7 3.7 5.0
Housing, Water, Electricity, 4.8 4.9 4.8 4.5
Gas and Other Fuels
Furnishings, Household 2.4 2.4 2.2 3.4
Equipment
Health 3.1 3.4 2.8 3.2
Transport 4.3 6.6 4.3 2.3
Communication -0.1 -0.2 -0.3 0.1
Recreation and Culture 1.1 1.3 2.4 2.6
Education 4.2 4.6 4.8 4.7
Restaurant and Miscellaneous 2.4 2.8 3.1 3.4
Goods and Services
Source of Basic Data: NSO, BSP
threshold from 27 items in the previous quarter.
Meanwhile, there were 21 food items with
inflation rates higher than the threshold in
Q2 2012, compared to the previous quarter’s
22 items.
Food Inflation
Food inflation decreased to 1.8 percent in Q2 2012
compared to the quarter-ago and year-ago rates of
1.9 percent and 6.3 percent, respectively. Ample
domestic supply of key food items, particularly
rice, corn, meat, and oils led to the continued
slowdown of food inflation in Q2 2012. The
inflation rate of rice, corn, meat, and oils declined
to -0.3 percent, 5.1 percent, 1.0 percent, and
-1.6 percent, respectively, from the quarter-ago
rates of 0.1 percent, 10.2 percent, 1.7 percent and
8.3 percent.
Non-food inflation
Non-food inflation went down to 3.7 percent
during the review quarter from 3.8 percent in the
previous quarter and 4.0 percent a year ago.
Lower inflation for electricity, gas and other fuels,
and transport supported the decline in non-food
inflation. In particular, from 9.2 percent in
Q1 2012, electricity, gas and other fuels inflation
decelerated to 6.1 percent in Q2 2012 due to
lower electricity charges and LPG prices. Likewise,
transport inflation slowed down to 2.3 percent
from the quarter-ago rate of 4.3 percent due
largely to downward price adjustments for
gasoline and diesel.
5
UPDATED CORE INFLATION MEASURE FOR THE PHILIPPINES
I. Background
Core inflation is a widely used measure of the underlying trend or movement in the average
consumer prices. It is often used as a complementary indicator to what is known as “headline” or
Consumer Price Index (CPI) inflation. While the headline inflation measures the rate of change in the
CPI, a measure of the average price of a standard “basket” of goods and services consumed by a
typical family, core inflation measures the change in average consumer prices after excluding from
the CPI certain items with volatile price movements. By stripping out the volatile components of the
CPI, core inflation allows us to see the broad underlying trend in consumer prices. Core inflation is
often used as an indicator of the long-term inflation trend and as an indicator of future inflation.
In 2003, the official definition and methodology for computing core inflation in the
Philippines based on the exclusion method was approved by the NSCB Board through NSCB
Resolution No. 6 Series of 2003. The exclusion method simply excludes a fixed, pre-specified list of
volatile CPI components (typically food and energy items) whose short-term behavior tends to
diverge from that of the underlying price trend. The official definition is the result of inter-agency
technical discussions among the NSO, the NSCB, the National Economic and Development Authority
(NEDA), the Statistical Research and Training Center (SRTC), the National Wage and Productivity
Commission (NWPC), the Department of Trade and Industry (DTI), and the Bangko Sentral ng Pilipinas
(BSP). In February 2004, the NSO began publishing, alongside the CPI headline inflation rate, an
official rate of core inflation, defined as the rate of change of headline CPI after excluding selected
food and energy items.
The authorities agreed on the use of the exclusion method for generating the official core
inflation rate for the Philippines. The exclusion method was chosen because: (a) it is easier to
understand compared to the other methodologies; (b) it is more transparent and can be easily
computed by anyone from the CPI data; (c) it can be produced by the NSO at the same time as the
headline inflation rate; and (d) it is in accordance with the common international practice of
excluding food- and energy-related components of the CPI. Given that core inflation is a relatively
new concept for the Filipino public in general, policymakers believed that the simplicity of the
exclusion method can facilitate greater understanding by the public and consequently, help build
credibility in the use of core inflation to measure underlying inflationary pressures.
II. Updated Core Inflation Measure (2006 = 100)
Starting in July 2011, the National Statistics Office (NSO) released the consumer price index
(CPI) data with 2006 as base year. Previously, the CPI series used 2000 as the base year. With the
rebasing and reweighting of the CPI (with 2006 as base year), the composition of the list of excluded
items from the official core inflation rate was reexamined by an inter-agency working group. This was
in accordance with the National Statistical Coordination Board (NSCB) Resolution No. 6 Series of
2003, which requires that the list of excluded items be reviewed by the NSCB Board and the Technical
Committee on Price Statistics (TCPS) whenever the CPI data is rebased.
The analysis was carried out for the 2006-based NSO definition of core inflation starting with
a ranking of the most historically volatile items in the CPI basket. The most historically volatile CPI
components were identified based on the coefficients of variation (CV) of the year-on-year changes
in CPI for each item for the sample period January 2001 – December 2011. The selection of items to
6
be excluded from the CPI basket follows an iterative procedure which basically involves selecting the
most historically volatile sub-items at each level using 3-digit level data as a starting point.4
The following criteria were used in selecting items to exclude: (a) CPI item should be food-
and energy-related; (b) significant volatility (which should not be predictable);5 and (c) CPI weight of
more than 1.0 percent. Using the above-mentioned criteria, the most volatile items at the 3-digit
level include the following: (1) operation of personal transport equipment; (2) electricity,
gas, and other fuels; and (3) food. In the next iterations, the most volatile sub-items under the 3-
digit level and 4-digit levels are determined. During this stage, items with CVs greater than the CV of
the bigger group it falls under are considered significantly volatile and are excluded from the basket.
The updated list of excluded items from the 2006-based core inflation is presented in Table
1. The 2006-based core inflation series excludes 20.0 percent of the total weight, higher by 1.6
percentage points than the weight of excluded items from the 2000-based core inflation rate series
at 18.4 percent. The excluded items from 2006-based core inflation series are mostly the same food-
and energy-related items excluded from the CPI series with 2000 as base year, with the addition of
meat.
Table 1. List of Food- and Energy-related Items Excluded from Core Inflation (2006 = 100)
CPI Items CPI Weights
Average
Inflation
Standard
Deviation
Coefficient of
Variation
Vegetables cultivated for their roots, fresh or dried 0.6 5.2 11.2 213.3
Vegetables cultivated for their fruit, fresh or dried 1.2 5.4 7.7 142.0
Corn 0.7 6.2 8.8 141.6
Gas oils for motor vehicles 0.7 12.9 17.8 138.1
Rice 8.9 5.4 7.2 132.4
Natural gas, liquefied or in the gaseous state 1.5 12.7 14.0 109.7
Meat, fresh, chilled or frozen 4.9 5.1 4.3 85.0
Fruit, fresh 1.5 4.1 3.6 89.6
TOTAL WEIGHT 20.0
Table 2. Excluded Items from the 2000- and 2006-based Core Inflation Measure
CPI Item CPI Weight CPI Item2 CPI Weight 3
Rice 9.4 Rice 8.9
Corn 0.9 Corn 0.7
Fruits and vegetables 5.3 Meat, fresh, chilled or frozen 4.9
LPG 1.3 Fruit, fresh 1.5
Kerosene 0.3 Vegetables cultivated for their roots, fresh or dried 0.6
Oil, gasoline and diesel 1.3 Vegetables cultivated for their fruit, fresh or dried 1.2
Natural gas, liquefied or in the gaseous state 1.5
Gas oils for motor vehicles 0.7
Total excluded weight 18.4 20.0
(2000 = 100) (2006 = 100)
4 The most volatile sub-items under the selected most volatile items at the 4-digit level (i.e., 5-digit level items) are
excluded from the core CPI basket. 5 Unpredictable volatility is especially pronounced in food and energy prices
7
Figure 1. Historical Price Changes of Excluded Items, January 2001 – December 2011
Figure 2 shows a comparison of the core inflation for base years 2000 and 2006. The historical plots
show similar paths of the two core inflation rate series.
Figure 2. 2006-based Headline and Core Inflation Rates (Jan 2001 – Jun 2012)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Headline inflation
Core inflation
The path of the core inflation rate series (Figure 3) generally follows that of the headline inflation
rate. For the period January 2001 – June 2012, core inflation is, on average, lower than the headline
inflation rate by 0.2 percentage point. Starting January 2012, however, core inflation rate is higher
than the headline inflation, indicating that the prices of core CPI items are more persistent than the
non-core (excluded) items recently while prices of non-core items have remained relatively stable.
Figure 3. 2006-based Headline and Core Inflation Rates (Jan 2001 – Jun 2012)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Headline inflation
Core inflation
-20
-10
0
10
20
30
40
01 02 03 04 05 06 07 08 09 10 11
Vegetables cultivated for their roots, fresh or dried
-20
-10
0
10
20
30
40
01 02 03 04 05 06 07 08 09 10 11
Vegetables cultivated for their fruit, fresh or dried
-20
-10
0
10
20
30
40
50
01 02 03 04 05 06 07 08 09 10 11
Corn
-40
-20
0
20
40
60
01 02 03 04 05 06 07 08 09 10 11
Gas oils for motor vehicles
-10
0
10
20
30
40
01 02 03 04 05 06 07 08 09 10 11
Rice
-30
-20
-10
0
10
20
30
40
01 02 03 04 05 06 07 08 09 10 11
Natural gas, liquefied or in gaseous state
-5
0
5
10
15
20
01 02 03 04 05 06 07 08 09 10 11
Meat, fresh, chilled or frozen
-5
0
5
10
15
01 02 03 04 05 06 07 08 09 10 11
Fruit, fresh
8
Tests for the equality of means and variances for the headline inflation and core inflation rate series
for the sample period January 2002 – March 2012 showed that the means of the two series are not
statistically different but their variances were found to be significantly different from each other.
Meanwhile, dividing the sample period into two sub-samples: (1) January 2002 – December 2007 and
(2) January 2008 – March 2012, the results of the tests showed that:
• For the period January 2002 – December 2007, both the means and variances of the headline inflation and core inflation are not statistically different.
• However, for the period January 2008 – March 2012, the means and variances of the headline inflation and core inflation were found to be significantly different.
Tests for Equality of Means and Variances of
Headline Inflation and Core Inflation (p-values)
Test 2002-2012.03 2002-2007 2008-2012.03
Test for the Equality of Means (t test)* 0.1542 0.7673 0.0670
Test for the Equality of Variances (F test)**
0.0000 0.2012 0.0000
*t test
Null hypothesis: the means of the two inflation series are the same
Reject the null hypothesis if p-value is less than or equal to the level of significance α=0.1.
** F test
Null hypothesis: the variances of the two inflation series are the same
Reject the null hypothesis if p-value is less than or equal to the level of significance α=0.1.
III. Next Steps
Beginning in June 2012, along with the release of headline CPI for May 2012, the NSO has
started releasing data on official core inflation with 2006 as base year for the period January 2010 -
May 2012. Subsequently, historical and updated data on the official core inflation rate for the period
January 2000 – June 2012 were published on the NSO website on 5 July 2012. NSO is currently
working on the historical series (prior to 1999) of the core CPI.
9
Private Sector Economists’ Inflation Forecasts
Mean inflation forecasts for 2012 to 2014 ease.
4.4
5.3
4.5
4.1
4.8
4.3 4.3 4.2
3.5
3.1
3.7
4.6
4.4
4.5
4.14.1
3.6
4.2
3
4
4
5
5
6
Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Me
an
Fo
rec
ast
fo
r Fu
ll-y
ea
r, in
pe
rce
nt
BSP Private Sector Economists' Survey
2012 2013 2014
Q3 Q4 Full year Full year Full year
1) Banco De Oro 2.96 3.00 3.00 3.25 3.15
2) Bangkok Bank 3.25 3.50 3.25 4.00 4.25
3) Bank of America 3.20 3.30 3.00 3.60 -
4) Bank of China 2.50 3.00 3.20 3.00 3.40
5) Bank of Commerce 2.80 2.90 2.90 - -
6) Barclays Capital - - 3.20 - -
7) China Bank 2.80 3.00 3.00 3.20 3.60
8) Deutsche Bank - - 3.00 3.80 -
9) Forecastweb 3.30 3.60 3.30 - -
10) HSBC 3.40 3.70 3.30 4.70 -
11) IDEA 2.40 2.70 2.70 2.30 1.80
12) Land Bank of the Philippines 3.50 3.40 3.50 4.00 4.10
13) Maybank- ATR Kim Eng Sec. Inc. 3.00 3.30 3.10 4.00 5.00
14) MIB 3.00 3.20 3.00 3.50 -
15) Mizuho 2.70 2.80 2.80 3.00 3.20
16) Philippine Equity Partners 3.20 3.30 3.00 3.60 -
17) RCBC 3.0-3.3 3.0-3.7 3.0-3.2 3.0-4.0 3.0-4.0
18) UCPB 3.80 3.60 3.70 3.80 3.90
Median Forecast 3.1 3.3 3.1 3.6 3.6
Mean Forecast 3.1 3.2 3.1 3.6 3.6
High 3.8 3.7 3.7 5.0 5.0
Low 2.4 2.7 2.7 2.3 1.8
Number of observations 16 16 18 15 10
Memo Item:
Government Target 4.0±1.0 4.0±1.0 4.0±1.0
Private Sector Forecasts for Inflation, Jun 2012
Annual Percent Change
2012 2013 2014
0
10
20
30
40
50
60
10
Meanwhile, results of the CES for Q2 2012 show
that consumers expect a slightly higher inflation
over the next 12 months.
Consumers project inflation to increase over the
next 12 months. In particular, respondents
anticipate inflation to inch up to 8.8 percent from
8.3 percent in the previous survey round.
Respondents expect higher inflation for the
following items: light (from 10.9 percent to
12.8 percent); house rent (from 5.0 percent to
6.2 percent); water (from 6.8 percent to
8.0 percent); clothing (from 6.9 percent to
8.0 percent); and fuel (from 8.3 percent to
9.1 percent).
International oil prices retreat as the protracted
European debt crisis threatened to slow global
economic growth, reducing demand for crude
oil.
20
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013 2014 2015
Pri
ce in
US
do
lla
rs p
er
ba
rre
l
Spot and Estimated Future Prices of Dubai Crude Oil*
*Futures prices derived using Brent crude futures data.
30 March 2012
29 June 2012
Forecasts for 2012 global oil demand are
steady.
Energy Prices
The international price of Dubai crude oil fell by
8.4 percent q-o-q (q-o-q) in Q2 2012 amid
concerns that the European debt crisis is
deepening. The second quarter saw heightened
market concerns ahead of the Greek election and
contagion fears as Spain’s sovereign credit rating
was reduced by Standard and Poor’s (S&P), Fitch
Ratings and Moody’s.7 Spain subsequently
requested European financing amounting to €100
billion to help shore up its banking system. The
bailout, however, failed to ease concerns about
the region’s worsening debt crisis. Signs of
economic slowdown in China and the US, adding
to speculation of faltering oil demand, also
pushed oil prices lower.
Global energy authorities have generally
maintained their 2012 forecasts for global oil
demand as of June 2012 relative to their March
2012 projections. In June 2012, the OPEC8 and the
International Energy Agency (IEA)9 projected
global demand for 2012 to increase by 0.9 million
barrels per day (mmbd) and 0.8 mmbd,
respectively, the same as in the previous quarter.
Meanwhile, the Energy Information Agency
(EIA)10 projected a decrease in world oil demand
for 2012 at 0.8 mmbd in June compared to 1.1
mmbd in March. The bulk of the forecasted
7 On 26 April, S&P slashed Spain’s rating to BBB+ from A, citing the country’s “challenging fiscal outlook”. On 7 June,
Fitch Ratings also cut Spain’s long-term foreign and local currency issuer default ratings to ‘BBB’ from ‘A’, noting that
the country’s high level of indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in
Greece. On 13 June, Moody’s Investors Service also downgraded Spain’s government bond rating to Baa3 from A3,
following the country’s request for a €100 billion bailout package which will further increase its debt burden. 8 OPEC June 2012 Monthly Oil Market Report, www.opec.org
9 IEA, June 2012 Oil Market Report, www.iea.org
10 Energy Information Agency, June 2012 Short-Term Energy Outlook, www.eia.doe.gov
11
Local gasoline pump prices decrease.
Domestic Retail Pump Prices (peso/liter)*End-quarter prices
Quarter Gasoline** Kerosene Diesel LPG
2011
Q1 54.60 53.11 47.10 37.27
Q2
Q3
Q4
2012
Q1
Q2
54.65
56.45
53.83
58.45
47.95
49.77
49.51
49.43
53.85
45.50
44.20
44.05
44.89
48.70
39.80
39.22
38.46
37.68
48.70
36.64
Q-o-Q -10.50 -8.35 -8.90 -12.06
Y-o-Y -6.70 -4.27 -4.40 -2.58
* Average retail pump price for the Big Three oil companies—Caltex,
Petron, and Shell, Metro Manila prices only.
** Average price for unleaded gasoline
Source: Department of Energy (DOE)
Power rates rise due to higher generation cost
from the spot market.
decrease in world oil consumption over the next
two years is expected to come from non-OECD
regions, particularly China, the Middle East, and
Central and South America.
Meanwhile, the estimated futures prices of Dubai
crude oil in Q2 2012, which are based on
movements in Brent crude oil futures, showed a
lower path for 2012 onwards compared to the
estimates in the previous quarter.
Tracking global oil price movements, domestic
prices of gasoline, kerosene, diesel, and LPG
decreased by P10.50 per liter, P8.35 per liter,
P8.90 per liter, and P12.06 per liter in Q2 2012,
respectively, relative to end-Q1 2012 levels.
Likewise, domestic petroleum prices were all
lower during the review quarter compared to
year-ago levels, In particular, the prices of
unleaded gasoline, kerosene, diesel and LPG
declined by P6.70 per liter, P4.27 per liter, P4.40
per liter and P2.58 per liter, respectively.
Power
Power rates in NCR increased in Q2 2012 on
account of higher generation charges from the
Wholesale Electricity Spot Market11 (WESM).
Meralco reported that WESM charges rose during
the quarter due to the high demand for power in
the Luzon Grid coupled with the low availability of
coal-fired and hydroelectric power plants. Rates
of independent power plants (IPPs) also
contributed to the increase in power rates due
to the mechanical trouble that held down
utilization of the Quezon Power plant in April.
Likewise, power rates of NPC rose in Q2 2012.
Meanwhile on 11 June 2012, the Energy
Regulatory Commission (ERC) granted provisional
authority to MERALCO to increase distribution,
metering, and supply charges effective July 2012.
11
The WESM is a venue where electricity produced by power generating companies is traded just like any other
commodity.
12
Aggregate Demand and Supply
The Philippine economy posts strong growth.
Q2 20126.4
Q2 20125.8
0
2
4
6
8
10
12
14
Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
ye
ar-
on
-ye
ar
gro
wth
in p
erc
en
t
GDP and GNI in Real Terms
GDP GNI
Potential sources of upside pressures on
electricity charges remain, stemming from
pending petitions with the ERC. These include:
(1) Power Sector Assets & Liabilities Management
(PSALM) Corporation’s petition to recover
stranded debt and contract costs through an
increase in the universal charge; (2) PSALM’s
second petition with the ERC for True-Up
Adjustments of Fuel and Purchased Power Costs
(TAFPPC), and Foreign Exchange Related Costs
(TAFxA) under the Rules for the Automatic
Recovery of Monthly Fuel and Purchased Power
Costs and Foreign Exchange Related Costs by the
NPC; (3) the National Grid Corporation of the
Philippines’ (NGCP) petition to recover the costs
of repair of damages caused by tropical storms
“Ondoy” and “Pepeng” in 2009 as well as the
bombings in Lanao del Norte in 2008; and (4) the
National Power Corporation’s petition to increase
power rates in the universal charge for missionary
electrification.
Gross Domestic Product (GDP) grew robustly at
6.4 percent in Q1 2012, higher compared to the
4.0 percent growth (revised) recorded in Q4 2011
and 4.9 percent growth (revised) in the same
period last year. On the expenditure side,
expansion was driven largely by household
consumption and exports, which contributed
4.6 percentage points (ppts) and 3.9 ppts,
respectively, to GDP growth. Meanwhile, on the
production side, GDP growth was led by services,
which contributed 4.7 ppts to GDP growth.
Seasonally-adjusted GDP expanded by
2.5 percent q-o-q in Q1 2012 from 1.7 percent in
Q4 2011, supported largely by the growth in
services.
Gross National Income (GNI) growth accelerated
to 5.8 percent in Q1 2012 from 4.5 percent in Q4
2011 and 3.5 percent in Q1 2011. This was due to
the continued strong inflows of Overseas
Filipinos’ (OF) remittances which buoyed the
4.0 percent increase in net primary income.
13
Private consumption continues to expand.
6.6 pct
24.0 pct
-23.5 pct
-30
-20
-10
0
10
20
30
40
50
Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
ye
ar-
on
-ye
ar
gro
wth
in p
erc
en
t in
re
al te
rms
Domestic Demand
HH Consumption Govt Spending Capital Formation
Economic PerformanceAt constant 2000 prices
Growth rate (in percent)
Sector 2011 2012
Q1 Q4 Q1
By expenditure item
Household consumption 5.9 6.4 6.6
Government consumption -15.8 7.6 24.0
Capital formation 36.1 -3.8 -23.5
Fixed capital formation 12.5 -2.4 2.8
Exports 3.9 -8.2 7.9
Imports 11.2 -6.2 -2.6
Source: NSCB
Aggregate Demand
Household spending, accounting for 70.1 percent
of GDP, expanded by 6.6 percent in Q1 2012 from
5.9 percent in the previous year, given improved
employment conditions and generally low and
stable price levels. Increased consumption in food
and non-alcoholic beverages (6.3 percent)
supported mainly the overall growth of the
account. The expenditure items that recorded
higher growth compared to the previous year
were communication (10.7 percent); housing,
water, electricity, gas and other fuels
(5.1 percent); recreation and culture
(22.3 percent); restaurants and hotels
(10.4 percent); and health (10.6 percent). On the
other hand, expenditures in miscellaneous goods
and services (6.4 percent), transport
(6.5 percent), education (4.4 percent), furnishings
(2.6 percent), alcohol, beverage and tobacco
(0.8 percent), and clothing and footwear
(2.5 percent) increased at a slower pace.
Government consumption rebounded robustly in
Q1 2012 driven by the increased spending for
maintenance and other operating expenditures
(MOOE) of the government, as well as the
continued spending on a number of social
protection programs. Government final
consumption expenditure grew by 24.0 percent
after falling by 15.8 percent in Q1 2011.
By contrast, capital formation contracted
significantly by 23.5 percent, following a growth
of 36.1 percent in the same quarter a year ago.
The decline in capital formation was due mainly
to the large reduction in inventories changes.12
Durable equipment and construction grew, albeit
at a slower pace, by 3.6 percent and 0.3 percent,
respectively. The significant growth in public
construction (62.2 percent), buoyed by the
accelerated releases of funds for capital spending
and early releases of funds for projects with ready
implementation plans, was offset by the
contraction in private construction (-9.9 percent).
12
In end Q1 2012, there was a withdrawal of inventories amounting to P73.3 billion.
14
Other demand indicators point to continuing
improvements in local demand conditions.
Implied land values continue to trend higher.
Meanwhile, improved global economic climate
supported the recovery of the country’s total
exports. Total exports went up by 7.9 percent in
Q1 2012, as merchandise exports expanded on
account of robust exports of electronic
components (8.7 percent), which accounted for
62.8 percent of total merchandise exports.
Other Demand Indicators
Local demand conditions continued to improve in
Q2 2012. Energy sales expanded further, driven
by increased consumption from all major sectors,
consistent with the uptrend in the property
sector, driven mainly by the growing demand
from the O&O industry. Likewise, vehicle sales
recovered on increased consumer demand.
Average capacity utilization was broadly stable
and remained above the 80 percent mark while
survey-based production indices continued to
grow, albeit at a slower pace. The latest PMI data
also suggested an expanding economic activity,
with the manufacturing, services, and retail and
wholesale PMI indices exceeding the 50-index-
point benchmark. Expectations survey results
showed mixed trends with business confidence
sustaining its uptrend in anticipation of increased
domestic demand while consumer sentiment
weakened slightly on perceived high cost of
goods and services.
Property Prices
Land Values, Metro Manila
Data from Colliers International indicated that
implied land values13 in the Makati CBD and
Ortigas Center increased in Q1 2012 from the
quarter- and year-ago levels. Implied land values
in the Makati CBD reached P284,130/sq.m. in Q1
2012, higher by 2.3 percent and 5.9 percent
relative to the levels recorded in Q4 2011 and Q1
2011, respectively. Similarly, implied land values
in the Ortigas Center rose by 1.5 percent q-o-q
and 5.5 percent y-o-y to P130,783/sq.m. Land
values are presently at about 66-68 percent of
their 1997 levels in nominal terms, but only about
33-34 percent of their 1997 levels in real terms.
13
In the absence of reported closed transactions, implied land values based on trends are used by Colliers
International to monitor prices.
15
Office vacancy rates increase slightly due to
relocation.
Residential vacancy rates increase.
Vacancy Rates, Metro Manila
The monthly office vacancy rate in the Makati
CBD increased slightly to 4.4 percent in Q1 2012
from the previous quarter’s level of 4.1 percent
and the 3.7 percent a year ago. This was driven
largely by the transfer of Sun Life from the
Enterprise Center to its own office building in
Bonifacio Global City (BGC). Despite the lure of
BGC (which has been attracting back-office and
non-financial institutions), vacancy rates in the
Makati CBD are expected to go down in the next
12 months as most firms continue to prefer
Makati as business location due to familiarity and
brand amid limited available office space.
Similarly, the residential vacancy rate in the
Makati CBD at 11.7 percent in Q1 2012 was
higher than the previous quarter and Q1 2011
levels. The vacancy rates for other housing
segments rose while vacancy rate for the luxury
segment declined on sustained expatriate
demand for luxury 3-bedroom units amid limited
supply.
Office rental values increase further due to
strong demand from O&O sector.
Likewise, residential rental values remain on
an uptrend.
Rental Values, Metro Manila14
Monthly office rents in the Makati CBD reached
P685/sq.m. in Q1 2012, higher by 1.3 percent and
5.2 percent than the quarter- and year-ago levels,
respectively.15 Office rental rates continued to
rise, supported by strong demand from the O&O
industry. However, the supply of office space in
the Makati CBD remains limited due to the
delayed completion of the Zuellig Building, which
is the only office building due for delivery in this
area for 2012. Office rental values in Q1 2012
remained below the 1997 levels for premium
grade offices in nominal terms. In real terms,
office rental values were only about 42.1 percent
of the comparable levels in 1997.
Monthly rents for 3-bedroom condominium units
in the Makati CBD rose to P658/sq.m. in Q1 2012,
14
Actual rentals for housing comprise 13.8 percent of the 2006-based CPI basket. The NSO only surveys rentals
ranging from around P300-P10,000/month to compute rent inflation. However, the rental values discussed in this
section pertain to high-end rented properties, which may be considered as indicators of wealth and demand. 15
This was computed as the average of the rental values for the Premium, Grade A and Grade B segments. Premium
refers to office space with capital values of P75,000/sq.m. and above; Grade A, between P65,000 and P75,000/sq.m.;
and Grade B, P65,000/sq.m. and below.
16
Capital values for office buildings edge higher
in line with the rise in rental values.
representing a 4.8 percent growth from the
previous quarter. Similarly, monthly rents for the
3-bedroom segment were higher by 17.5 percent
relative to the levels in the previous year as
supply of luxury 3-bedroom units in the Makati
CBD continued to be limited. Residential rental
values in Q1 2012 were above their 1997 levels in
nominal terms but were only about 68.8 percent
of their 1997 levels in real terms.
Jones Lang LaSalle estimates showed that average
Grade A office rentals in the Makati CBD and BGC
reached P9,270/sq.m. per annum in Q1 2012, an
increase by 1.0 percent compared to the previous
quarter and by 13.7 percent compared to the
same quarter a year ago. Office rental values
continued to rise with sustained demand coming
from the O&O industry, as well as professional
services, advertising, and industrial sector-related
companies. Despite the substantial volume of
new supply over the next few quarters, the
country’s growing O&O industry is expected to
continue driving the demand for office space,
which may provide room for a moderate increase
in rental values amid the influx of new supply.
Capital Values, Metro Manila
Capital values16 for office buildings in the Makati
CBD increased in nominal terms in Q1 2012
compared to their quarter- and year-ago levels. In
line with the uptrend in office rental values,
Grade A office capital values in the Makati CBD
rose to P82,679/sq.m., higher by 1.5 percent and
by 5.2 percent compared to the quarter- and
year-ago levels, respectively. Office capital values
in Q1 2012 were higher than the 1997 levels for
grade A offices in nominal terms. Nevertheless, in
real terms, office capital values were about
51.7 percent of the comparable levels in 1997.
Capital values for luxury residential buildings in
Makati CBD were also higher than their quarter-
and year-ago levels. Average prices for luxury
residential condominium units increased by
4.8 percent q-o-q and 10.5 percent y-o-y in Q1
2012. Residential capital values in Q1 2012 were
above their 1997 levels for luxury residential
16
Probable price that the property would have fetched if sold on the date of the valuation. The valuation includes
imputed land and building value.
17
buildings in nominal terms but were only about
residential capital values were about 58.1 percent
of the comparable levels in 1997 in real terms.
Vehicle sales recover.
Energy sales sustain increase.
-10
-5
0
5
10
15
20
Q1
2008
Q2 Q3 Q4 Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
Q2
in p
erc
en
t
Meralco Energy Sales
Q2 2012
10.1 pct
Vehicle Sales17
Domestic vehicle sales picked up in the first two
months of Q2 2012, increasing by 16.9 percent
y-o-y, a reversal of the 15.7 percent contraction
recorded in the previous quarter (January-
February). Aggregate vehicle sales reached 26,569
units, higher than the 22,729 units sold in the
same period a year ago. According to the Chamber
of Automotive Manufacturers of the Philippines
(CAMPI) and the Truck Manufacturers Association
(TMA), the double-digit growth of sales in the local
assembly industry can be attributed to improving
supply conditions along with strong consumer
demand. Likewise, sales of completely built units
(CBUs) shipped from abroad remained strong, still
driven by higher demand for passenger cars.
• Passenger car sales increased by 11.7 percent year-on-year after posting double-digit
contractions for two consecutive quarters.
• Likewise, sales of commercial vehicles18 expanded by 19.3 percent from a 6.7 percent
contraction in Q1 2012 (January-February).
Energy Sales
Energy sales of Meralco increased by 10.1 percent
y-o-y in the first two months of Q2 2012, slightly
lower compared to the 9.9 percent in the
previous quarter (January-February). This was also
a turnaround from the 2.0 percent contraction in
the same period a year ago. The growth in energy
sales was driven by increased consumption from
all major sectors. For residential users, higher
temperature during the summer months led to
increased usage of air-cooling appliances. Similar
to the previous quarter, sales in the commercial
sector was driven mainly by real estate services
sub-sector along with trade and private services
17
Vehicle sales starting 2011 were adjusted to exclude the sales of four (4) members which left CAMPI, namely,
Hyundai, Volvo, Chevrolet, and Chana. 18
Commercial vehicles include Asian utility vehicles (AUVs), sports utility vehicles (SUVs), light commercial vehicles
(LCVs), light trucks, heavy-duty trucks, and buses.
18
Capacity utilization in manufacturing is generally
steady.
65.0
70.0
75.0
80.0
85.0
90.0
2008 2009 2010 2011 2012
Average Capacity Utilization for ManufacturingIn percent
May 2012 = 83.5
Source: NSO
-35
-25
-15
-5
5
15
25
35
45
2008 2009 2010 2011 2012
in p
erc
en
t
Volume of Production Value of Production
Source: NSO
Volume and Value Indices of Manufacturing Production
May 2012
4.7 pct
May 2012
3.1 pct
sub-sectors. Likewise, the industrial sector
continued to post double-digit growth on the back
of newly-connected customers such as the Cavite Economic Zone. The manufacturing sub-sector,
particularly, electrical machinery, also contributed
to the increase in the energy sales to the
industrial sector.
Capacity Utilization
Based on the NSO’s Monthly Integrated Survey of
Selected Industries (MISSI), the average capacity
utilization rate in the manufacturing sector was
slightly higher in May 2012 at 83.5 percent from
83.4 percent a month ago. The largest proportion
of the establishments surveyed continued to
operate above 80 percent.
Volume and Value of Production
Meanwhile, industrial production continued to
grow in May 2012 based on MISSI data, albeit
more modestly compared to the previous month.
Preliminary results of MISSI showed that the value
of production index (VAPI) increased at a slower
rate of 4.7 percent in May 2012, from 4.9 percent
in April 2012. The growth in production was
accounted for by the transport equipment and
footwear and wearing apparel sectors. Likewise,
the volume of production index (VOPI) posted a
minimal increase of 3.1 percent in May 2012,
though lower from 3.3 percent in the previous
month, driven by expansions in production output
of the following sectors: footwear and wearing
apparel, transport equipment, and furniture and
fixtures.
Business outlook sustains uptrend on robust
domestic demand and increased government
spending.
Business Expectations SurveyIndex 2011 2012
Q1 Q2 Q3 Q4 Q1 Q2
Business Outlook Index
Current Quarter 47.5 31.8 34.1 38.7 40.5 44.5
Next Quarter 59.4 33.0 53.9 36.1 55.4 44.6
Source: BSP
Business Expectations Survey (BES)
Results of the Business Expectations Survey (BES)
showed a sustained uptrend in business
confidence outlook for Q2 2012. Overall
confidence index (CI) rose by 4.0 index points to
44.5 percent from 40.5 percent in the previous
quarter.19 Likewise, business confidence in NCR
and AONCR were on the upward direction.
In particular, respondents attributed the
favorable business outlook for the current quarter
19
The BES was conducted during the period 2 April-11 May 2012 among 1,587 firms nationwide.
19
In contrast, consumer sentiment weakens.
Consumer Expectations Survey
Index 2011 2012
Q1 Q2 Q3 Q4 Q1 Q2
Current Quarter -23.1 -24.1 -18.7 -20.6 -14.7 -19.5
Next 3 months -6.2 -7.8 1.5 2.8 2.8 -2.4
Next 12 months 1.2 4.4 11.7 14.6 11.9 10.0
Source: BSP
to the following factors: (a) increase in orders and
new contracts/projects leading to higher volume
of production; (b) expansion of businesses and
new product lines; (c) increase in government
spending; and (d) seasonal uptick in demand
during summer, enrollment, and harvest seasons.
Also contributing to the improved sentiments
were the country’s manageable inflation, lower
interest rates, and the steady growth of
remittances from OF. This prevailing sentiment
mirrored the optimistic views of businesses in the
US, Germany, Australia, New Zealand, Hong Kong,
Korea, and Singapore.
Meanwhile for the next quarter (Q3 2012),
business sentiment fell by 10.8 index points to
44.6 percent from 55.4 percent in the previous
quarter. Firms were less optimistic due to
expectations of slower demand and slack in
business activity during the rainy season, which,
in turn, could affect the industry, wholesale and
retail trade, and services sectors.
Consumer Expectations Survey
Results of the Q2 2012 Consumer Expectations
Survey (CES)20 indicated weaker CI for both the
current and the next quarter, but a broadly steady
outlook for the year ahead. Overall consumer CI
in Q2 2012 declined to -19.5 percent from
-14.7 percent in Q1 2012. The primary reasons
for the bearish outlook for the current quarter
were the perceived high cost of goods and
services, low salary and income, and expectations
of higher household expenditures. Moreover,
consumer sentiment in the Philippines mirrored
the weaker sentiment of consumers in Japan,
United States, United Kingdom, and Taiwan.
The weaker consumer sentiment was carried over
to the next quarter as consumer CI turned
negative, from 2.8 percent in the previous
quarter, to -2.4 percent. Despite concerns over
rising prices, the outlook for the next 12 months
was broadly steady at 10.0 percent from
11.9 percent a quarter ago amid respondents’
expectations for better employment
opportunities, increase in salaries, and more
20
The CES is a quarterly survey of random sample of 5,978 households in the Philippines.
20
investments in the country.
PMI shows expansion in economic activity.
59.80
57.53
40
45
50
55
60
65
70
Jan
2011
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
2012
Feb Mar Apr May
diffusion index
Purchasing Managers' Index
Manufacturing Retail & Wholesale Services
63.45
Purchasing Managers’ Index
The latest results from the purchasing managers’
index (PMI) survey suggested an expanding
economic activity for May 2012, consistent with
the positive economic outlook. The manufacturing
PMI21 reached 59.80, significantly higher than the
month- and year-ago level of 55.7 and 53.7,
respectively. Four of the five indices posted an
increase, namely, new orders, production,
employment and inventories. Meanwhile, supply
delivery index slowed down indicating strong
performance across supply chain. Likewise, all
twelve manufacturing sectors remained above
growth threshold of 50. Among the sample of
manufacturing companies,22 37 percent of
respondents indicated that company performance
is on an upturn while nine percent of respondents
noted that their companies experienced a
downturn. More than half of the
purchasing/supply chain managers (54 percent)
were of the view that conditions are unchanged.
Likewise, the survey of retailers and wholesalers
(R/W)23 also showed a higher PMI in May 2012 at
57.53, reflecting preparations for the upcoming
school year. Compared to the same month last
year, the May 2012 index was lower by 3.3 index
points. Meanwhile, the survey showed that most
respondents (63.6 percent) indicated that
business conditions were unchanged while
29.5 percent of managers were optimistic. Only
6.8 percent indicated that their respective
companies experienced a decline in business
activities.
PMI Services24 in May 2012 remained above 50 at
63.45 from the 63.53 recorded in the previous
month. The May 2012 index was also lower by
21
An index above 50 indicates economic expansion, while an index below 50 implies a contraction. PMI surveys are
conducted on the last week of the month. 22
The Manufacturing PMI for May 2012 was based on interviews with a statistical sample of 355 purchasing and
supply managers from top manufacturing companies. 23
The Retail/Wholesale PMI for May 2012 was based on interviews of 93 purchasing and supply managers from top
retail/wholesale companies. 24
The Services PMI for May 2012 was based on interviews of 144 purchasing and supply managers from top service
firms. Industries in the PMI services are hotels and restaurants including travel agency, telecommunications,
provident and insurance companies, business and knowledge processing, transportation, banking activities and
financial, real estate, hospitals and media and broadcasting.
21
Merchandise exports and imports improve.
Exports of Goods (BOP data)
Growth rate (in percent)
Commodity Group2011 2012
Q1 Q4 Q1
Coconut products 72.7 -13.5 -38.9
Sugar and Products -8.0 8,000.0 108.7
Fruits and Vegetables 32.7 36.6 24.1
Other Agro-based products 37.5 5.4 8.6
Forest products 0.0 157.1 50.0
Mineral products 31.2 7.5 -5.1
Petroleum products 98.7 -30.1 -17.9
Manufactures 3.7 -22.1 7.6
Special transactions -4.4 13.9 18.8
Total Exports, as per NSO
Foreign Trade Statistics
7.8 -17.5 5.4
Conceptual and coverage
adjustments
7.5 -3.3 1.5
Total Exports, BPM5 8.1 -17.8 5.5
Source: BSP
0.7 index point relative to the same month a year
ago. The slightly lower PMI for May can be
attributed to the drop in four of the six indices
relative to the previous month, namely,
outstanding business, price charge, average
operating costs and employment. Of the four
indices, the average operating costs recorded the
highest decline at 2.16 compared to the preceding
month. Using industry level data, business
processing, hotels and restaurants, and provident
and insurance companies appeared to have
slowed down. Despite the slight decline in
services PMI, survey results showed a higher
positive response rate (42 percent) with regard to
business activity compared to the previous month
while only 10 percent experienced a downturn,
with the remaining 48 percent indicating
unchanged conditions.
External Demand
Exports
Merchandise exports improved in Q1 2012,
expanding by 5.5 percent, a reversal of the
17.8 percent contraction in the previous quarter.
The growth in exports was mainly due to
manufactures, specifically, outward shipments of
electronic products, driven by export earnings
from semiconductors, electronic data processing
and other electronics— consistent with the book-
to-bill ratio of 1.12 in March 2012 from 0.95 in the
same period a year ago. Despite the price
contraction of semiconductors, the volume
ordered more than offset the decrease as
sustained demand from the US and selected Asian
countries supported the export earnings of the
commodity. Under manufactures, machinery and
transport equipment also contributed to export
growth as shipments of motorized vessels along
with other parts of air conditioning machines
increased. Likewise, exports of wood
manufactures expanded as exporters continued
to benefit from the rehabilitation efforts ongoing
in Japan following the natural disasters that struck
the country in 2011.
Imports
Likewise, merchandise imports recovered in Q1
2012 at 4.7 percent after contracting for two
22
Imports of Goods (BOP data)
Growth rate (in percent)
Commodity Group2011 2012
Q1 Q4 Q1
Capital Goods -1.1 -3.0 19.5
Raw Materials &
Intermediate Goods
24.4 -17.5 -9.5
Mineral Fuels & Lubricants 31.7 22.8 37.0
Consumer Goods -20.7 -0.1 6.7
Special Transactions 5.5 -5.9 -22.7
Total Imports1/ 14.3 -6.3 4.7
Conceptual and coverage
adjustments
-46.9 25.3 6.4
Total Imports, BPM5 13.4 -6.0 4.7
1/ Include valuation adjustments to NSO data
Source: BSP
1.0 pct
4.9 pct
8.5 pct
-10
-5
0
5
10
15
20
1 2 3 4 5 6 7 8 9 10 11 12 13
ye
ar-
on
-ye
ar
gro
wth
in p
erc
en
t i
n r
ea
l te
rms
GDP, Production Side
Agriculture Industry Services
Economic PerformanceAt constant 2000 prices
Growth rate (in percent)
Sector 2011 2012
Q1 Q4 Q1
By industrial origin
Agri, Hunting, Forestry & Fishing 4.4 -2.5 1.0
Agriculture and Forestry 6.3 -2.0 2.1
Fishing -3.1 -4.8 -3.8
Industry 7.3 3.4 4.9
Mining and quarrying 32.2 -16.3 -11.0
Manufacturing 8.1 3.3 5.7
Construction 4.2 8.1 3.6
Electricity, gas and water supply -0.6 2.9 8.0
Services 3.6 5.9 8.5
Transport., Storage, & Comm. 4.2 4.1 9.0
Trade 2.8 3.4 8.9
Finance 6.4 1.5 8.8
Real estate, Rent, & Bus. Act. 6.2 13.6 7.9
Government services -7.9 5.2 1.5
Other services 5.0 7.5 10.5
Source: NSCB
consecutive quarters in 2011. The improvement in
import performance can be traced to mineral
fuels and lubricant, specifically, petroleum crude.
The double-digit growth in imports of petroleum
crude was mostly due to increased price and
volume of the commodity. In addition, inward
shipments of capital goods also contributed to
import growth due to the refleeting program of
two airlines, thus, boosting demand for aircraft,
ships, and boats, which grew by 229.4 percent.
The following commodities also contributed to
the increase, office and EDP machines
(28.0 percent), and telecommunication
equipment and electrical machinery
(16.7 percent).
Aggregate Supply
The services sector, which comprised 56.2 percent
of GDP, grew by 8.5 percent in Q1 2012 and
contributed 4.7 ppts to GDP growth. The strong
growth in the sector was propelled by the
expansion in all sub-sectors, led by trade and
repair of motor vehicles, motorcycles, personal
and household goods (8.9 percent), other services
(10.5 percent), and real estate, renting and other
business activities (9.2 percent). 25
The industry sector continued to grow, albeit at a
slower pace. The sector, which expanded by
4.9 percent and contributed 1.6 ppts to GDP
growth, was driven primarily by manufacturing
(5.7 percent). Industrial output, however, was
pulled down by the contraction in mining and
quarrying (-11.0 percent) from a double digit
growth of 32.2 percent in the previous year.
The growth of agriculture, hunting, forestry and
fishery (AHFF) sector likewise decelerated due to
adverse weather conditions. AHFF, which
accounted for 11.6 percent of GDP, slowed down
to 1.0 percent in Q1 2012 from 4.4 percent in
Q1 2011. Palay and sugarcane production fell
significantly by 1.1 percent and 6.5 percent,
respectively, from double digit growth of
15.6 percent and 26.6 percent a year ago.
Similarly, mango and cassava declined by
25
Real estate, renting and other business activities sector includes business processing outsourcing (BPO).
23
6.0 percent and 2.7 percent, respectively, in
Q1 2012. The contraction in these four sub-
sectors offset the increase in production in the
other sub-sectors (poultry, livestock, corn, and
coconut including copra).
Labor Market Conditions
Employment condition improves.
April 2012
6.9 pct
April 2012
19.3 pct
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
in p
erc
en
t
Unemployment and Underemployment
Unemployment Underemployment
Based on the preliminary results of the April Labor
Force Survey (LFS), the unemployment rate in April
2012 was estimated at 6.9 percent, lower than the
7.2 percent registered in both April 2011 and
January 2012 LFS. Meanwhile, the proportion of
underemployed to total employed persons was
slightly lower at 19.3 percent in April 2012 from
19.4 percent in the same period last year, but was
higher than the 18.8 percent in January 2012.26
The number of employed persons increased by
2.8 percent y-o-y in April 2012 to 37.8 million,
driven largely by the growth in the services sector.
Employment in the services sector was higher by
0.4 million, representing a 2.2 percent growth. The
services sector accounted for 51.4 percent of the
total employed persons, while the agriculture and
industry sectors employed 33.0 percent and
15.6 percent, respectively.
In terms of major occupation groups, the y-o-y
increase in the employment level could be traced
to the higher growth of technicians, workers in
plants, laborers, trade workers, professionals,
service workers and special occupations workers.
26
Underemployed persons include all employed persons who express the desire to have additional hours of work in
their present job or an additional job, or to have a new job with longer working hours. Visibly underemployed persons
are those who work for less than 40 hours during the reference period and want additional hours of work.
24
II. MONETARY AND FINANCIAL MARKET CONDITIONS
Domestic Liquidity and Credit Conditions
Domestic liquidity growth accelerates with the
sustained expansion of NFA …
… and a recovery of NDA.
Bank lending growth remains solid.
M3 growth rose to 7.9 percent in May 2012 from
the end-Q1 2012 growth of 5.6 percent. The
growth of domestic liquidity continued to be
fueled by the expansion in net foreign assets
(NFA), particularly in the BSP’s NFA position, as
foreign exchange inflows from OF remittances
and portfolio investments continued to increase.
Meanwhile, the NFA of banks decreased further
owing to the continued rise in thei
