Bangko Sentral ng Pilipinas
ISSN 1655-5104
REPORT
2009SECOND Quarter
INFLATION
142.4
142.6
142.8
143.1
144.0
145.1
146.8
147.3
148.6
151.6
153.8
157.4
159.9
160.3
159.7
159.1
156.2
156.7
157.2
158.0
158.1
158.9
158.8
159.8
0.72
0.71
0.72
0.72
0.71
0.71
0.71
0.70
0.70
0.70
0.70
0.69
0.69
0.68
0.68
0.67
0.66
0.65
0.64
0.63
0.63
0.63
0.63
0.63
0.64
0.63
0.63
0.63
0.63
0.63
12.4
11.8
11.2
9.9
8.0
7.1
7.3
6.4
4.8
3.3
1.5
FOREWORD
The 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 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 inf lation 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 rigorous economic analysis behind the conduct 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 follow and understand and enable them to better monitor the BSP’s commitment to the inflation target, thereby helping both in anchor ing inflation expectations and encouraging informed debate on monetary policy issues.
The government’s targets for annual headline inflation under the inflation
targeting framework have been set at 3.5 percent and 4.5 percent for 2009 and 2010, both with a tolerance interval of ± 1.0 percentage point. The inflation target range for 2009 therefore is 2.5-4.5 percent and for 2010, 3.5-5.5 percent.
The report is published on a quarterly basis, presenting a survey of the various
factors affecting inflation. These include recent price and cost developments, 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 last quarter, as well as a comprehensive analysis of the BSP’s view of the inflation outlook for the policy horizon. This is followed by a discussion of the implications of the assessment of inflation and economic conditions on the monetary policy settings of the BSP.
The Monetary Board approved this Inflation Report at its meeting on
30 July 2009.
AMANDO M. TETANGCO, JR.
Governor
4 August 2009
T
ii
List of Acronyms, Abbreviat ions, and Symbols AFF Agriculture, Fishery, and Forestry AMCs Asset Management Companies ARMM Autonomous Region of Muslim Mindanao AP Asia Pacific AL Auto Loans BAS Bureau of Agricultural Statistics BES Business Expectations Survey BIS Bank for International Settlements BOC Bureau of Customs BPO Business Processing 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 Consumer Price Index ECB European Central Bank EMBI Emerging Market Bond Index ENSO El Niño Southern Oscillation ERC Energy Regulatory Commission EU European Union FAO Food and Agriculture Organization GDP Gross Domestic Product GNP Gross National Product GRAM Generation Rate Adjustment Mechanism IBL Interbank Loans EIA Energy Information Administration ICERA Incremental Currency Exchange Rate Adjustment FCDA Foreign Currency Differential Adjustment IEA International Energy Agency IMF International Monetary Fund IPP Independent Power Producer KBs Commercial banks LFS Labor Force Survey LPG Liquefied Petroleum Gas LTFRB Land Transportation Franchising and Regulatory Board MEM Multi-Equation Model Meralco Manila Electric Company MISSI Monthly Integrated Survey of Selected Industries MTP Major Trading Partner MW Megawatt NCCP National Council for Commuters Protection NDA National Domestic Assets NFA Net Foreign Assets, National Food Authority NFIA Net Factor Income From Abroad NG National Government NIA National Income Accounts
iii
NPC National Power Corporation NPLs Non-performing loans NSO National Statistics Office OECD Organization for Economic Cooperation and Development OMOs Open market operations OPEC Organization of Petroleum Exporting Countries PBR PCE PMI
Performance-based Rate Personal Consumption Expenditure Purchasing Managers’ Index
PSALM Power Sector Assets and Liabilities Management PSEi Philippine Stock Exchange Composite Index PSS Postal Savings System PSIC Philippine Standard Industrial Classification RB Rural Banks REER Real Effective Exchange Rate RM Reserve Money ROP Republic of the Philippines RP Repurchase RREL Residential and Real Estate Loans RRP Reverse Repurchase SEM Single-Equation Model SDA Special Deposit Account TB Thrift Bank TCS Transportation, Communications, and Storage U/KBs Universal/commercial banks WEO World Economic Outlook
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 uses various instruments to effect the desired monetary policy stance to achieve the inflation target. These include (a) raising/reducing the BSP's policy interest rates; (b) increasing/decreasing the reserve requirement; (c) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks and trust entities of BSP-supervised financial institutions; (d) increasing/decreasing its rediscount rate on loans extended to banking institutions on a short-term basis against eligible collaterals of banks’ borrowers; and (e) outright sales/purchases of the BSP’s holdings of government securities. The BSP’s primary monetary policy instruments are its overnight reverse repurchase (RRP) or its borrowing rate and overnight repurchase (RP) or its lending rate. Policy Target The BSP uses the Consumer Price Index (CPI) or headline inflation rate which is compiled and released to the public by the National Statistics Office (NSO) as its target for monetary policy. The policy target is set by the Development Budget Coordinating Committee (DBCC)1 in consultation with the BSP. For 2009, the headline inflation target has been set at 3.5 percent ± 1.0 percentage point, while for 2010, the inflation target has been set at 4.5 ± 1.0 percentage point. BSP’s Explanation Clauses These refer to the predefined set of acceptable circumstances under which an inflation-targeting central bank may fail to achieve its inflation target. These clauses recognize 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 Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the Department of F inance (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. Beginning in July 2006, the Monetary Board meets every six weeks to review and decide on the stance of monetary policy. Prior to July 2006, monetary policy meetings by the Monetary Board were held every four weeks.
Chairman Amando M. Tetangco, Jr. Members Peter B. Favila Raul A. Boncan
Juanita D. Amatong
Nelly F. Villafuerte Alfredo C. Antonio
Ignacio R. Bunye
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. The Committee meets every six weeks (beginning July 2006) but may also meet in between the regular meetings, whenever it is deemed necessary. Prior to July 2006, the Committee met every four weeks.
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 Managing Director 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
Schedule of Meetings of the Advisory Committee and the Monetary Board on Monetary Policy for 2009
Meeting No.
Advisory Committee 1 Monetary Board 2 Publication of MB
Highlights 3
1 26 January 29 January 26 February 2 2 March 4 5 March 4 2 April 3 13 April 16 April 14 May 4 25 May 28 May 25 June 5 6 July 9 July 6 August 6 17 August 20 August 17 September 7 28 September 1 October 29 October 8 3 November 5 5 November 5 3 December 9 14 December 17 December 14 January 2010
Notes: 1 Under MB Resolution No. 630, the frequency of meetings of the Advisory Committee and the Monetary Board was set at every six weeks starting July 2006. Prior to this, the Advisory Committee and the Monetary Board meetings were held every four weeks. 2 Monetary Board meetings on monetary policy are held on the Thursday after the latest Advisory Committee meeting. 3 Under MB Resolution No. 630, the lag in the publication of the highlights of the Monetary Board meetings on monetary policy was reduced to four weeks. Prior to this, the highlights were published six weeks after the reference meeting date. 4 Advisory Committee meeting scheduled on 9 March 2009 and Monetary Board meeting scheduled on 12 March 2009 will be moved one week earlier. Bank for International Settlements (BIS) bi-monthly Governors’ meeting is on 8-9 March 2009. 5 Advisory Committee meeting scheduled on 9 November 2009 and Monetary Board meeting scheduled on 12 November 2009 will be moved one week earlier. Bank for International Settlements (BIS) bi-monthly Governors’ meeting is on 8-9 November 2009; 2 November 2009 (All Soul’s Day), which falls on a Monday, is a holiday.
vii
CONTENTS
Overview 1
I. Inflat ion and Real Sector Developments 3
Prices 3
Aggregate Demand 11
Aggregate Supply 20
Labor Market Conditions 22
II. Monetary and Financial Market Conditions
23
Interest Rates 23
Financial Market Conditions 25
Banking System 27
Exchange Rate
31
Domestic Liquidity and Credit Conditions 34
III. Fiscal Developments IV. External Developments
36
37
V. Monetary Policy Developments
41
VI. Inflation Outlook 43
Private Sector Economists’ Inflation Forecasts BSP Inflation Forecasts
Risks to the Inflation Outlook VII. Implicat ions for the Monetary Policy Stance
43 45
49
53
Summary of Monetary Policy Decisions
1
OVERVIEW3
• Inflation continues to decline. Headline inflation was lower in Q2 2009 compared to the
previous quarter, as price pressures continued to abate. The downtrend in headline inflation was due mainly to lower food inflation as domestic and global supply conditions improved. In addition, fuel inf lation was negative from the strong base effects following the very high kerosene and LPG prices in the previous year. Core inflation continued to moderate in the second quarter, reflecting soft demand conditions. Meanwhile, inflation expectations remained well anchored, with both the BSP and private sector surveys indicating expected inflation falling within the target ranges for 2009 and 2010.
• The domestic economy faces strong headwinds from the global downturn. Economic growth in the f irst quarter showed a sharper-than-expected slowdown, reflecting the negative contributions of exports and gross capital formation, as well as the significantly lower growth of personal consumption expenditures. Various leading demand indicators, including the sustained drop in industrial energy sales and low capacity utilization in the manufacturing sector, continued to suggest weak economic activity through the second quarter of 2009.
• Financial markets appear to be stabilizing, albeit at low levels. Supported by the perception that the global economic downturn is bottoming out, the Philippine Stock Exchange Composite Index (PSEi) surged in the second quarter, posting an average of 2,310.3 index points, higher by 21.9 percent than the level in the previous quarter. Likewise, debt spreads narrowed as global financial markets showed incipient signs of stabilizing as aggressive policy measures gained traction and investor risk appetite improved. However, in the foreign exchange market, the peso depreciated slightly during the quarter due to weaker domestic growth prospects, widening f iscal deficit, and the political noise created by the proposed move to amend the constitution .
• Domestic liquidity and credit expand anew. The growth in domestic liquidity was mainly
driven by the increase in net foreign assets (NFA) of depository corporations as the BSP continued to build up its international reserves, while banks reduced their foreign liabilities as they paid off maturing obligations. Meanwhile, outstanding loans of commercial banks continued to post a double-digit expansion even as credit standards remained basically unchanged in the second quarter relative to the previous quarter.4
• Domestic interest rates decline. Interest rates decreased in Q2 2009 relative to the previous quarter’s levels as market sentiment turned more favorable and inflation conditions improved. The secondary market yield curve for government securities shifted downward in Q2 2009 as lower inflation expectations drove down interest rates across all tenors. Similarly, interest rates on bank loans went down, indicating that banks passed on partially to their borrowers the BSP’s cuts in policy rates.
• The BSP reduces its key policy interest rates further by another 50 basis points in Q2 2009, bringing the cumulative reduction to 175 basis points since December 2008. The BSP’s decision to ease the monetary policy stance was based on the assessment that inflation would stay within target over the course of the policy horizon. Inflation pressures are expected to remain subdued, given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices.
3 The analyses in this report are based on information as of 30 June 2009. 4 From preliminary results of the Q2 2009 BSP Senior Bank Loan Officers’ Survey. Q1 2009 results indicated that overall credit standards tightened somewhat in Q1 2009 relative to Q4 2008.
2
• The latest inflation forecasts continue to show subdued price pressures, with headline inflation expected to settle at around the middle of the target range for 2009 and at the lower bound of the target range for 2010. On balance, downside pressures on prices predominated due mainly to expectations of a marked deceleration in global economic activity which is expected to continue to dampen imported inflation and inflation expectations, and weaker domestic demand conditions. However, there are upside risks that the unprecedented large stimulus programs in the advanced economies could exert inf lationary pressures in the medium term and global commodity prices, particularly oil, could rebound.
• Monetary policy will continue to provide support to economic activity to the extent that the inflation outlook allows. The decision to provide additional monetary stimulus will be carefully considered, taking into account the signif icant monetary easing that has already taken place since December 2008, with key policy rates being reduced and liquidity provision being undertaken through lower reserve requirements, a larger rediscounting budget, and easier access to the rediscounting facility. With considerable monetary stimulus already in place, and the implementation of fiscal action already in the pipeline, the BSP believes that prevailing monetary settings are appropriately calibrated to the inflation outlook and domestic demand. Going forward, the BSP will continue to pay close attention to signs of global demand recovery as well as to a possible build-up in commodity price pressures over the medium term, with a view to undertaking timely action towards a non-inflationary recovery in economic activity.
[On 9 July 2009, the Monetary Board reduced the RRP and RP rates by 25 basis points to 4.0
and 6.0 percent, respectively. Given the continued benign inflation outlook, the Monetary Board believed that there was room for further easing in the monetary policy stance, which should also provide support to financial markets and the real economy.]
3
I. INFLATION AND REAL SECTOR DEVELOPMENTS Prices
0
2
4
6
8
10
12
14
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Headline Inflation Quarterly average in percent (2000=100)
Q2 20093.2
Overall price pressures continued to abate in Q2 2009. Measures of underlying or core inflation also eased during the period. The continued downtrend in headline inflation was due mainly to lower food inflation from favorable supply conditions, particularly the sustained growth in agriculture, and lower global food prices year-on-year. In addition, fuel inflation was negative from the strong base effects following the very high kerosene and LPG prices in the previous year. At the same time, demand-side price pressures appear to be limited given the weak domestic demand conditions and continued easing in core inflation.
0
2
4
6
8
10
12
14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2002 2003 2004 2005 2006 2007 2008 2009
Headline Inflation Core Inflation
Headline and Core InflationQuarterly average in percent (2000=100)
Q2 2009
Headline3.2
Core4.4
Both food and non-food inflation decline.
0
2
4
6
8
10
12
14
16
18
2002 2003 2004 2005 2006 2007 2008 2009
Headline Inflation Food Inflation Non-food Inflation
Headline, Food and Non-food Inflation Quarterly average in percent (2000=100)
Headline and Core Inflation Headline inflation fell to 3.2 percent in Q2 2009 from 6.9 percent in the previous quarter and 9.7 percent in Q2 2008. Both food and non-food inflation declined markedly in Q2 2009. Food contributed 2.8 percentage points to inflation, of which 0.7 percentage point came from rice. Housing and repairs contributed 0.5 percentage point, while services and clothing contributed 0.1 percentage point each. Meanwhile, declining fuel prices shaved off 0.3 percentage point from headline inflation. Food inflation fell to 5.6 percent in Q2 2009 from 11.9 percent in Q1 2009 and 13.8 percent in the same quarter a year ago. Similarly, non-food inflation declined to 0.7 percent in Q2 2009 from 2.2 percent in Q1 2009 and 6.1 percent in the same quarter in 2008. By geographical location, National Capital Region (NCR) inf lation was recorded at a lower rate of 0.9 percent in Q2 2009 from 4.1 percent in Q1 2009 while for areas outside NCR, inflation decelerated to 4.1 percent from 8.1 percent.
Inflation sustains downward path.
4
Core inflation also continues to decline.
Alternative Core Inflation MeasuresQuarterly averages of year-on-year change
Quarter Official CoreInflation
TrimmedMean 1/
WeightedMedian 2/
Net of Volatile Items 3/ *
2006 5.5 5.4 5.0 6.9Q1 6.2 5.9 5.4 8.1Q2 6.1 5.8 5.0 7.6Q3 5.2 5.2 5.2 6.7Q4 4.8 4.5 4.2 5.0
2007 2.8 2.6 2.3 2.7Q1 3.2 2.9 2.5 3.0Q2 2.6 2.2 2.2 2.5Q3 2.9 2.3 2.1 2.5Q4 2.4 2.9 2.5 3.0
2008 6.2 7.6 7.3 7.8Q1 4.1 5.1 4.5 5.2Q2 6.2 7.7 7.4 8.0Q3 6.9 9.6 9.1 9.7Q4 7.7 7.9 8.1 8.1
2009Q1Q2
6.34.4
5.83.9
5.63.9
5.22.6
1/ The trimmed mean represents the average inf lat ion 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 inf lat ion rates.
3/ The net of volatile items method excludes the following items: educat ional services, fruits and vegetables, personal services, rentals, recreat ional services, rice, and corn.
* 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 af ter excluding non-core items. The previous methodology retained the weights of vola tile items in the CPI basket while keeping their indices constant at 100.0 from month to month.
Source: NSO, BSP estimates
Contribution to Quarterly Inflationin percent
ItemWeight in Headline
CPI
Percentage Contribution to Year-on-Year Headline
Inflation
Q2 2009
Q1 2009
Q2 2008
Core Inflation 81.6 2.83 4.24 5.13Non-core Items 18.4 0.35 2.67 4.62
Rice 9.4 0.67 2.78 3.08Corn 0.9 0.06 0.23 0.24Fruits and
Vegetables 5.3 0.31 0.22 0.54
Gas, LPG 1.3 -0.22 -0.21 0.28Kerosene 0.3 -0.05 -0.02 0.07Oil, Gasoline and
Diesel 1.3 -0.41 -0.33 0.41
Headline Inflation 100.00 3.18 6.91 9.75
Source of Basic Data: NSO, BSP
Core inflation, an indicator of the long-term trend of inflation, continued to decline during the quarter. The official NSO core inflation measure eased to 4.4 percent in Q2 2009 compared to 6.3 percent in the previous quarter and 6.2 percent in the same quarter a year ago. Similarly, alternative measures of core inflation estimated by the BSP (trimmed mean, weighted median, and net of volatile items) reflected an overall downtrend in Q2 2009. Core inflation contributed 2.8 percentage points to headline inflation in Q2 2009, lower than the 4.2 and 5.1 percentage-point contribution to inflation recorded in Q1 2009 and Q2 2008, respectively. With the decline in year-on-year food and petroleum prices, the contribution of non-core CPI items decreased to 0.4 percentage point from 2.7 percentage points in the previous quarter and 4.6 percentage points in the same quarter a year ago.
5
The number of i tems with above-target inflation rates decreases further.
0
20
40
60
80
100
120
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2004 2005 2006 2007 2008 2009
Cumulative Weight (in percent) Number of Items Exceeding Threshold Inflation
CPI Items with Inflation Rates Above Threshold
The proportion of Consumer Price Index (CPI) basket components (at the 4-digit Philippine Standard Industry Classif ication (PSIC) level) showing inflation rates above a given threshold provides an indication as to whether pressures on consumer prices are becoming generalized over time. The number of items with inflation rates greater than the threshold of 4.5 percent (the upper end of the inflation target for 2009) decreased to 75 in Q2 2009 from 90 in the previous quarter. These items accounted for a lower proportion of the CPI basket at 51.4 percent compared to 58.2 percent in the previous quarter. Dividing the CPI basket into food and non-food components generated the same trend. There were 46 food items with inflation rates above the threshold compared to 53 in the previous quarter, while 29 non-food commodities posted inflation rates lower than the threshold in Q2 2009 compared to 37 in the previous quarter.
6
Inflation Rates for Selected Food ItemsQuarterly averages in percent (2000=100)
Commodity 2009 2008
Q2 Q1 Q4 Q3 Q2 Q1
Food, Beverage and Tobacco 5.6 11.9 13.8 17.0 13.8 7.0Food 5.7 12.4 14.5 17.9 14.6 7.2Cereal & Cereal Products 7.4 25.5 27.3 36.7 28.0 8.6o/w Rice 7.2 29.6 30.4 44.0 33.0 8.7
Corn 6.7 26.5 26.3 33.0 27.0 5.9Dairy Products 7.1 9.7 12.7 13.7 13.5 11.4Eggs 7.4 7.2 5.6 6.1 7.9 8.1Fish 5.4 7.3 9.6 9.3 9.7 7.8Frui ts & Vegetables 5.8 4.2 10.9 15.3 10.2 10.6Meat 4.2 9.3 9.4 10.9 10.5 4.9Misc. Food 4.0 7.4 8.6 9.0 7.4 4.2Beverages 4.3 5.5 6.5 6.1 5.1 3.7Tobacco 3.8 3.9 3.8 3.9 3.5 3.1
Source of Basic Data: NSO, BSP
Prices of agricultural commodities decline generally.
Food Inflation Food inflation continued to decline steadily in Q2 2009 to 5.6 percent from 11.9 percent in the previous quarter and 13.8 percent a year-ago. The quarter-on-quarter slower increase in the prices of all food items—except for eggs and fruits and vegetables—contributed to the decline. This development was largely brought on by lower global food prices and relatively stable supply conditions in agriculture. Agricultural Commodity Prices Palay prices fell to P15.63 per kilo in June 2009 from P16.03 per kilo in March 2009 and P18.19 per kilo a year ago, as palay output increased due to the expansion of harvest area and sufficient water supply. Likewise, special and ordinary rice prices fell to P34.55 per kilo and P31.40 per kilo, respectively, in June 2009 from P34.62 per kilo and P31.46 per kilo in March 2009 and P38.40 per kilo and P35.79 per kilo a year ago. The National Food Authority’s (NFA) increased distribution of government rice helped stabilize rice prices, particularly in Metro Manila. The prices of corn (corngrain, white) fell to P20.16 per kilo in June 2009 from P23.35 per kilo in March 2009 due to the expanded distribution of white corn variety. However, the price of corn a year ago was lower at P18.06 per kilo. Prices of pork and beef products were generally stable while prices of poultry products increased in June 2009 relative to March 2009. The uptrend in the prices of poultry products, particularly chicken, was due to the unexpected increase in demand as consumers shifted away from pork products following the recurrence of several hog diseases in various hog-producing provinces. In addition, the rise in the prices of day-old chicks also contributed to the increase in the prices of chicken products.
Food inflation falls markedly.
7
Likewise, non-food inflation is lower.
Inflation Rates for Selected Non-Food ItemsQuarterly averages in percent (2000=100)
Commodity2009 2008
Q2 Q1 Q4 Q3 Q2 Q1Non-Food Items 0.7 2.2 5.9 7.8 6.1 4.2Clothing 2.6 3.5 5.0 4.6 4.1 3.1Housing & Repairs 3.0 4.1 5.3 4.9 4.1 2.7Fuel, Light & Water -4.2 -2.4 5.4 7.1 8.0 5.4
Fuel -12.2 -9.3 5.9 27.4 19.0 16.8Light -1.4 2.4 5.7 -5.7 1.7 -1.8Water 10.3 1.0 3.1 2.6 2.2 2.5
Services 0.3 2.5 7.4 12.7 8.2 5.9Transpo & Comm. -4.3 -1.4 7.7 18.5 9.4 5.6Miscellaneous 2.9 3.3 3.8 3.3 2.8 2.0
Source of Basic Data: NSO, BSP
5152535455565758595
105115
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dubai Crude OilQuarterly average spot price in US dollars per barrel
Q2 2009 US$59.12
Non-Food Inflation Non-food inflation continued to decelerate during the quarter, with all sub-components of the non-food index, except water, registering either lower or negative inflation rates relative to the quarter- and year-ago rates. Energy Prices The international price of Dubai crude oil was lower by about half (or 49.4 percent) year-on-year at US$59.12 per barrel in Q2 2009 from an average of US$116.91 per barrel in the same period last year. Lower prices were due mainly to weaker demand for oil, particularly in member-countries of the Organization for Economic Cooperation and Development (OECD), reflecting the sharp slowdown in the global economy. On a quarter-on-quarter basis, however, the international price of Dubai crude oil was higher by 33.5 percent to reach US$59.12 per barrel in Q2 2009 compared to US$44.27 per barrel in Q1 2009 on expectations that the demand for oil will strengthen over time as there have been tentative signs that the global economic downturn may be nearing bottom. Falling US crude and gasoline inventories as well as supply concerns arising from militant attacks on oil installations in Nigeria (Africa’s largest crude oil producer) also added pressure to oil prices. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain its current oil production level during its meeting on 28 May 2009.
International oil prices are lower year-on-year.
8
Consequently, local pump prices of petroleum products are also lower year-on-year.
10
20
30
40
50
60
70
2007 2008 2009Unleaded Gasoline Diesel Oil
Local Retail Prices of Selected Oil ProductsPrice in pesos per liter
Jun 2009P34.61
Jun 2009P42.71
World oil prices are expected to increase further in 2010, as the global economy recovers.
10
25
40
55
70
85
100
115
130
145
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Spot and Estimated Future Prices of Dubai Crude Oil* Price in US dollars per barrel
*Futures price derived using Brent crude futures data.
30 Jun 2009
31 Mar 2009
The Energy Information Administration6 projects that world oil consumption will fall by 1.8 million barrels per day (mb/d) in 2009 but the rate of decline in consumption is expected to moderate later in the year. Similarly, OPEC expects that world oil demand will decrease by 1.6 mb/d in this year.7 Both estimates were virtually unchanged from May as the world demand for oil appears to be settling down. Tracking the easing international oil prices during Q2 2009, the domestic pump prices of petroleum products were lower compared to the same period last year. The prices of gasoline, kerosene, diesel, and LPG during Q2 2009 declined by P16.75 per liter, P16.74 per liter, P17.83 per liter, and P8.01 per liter, respectively. Relative to Q1 2009, however, the domestic prices of gasoline, kerosene, and diesel during Q2 2009 were higher by P5.75 per liter, P6.75 per liter, and P6.36 per liter, respectively, consistent with more recent developments. Kerosene and diesel prices were increased ten times and gasoline twelve times in the second quarter. Meanwhile, the price of LPG was lower by P0.19 per liter with two reductions during the quarter.8 The import tariff on specific crude and refined petroleum products remained at three percent from April to June, as the average prices of Dubai crude and diesel remained below the trigger price levels.9 The estimated futures prices of Dubai crude oil, based on movements in Brent crude oil futures, suggest higher prices for 2009 and 2010 on the expected rebound in oil demand as the global economy recovers.
6 Energy Information Agency, Short-Term Oil Outlook, June 2009, www.eia.doe.gov 7 OPEC Monthly Oil Market Report, June 2009, www.opec.org 8 The DOE explained that the price of LPG does not necessarily follow the direc tion of the prices of other petroleum products . The price of LPG is influenced mainly by the pricing of major producers in Saudi Arabia, which is reflected in the monthly contract price, while movements in oil prices are influenced by the conditions in the international oil market. 9 Under the implementing guidelines, the tariff on imported oil products will be reduced from 3 percent to between 0-2 percent when oil prices reach the (revenue neutral) trigger price levels indicated by the Department of Finance (DOF). The trigger period shall be based on the first 15 days of the month when the average price of oil shall be computed for purposes of determining the trigger prices. If the trigger price levels are reached, the DOE shall issue a certification to DOF for the latter to implement the corresponding reduction in oil import tariff.
9
Retail power rates post a net reduction.
Transportation In the transport sector, a hearing to discuss the National Council for Commuters Protection’s (NCCP) petition with the Land Transportation and Franchising Regulatory Board (LTFRB) for the reduction in bus and jeepney fares was set in April but this did not push through. Meanwhile, hearings to discuss the restoration of the minimum jeepney fare to P7.50 (from the existing P7.00)11 were held on 11 June and 15 July [On 15 July, it was agreed that another meeting will be set to continue the discussion but the date has not yet been determined]. Utility Charges Power The increase in Meralco’s distribution rates was offset by lower generation costs, resulting in a net reduction in retail electricity rates during the quarter. The Energy Regulatory Commission (ERC) approved in April Meralco's application to increase distribution-related charges under the performance-based rate (PBR) mechanism starting May 2009. However, the increase in Meralco’s distribution rates was offset by the lower generation cost of Meralco’s suppliers with cheaper natural gas. In addition, the Currency Exchange Rate Adjustment (CERA) refund, which was implemented in March, also tempered electricity costs during the quarter. Nonetheless, upside pressures on electricity rates stemming from the pending petitions with the ERC remain. These include: (1) Meralco’s pending petition to retrieve its lifeline and inter-class cross-subsidy under-recoveries, and (2) NPC’s petition to recover actual and incremental fuel, independent power producers (IPP) and foreign exchange rate f luctuation costs under the 13th generation rate adjustment mechanism (GRAM) and the 12th incremental currency exchange rate adjustment (ICERA). On a month-on-month basis, this will increase rates by an average of 4.3 percent for Luzon and 52.7 percent for Visayas. Mindanao rates will go down by 4.4 percent. Meanwhile, potential rate reductions could come from the proposed lower system loss caps for distribution utilities (DUs).
11 The petition was filed by the Alliance of Concerned Transport Operators (ACTO) with LTFRB in May 2009.
10
MWCI rates are higher due to rate rebasing.
The Power Sector Assets and Liabilities Management (PSALM) breached the 70 percent privatization threshold for the generation plants of the NPC in Luzon and Visayas in November 2008. This is one of the requirements for the implementation of open access and retail competition.12 In addition, with the successful sale of the 0.8-megawatt (MW) Amlan Hydroelectric Power Plant in Negros Oriental in January 2009, PSALM has sold 17 out of the 31 NPC plants identified for privatization.13 Water On an a year-on-year basis, rates of Manila Water Company, Inc. (MWCI) were higher by 14.7 percent in Q2 2009 due to rate rebasing, a process which is done every f ive years to review the service improvement plan and evaluate the required capital investment to implement the plan. The increase in MWCI rates, which offset the 1.5 percent year-on-year decrease in Maynilad rates, contributed to the 10.3 percent year-on-year increase in water CPI for the quarter. However, on a quarter-on-quarter basis, Maynilad water rates were lower in the second quarter while the rates of MWCI were unchanged. On a net basis, Maynilad rates were lower by P2.03 per cubic meter in the second quarter as the P1.38 increase in the basic charge was offset by the refund arising from the gains related to the prepayment of dollar-denominated loans.15
12 PSALM is pursuing the selection of power producer adminis trators (IPPAs) in 2009 to meet the last precondition for open access and retail competition as stated in the Electric Power Industry Reform Act (EPIRA). 13 The 16 power plants that have been sold are Tolomo, Agusan, Barit, Cawayan, Loboc, Pantabangan-Masiway, Magat, Masinloc, Calaca, Ambuklao-Binga, Tiwi-Makban, Panay-Bohol, and Amlan power plants. 15 The refund was ordered by the Metropolitan Waterworks and Sewerage System Regulatory Office (MWSS-RO) in May 2009.
11
Aggregate Demand and Supply Economic activity slows markedly. .
0123456789
10
2002 2003 2004 2005 2006 2007 2008 2009
GDP GNP
GDP and GNP Growth RatesAnnual Growth in Real Terms (%)
0.4 pct
4.4 pct
Q1 2009
Private consumption growth decelerates…
-25-20-15-10-505
1015202530
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Private Consumption Govt. Spending Fixed Investment
Domestic DemandAnnual Growth in Real Terms
Reflecting the weaknesses in both external and domestic demand, real Gross Domestic Product (GDP) grew by an annual rate of 0.4 percent in the f irst quarter of 2009, the lowest rate since Q4 1998. The slowdown in real GDP reflected primarily the negative contributions from exports and gross capital formation and the signif icantly lower personal consumption expenditures (PCE) growth. On the production side, the downturn in the industry sector, specifically manufacturing, was the main contributor to the slowdown in output growth while services and agriculture provided some support as they managed to expand during the period. Meanwhile, the expansion of Gross National Product (GNP) in real terms slowed down to 4.4 percent compared to 6.7 percent in Q4 2008. The growth in GNP was supported by the increase in net factor income from abroad (NFIA) at 40.8 percent, due to sustained inflow of overseas Filipinos’ (OF) remittances. However, on a seasonally-adjusted quarter-on-quarter basis, GDP dropped by 2.3 percent, the lowest for the past 20 years. Seasonally-adjusted GNP likewise declined by 1.2 percent. This was the first time that both the GDP and the GNP contracted quarter-on-quarter since the first quarter of 2001. Aggregate Demand Expenditures by major economic sectors The growth in PCE weakened to 0.8 percent from 5.0 percent in the previous quarter and 5.1 percent in Q1 2008 even as consumer prices softened. Household spending on the four major expenditure sub-sectors, including food (which accounts for 54.0 percent of total PCE), transportation/communication, household operations, and miscellaneous items, decelerated in the first quarter compared to the same quarter a year ago. In addition, expenditures on clothing and footwear, tobacco, and beverages also contracted.
12
Economic PerformanceGrowth rate (in percent)
Sector 2009 2008Q1 Q4 Q1
By expenditure itemPersonal consumption 0.8 5.0 5.1Government Consumption 3.8 2.6 -0.3Capital Formation -16.5 -13.1 -1.7
Fixed Capital Formation -5.7 0.1 3.0Exports -18.2 -11.5 -7.7Imports -19.2 5.0 -2.6
Source: NSCB
…while capital formation and exports register contractions.
Government expenditure posted a 3.8 percent growth, reversing the 0.3 percent decline in Q1 2008 and slightly higher than the 2.6 percent growth in the previous quarter. This moderate expansion was due to the increased disbursement of government funds for maintenance and other operating expenses.
Capital formation contracted further by 16.5 percent in Q1 2009 from 13.1 percent in the previous quarter as investment in durable equipment fell by 17.9 percent. Meanwhile, increased investments in residential assets boosted private construction, while infrastructure investments by the government led to a less negative growth in public construction. The global economic downturn continued to affect adversely the country’s exports in the first quarter. Exports declined by 18.2 percent as exports of merchandise goods dropped sharply by 24.6 percent led, in turn, by the decline in electronic products. At the same time, imports also plunged by negative 19.2 percent. The overall performance of imports was weighed down by the huge decline in the importation of merchandise products particularly electrical machinery and appliances, and mineral fuels, lubricants, and related materials.
13
Land values stabilize.
0
20,000
40,000
60,000
80,000
100,000
120,000
2001 2002 2003 2004 2005 2006 2007 2008 2009
Average Land Values, Makati CBD and Ortigas Real prices, based on rebased CPI (1991=100)(in pesos per square meter)
Makati Ortigas
*Base year chosen was the earliest year for which data was available.
Makati CBD office and residential vacancy rates increase.
Vacancy Rates, Makati CBD (%)Year-on-Year Growth (%)
Forecast Year-On-Year Growth (%)
2009 2008 2009 2010Q1 Q4 Q3 Q2* Q3* Q4 Q1
Office Rent -13.8 -8.6 -0.2 5.0 -10.5 -8.0 -8.3Residential Rent
(Prime 3Br) 5.0 8.4 8.4 4.9 -2.2 -3.1 -5.0
Source: Colliers International Research* Forecast from previous quarterly reports.
Other Demand Indicators Other indicators, meanwhile, continued to point to some moderation in demand conditions including: 1) the slowdown in property market activity, 2) the decline in vehicle sales, 3) the bearish second quarter consumer sentiment, 4) the decline in energy consumption, and 5) the drop in capacity utilization in the manufacturing sector. Property Prices
The latest report from Colliers International indicated that, quarter-on-quarter, implied land values19 were unchanged in Q1 2009 from the previous quarter’s levels. In particular, the implied land values in the Makati Central Business District (CBD) and Ortigas Center were unchanged at P297,300/sq.m. and P132,440/sq.m., respectively, on a quarter-on-quarter basis. Year-on-year, implied land values showed a slight increase of 1.6 percent for the Makati CBD and 0.7 percent for Ortigas Center in the f irst quarter of 2009. Land values had also stabilized in emerging business districts such as the Bonifacio Global City. According to Colliers, land sale transactions are expected to be minimal in 2009 and land values are expected to decline by around 3-5 percent in 2009. This could be due to weaker property market conditions as indicated by falling rentals, signif icant available supply, and deferred expansion plans of locators.20 Vacancy Rates Monthly off ice and residential vacancy rates in the Makati CBD at 4.4 percent and 9.0 percent, respectively, were higher in Q1 2009 compared to the previous quarter and year-ago levels. In the office sector, the increase in vacancy rates for this quarter could be attributed to the following: (1) addition of new office space; (2) movements of CBD tenants to other locations; and (3) postponed decisions of prospective tenants.
19 In the absence of closed transactions, implied land values based on trends are used by Colliers International to monitor prices. Implied va lues approximate the property prices had there been sales transactions during the period. 20 Colliers International, The Knowledge Report: Philippine Property Market Overview, April 2009
14
Meanwhile, office and residential rental values decline.
0
100
200
300
400
500
600
700
2001 2002 2003 2004 2005 2006 2007 2008 2009
Office and Residential Rental Values Real prices, based on rebased CPI (1995=100)(in pesos per square meter per month)
Office rental value Residential rental value
In the residential sector, the increase in vacancy rates came from non-luxury condominiums, particularly the older buildings that are currently competing against newer condominium developments. Tenant movements late last year were becoming more apparent as more units became available. According to Colliers, vacancy in the residential sector is expected to maintain its current level but may hit double digits at some point.
Rental Values
• Monthly off ice rents in the Makati CBD reached P695/sq.m. in Q1 2009, lower by 4.3 percent than the levels in the previous quarter.23 According to Colliers, premium grade office buildings led the decline in office rents, mainly due to current and expected vacancies. The average rent for this segment is expected to decline further this year with the glut in the supply of office spaces.
• Monthly rents for 3-bedroom condominium units in the Makati CBD declined by 1.4 percent to P576/sq.m from the previous quarter. Colliers noted that the demand for larger-sized condominium units in Makati had diminished and adjustments in rents became more evident. New residential projects in many areas in Metro Manila will also continue to put downward pressure on rents in older condominium buildings in Metro Manila.
• Colliers also reported that monthly residential rents in Rockwell and Fort Bonifacio as of Q1 2009 were generally unchanged at P684/sq.m. and P625/sq.m, respectively. Colliers expected that rent values in Fort Bonifacio would likely resist significant downward pressures in 2009 because luxury 3-bedroom units are almost fully occupied at any given time.
23 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.
15
Vehicle sales decline.
-30
-20
-10
0
10
20
30
40
2007 2008 2009
Monthly Sales of Passenger Cars Year-on-year change in percent
-30
-20
-10
0
10
20
30
40
50
60
2007 2008 2009
Monthly Sales of Commercial VehiclesYear-on-year change in percent
-60
-40
-20
0
20
40
60
80
2007 2008 2009
Monthly Sales of Trucks and BusesYear-on-year change in percent
Vehicle Sales • Year-on-year passenger car sales fell by 1.0
percent in the second quarter of 2009, a reversal of the year-ago and quarter-ago growth of 13.0 percent and 4.6 percent, respectively. According to the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), lower car sales can be attributed to shorter selling days in April and other inventory problems. On a quarter-on-quarter basis, however, passenger car sales grew by 7.5 percent, an improvement compared to the 4.2 percent contraction in Q1 2009.
• Year-on-year sales of commercial vehicles declined−for the third consecutive quarter−in Q2 2009 by 5.7 percent compared to a growth of 18.9 percent in the comparable period a year ago. The decline was steeper than the 4.4 percent drop in the previous quarter. Meanwhile, quarter-on-quarter sales growth of commercial vehicles recovered, expanding by 11.2 percent from negative 6.6 percent in the previous quarter.
• Year-on-year sales of trucks and buses also fell in Q2 2009 by 17.0 percent compared to a growth of 14.7 percent in the same period a year ago and 2.3 percent a quarter ago. On a quarter-on-quarter basis, however, sales of trucks and buses grew by 1.0 percent, a turnaround from the 7.0 percent decline in the previous quarter.
16
Energy sales decline on weaker industrial sector consumption.
-15
-10
-5
0
5
10
15
2007 2008 2009
Monthly Meralco Power SalesYear-on-year change in percent
Capacity utilization declines.
75.0
76.0
77.0
78.0
79.0
80.0
81.0
82.0
2007 2008 2009
Monthly Average Capacity Utilization for ManufacturingIn percent
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2007 2008 2009
Volume of Production Value of Production
Volume and Value Indices of Manufacturing Productionyear-on-year change in percent
Power Sales • Energy sales for the first two months of Q2 2009
decreased by 1.1 percent. This development was an improvement from the 6.2 percent contraction in the f irst two months of the previous quarter, but was a reversal of the 3.0 percent growth registered during the first two months of Q2 2008. The contraction in energy sales can be traced to the decline in the power consumption of the industrial sector, which fell for the sixth consecutive month in May, consistent with lower industrial output.
• Capacity utilization in manufacturing dropped to
an average of 78.4 percent in the f irst quarter of 2009 from 80.9 percent in the fourth quarter of 2008, reflecting a further and steeper slowdown in manufacturing activity since the peak in the third quarter of 2008 of 81.3 percent. Monthly utilization levels, nevertheless showed a gradual uptrend since February to reach 79.9 percent in April 2009 after dropping significantly in January 2009.
• Meanwhile, the NSO’s Monthly Integrated
Survey of Selected Industries (MISSI) indicators for volume and value of production also reflected this development as they showed two-digit year-on-year declines in the f irst quarter, which continued until April.
17
Business sentiment reflects less negative outlook on the economy.
Business Expectations SurveyIndex 2009 2008
Q2 Q1 Q4 Q3 Q2
Business Outlook Index
Current Quarter -2.6 -23.9 -6.8 -12.9 12.6
Next Quarter 13.7 -6.5 -0.5 16.6 16.6
Source: BSP
Business Expectations Survey
• The Q2 2009 Business Expectations Survey
(BES) results showed that business sentiment improved in the quarter while the outlook in the next quarter turned more bullish. The more favorable view of business was driven by better confidence in the US and global markets and the announcement of the Economic Resiliency Plan of the National Government (NG). Business sentiment improved in Q2 2009 as the overall confidence index (CI) rose by 21.3 index points to -2.6 percent in the second quarter from -23.9 percent in the first quarter. The CI reverted to positive territory in Q3 at 13.7 percent, 20.2 index points higher quarter-on-quarter as respondents expected an economic turnaround to commence by the third quarter of 2009. This means that optimists outnumbered the pessimists on the next quarter outlook. However, the Q3 2009 index was down by 2.9 index points on year-on-year basis.
• Business optimism was driven by improving confidence in the US and global financial markets—reflecting in large part the expected impact of the fiscal stimulus packages implemented by G-20 nations. The announcement by the NG of its Economic Resiliency Plan, the series of BSP policy rate cuts, and the decelerating inflation also helped lift business sentiment. Seasonal factors such as the expected pick-up in demand during the summer season and school opening in June as well as new and improved management strategies also contributed to this development.
18
Consumer confidence on the economy remains bearish.
Consumer Expectations SurveyIndex 2009 2008
Q2 Q1 Q4 Q3 Q2
Curren t Quarter -34.2 -25.7 -40.3 -52.8 -43.8
Next 3 months -13.2 -6.2 -11.2 -25.1 -26.9
Next 12 months -7.6 -2.3 -10.7 -23.9 -20.3
Source: BSP
Consumer Expectations Survey • Q2 2009 Consumer Expectations Survey
(CES) results showed overall consumer confidence declining quarter-on-quarter. However, compared to a year ago, consumers were more optimistic about their future. The nationwide consumer confidence index (CI) for the second quarter of 2009 at -34.2 percent exhibited a decline by 8.5 index points quarter-on-quarter. The weaker consumer outlook in the current quarter was attributed by respondents to the softening labor market and lower family income due to the recessionary conditions in the global economy. Respondents did not expect the conditions to improve in the near term as the next quarter CI and the next 12 months index also showed quarter-on-quarter declines after improving in the past two surveys.
19
Exports of Goods (BOP data)Growth rate (in percent)
Commodity Group2009 2008
Q1 Q4 Q1
Coconut products -60.0 -12.8 182.1
Sugar and Products 73.3 850.0 -25.0
Fruits and Vegetables 8.2 -8.8 1.2
Other Agro-based products -12.7 4.0 10.5
Forest products -25.0 60.0 -20.0
Mineral products -38.1 -45.6 7.4
Petroleum products -91.9 -70.1 109.2
Manufactures -35.1 -20.3 -1.3
Special transactions -47.2 -23.5 13.9
Total Exports, as per NSO Foreign Trade Statistics
-36.8 -22.5 2.8
Conceptual and coverage adjustments
24.4 41.7 5.6
Total Exports, BPM5 -37.0 -22.0 2.9
Source: BSP
Imports of Goods (BOP data)Growth rate (in percent)
Commodity Group2009 2008
Q1 Q4 Q1
Capital Goods -26.6 -23.9 4.6
Raw Materials & Intermediate Goods
-33.4 -21.7 -0.6
Mineral Fuels & Lubricant -54.9 -28.4 85.4
Consumer Goods -7.2 -6.9 52.4
Special Transactions -47.1 -38.4 2.1
Total Imports1/ -34.6 -22.3 14.6
Conceptual and coverage adjustments
-11.9 -576.2 65.2
Total Imports, BPM5 -34.4 -21.5 15.0
1/ Include valuation adjustments to NSO dataSource: BSP
External Demand
Exports
• Exports of goods declined signif icantly in Q1 2009 by 37.0 percent, a reversal of the 2.9 percent growth in the same period in 2008 and a further decline from the 22.0 percent contraction in the previous quarter.
• The contraction was led by manufactures, which contributed 30.2 percentage points to the decline in exports. The drop in petroleum and mineral products exports also contributed to the decline in total exports. These were due to the falling prices of oil, copper metal, and copper concentrates during the review quarter. Likewise, exports of coconut products contracted by 60.0 percent as demand for coconut products weakened in favor of cheaper alternative products.
Imports
• Meanwhile, imports of goods declined further by 34.4 percent year-on-year in Q1 2009 from the 21.5 percent contraction in the previous quarter, reversing the 15.0 percent growth in the same quarter a year ago.25
• All major commodity groups posted negative year-on-year growth during the review quarter. Imports of raw materials and intermediate goods decreased by 33.4 percent and contributed 17.9 percentage points to the contraction of imports. This was mainly driven by the 44.9 percent decline in the production of materials/accessories for the manufacture of electronic equipment, followed by imports of mineral fuels, lubricants, and related materials, which fell by 54.9 percent.
25 Merchandise imports in the quarterly BOP report are quoted in current US dollar prices, while those from the NIA are quoted in constant 1985 peso prices. Imports per BOP are based on the BPM5 concept (i.e., excluding from the NSO foreign trade figures those goods that did not involve change in ownership) and reflec t, among others, the following things: a) upward adjustments on the valuation of consigned raw materials for electronics and garments exports; b) OF remittances in kind; and c) military imports .
20
Industrial output falls due to weak economic activity in key export markets while services and agriculture continue to post modest expansions.
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
2002 2003 2004 2005 2006 2007 2008 2009
Agriculture Industry Services
Agriculture, Industry and Services SectorsAnnual Growth in Real Terms
Economic PerformanceGrowth rate (in percent)
Sector 2009 2008Q1 Q4 Q1
By industrial originAgriculture, Fishery & Forestry 2.1 2.9 2.8
Agriculture and Fishery 2.1 2.9 2.8Forestry 19.1 7.4 2.4
Industry -2.1 5.3 2.7Mining and quarrying 16.1 18.2 12.3Manufacturing -7.3 3.4 2.4Construction 16.7 14.5 -4.3Electricity, gas and water 1.0 3.8 9.5
Services 1.4 1.3 5.2Transport., Comm., & Storage 4.1 4.5 5.6Trade -0.2 0.0 1.1Finance 0.2 -4.6 12.2O. Dwellings & real estate 1.8 1.7 7.2Private services 2.9 2.4 5.7Government services 0.0 6.2 5.2
Source: NSCB
Aggregate Supply • Reflecting the decline in external trade,
industry, which accounted for 30.5 percent of total GDP, posted a negative 2.1 percent growth in Q1 2009 as manufacturing dropped by 7.3 percent. This was the first time since Q3 1985 that manufacturing posted a contraction. Meanwhile, mining and construction continued to post double-digit expansions for the second consecutive quarter. Copper, nickel, coal, and other non-metallic minerals contributed to higher mining output. Construction continued to grow, supported by the demand for residential properties.
• Services, while remaining the key contributor to growth among the production sectors, posted a lower growth of 1.4 percent relative to 5.2 percent in the previous year, dragged by the decline in trade, and the slowdown across all services sub-sectors. Private services, however, continued to be a key growth driver, supported by the active business processing outsourcing (BPO) industry. This, in turn, boosted the expansion in the communications sub-sector, propping up the transportation, communications, and storage (TCS) sub-sector.
• Driven mainly by palay production, the agriculture, fishery and forestry (AFF) sector posted a 2.1 percent growth in Q1 2009. However, the Q1 2009 growth level was slightly lower compared to the year- and quarter-ago growth rates. The improvement in palay production was due to the significant expansion of harvest areas in Bicol, Central Luzon, Cagayan Valley, SOCCKSKSARGEN, and in the I locos Region. Poultry likewise expanded, brought about by the bigger volume of broilers produced from commercial farms, higher inventory of layers and a continued rise in chicken egg production. Corn output, however, declined by 3.4 percent, a reversal of the 16.9 percent growth posted in Q12008, due to unfavorable weather conditions, pest infestations, and limited availability of credit.
21
• Meanwhile, the Food and Agricuture Organization’s (FAO) April 2009 Crop Prospects and Food Situation continued to indicate an overall decline in world cereal production in 2009 from the previous year’s record output as farmers have been discouraged by poor expected returns on their crops due to the sharp decline in grain prices and high input costs. FAO’s forecast for world cereal production in 2009 stands at 2.2 billion tons (including rice in milled terms), 3.0 percent down from last year’s global high, although this is still expected to be the second largest crop on record. Production declines are forecasted for wheat and coarse grains while the global rice crop is expected to register a marginal increase in output. Early indications point to smaller grain crops, partly as a result of a return to trend yields after strong productivity gains last year, and a reduction in overall plantings (mostly wheat) after last year’s exceptional level. However, global stock supply would be adequate to meet forecasted demand due to the large carryover of stocks from the previous season.
22
Labor Market Conditions
Unemployment and underemployment decline year-on-year.
0.0
5.0
10.0
15.0
20.0
25.0
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2007 2008 2009
Unemployment rate, SA (Left Scale) Underemployment (Right Scale)
Unemployment and Underemployment Rate
• Labor market conditions improved during the
quarter. According to the April 2009 Labor Force Survey (LFS), the unemployment rate declined to 7.5 percent in April 2009 from 7.7 percent in January 2009 and 8.0 percent in April 2008.16 This positive development may support the country’s soft demand conditions by improving personal consumption and, in turn, driving up domestic demand.
• Compared to Q1 2009 and Q2 2008, the latest
LFS showed that the total number of employed persons rose by 2.1 percent and 4.3 percent, respectively. The April LFS showed that the services sector employed 50.3 percent of the total employed population, while the agriculture and industry sectors accounted for 35.2 percent and 14.5 percent, respectively.
• Underemployment in April 2009 was 18.9
percent from 18.2 percent in January 2009 and 19.8 percent in April 2008. Based on the latest survey, underemployed persons in agriculture accounted for 46.5 percent, services for 38.9 percent, and industry for 14.5 percent of the total number of underemployed persons.17
16 Starting April 2005, the new LFS questionnaire defines the unemployed to “include all persons who were 15 years old and over as of their last birthday and were reported as without work, and currently available for work, seeking work or not seeking work for va lid reasons.” 17 Underemployed persons inc lude 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. Invisible underemployment refers to individuals who are working in jobs where their skills are not adequately utilized (e.g., a nursing graduate working as a bank teller).
23
II. MONETARY AND FINANCIAL MARKET CONDITIONS
Interest Rates • The 91-day, 182-day, and 364-day Treasury
bill (T-bill) rates decreased in Q2 2009 relative to the previous quarter to settle at 4.332 percent, 4.492 percent, and 4.677 percent, respectively.
• T-bills remained attractive to investors as
auctions by the Bureau of the Treasury (BTr) continued to attract a large volume of bids in Q2 2009.
• Meanwhile, the average actual lending rate
decreased by 66.9 basis points to settle at 8.328 percent in the week of 24-30 June from the 8.997 percent registered in the week of 23-27 March. This indicated that banks passed on partially to their borrowers the BSP’s cut in policy rates on 16 April and 28 May 2009.
Yield Curve • Secondary market yields declined across all
tenors as of end-June 2009 relative to end-March 2009. The decrease in the yields ranged from 1.1 basis points (for 1-year government securities) (GS) to 170.2 basis points (20-year GS).
• The yield curve shifted downward as bond
prices rose with increased buying activity due to the favorable inflation outlook and expectations of additional policy rate cuts by the BSP to support economic growth requirements given the favorable inflation outlook.
Domestic interest rates decline.
2
3
4
5
6
7
8
2007 2008 2009
91-day T-bill rate Overnight RRP Rate
91-day T-bill rate and BSP RRP rate In percent
Yields in the secondary market decrease across all tenors during the quarter.
2
34
56
78
910
1112
3Mo 6Mo 1Yr 2Yr 3 Yr 4Yr 5Yr 7Yr 10Yr 20Yr 25Yr
Yield in percent
Maturity
end-December 2008 end-March 2009 end-June 2009
Yield of Government Securities in the Secondary MarketIn percent
24
-400.0
-300.0
-200.0
-100.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09
RP 91-day T -bill vs US 90-day LIBOR (before tax) RP 91-day T-bill vs US 90-day T-bill (before tax)RP 91-day T -bill vs US 90-day LIBOR (after tax) RP 91-day T-bill vs US 90-day T-bill (after tax)
Interest Rate Differentialsin basis points
0
1
2
3
4
5
6
7
8
2007 2008 2009
BSP RRP rate US Fed funds rate
BSP RRP Rate and US Fed Funds Rate In percent
Real lending rate increases on lower inflation.
13.40
10.20
9.90
6.90
5.70
5.00
4.60
3.40
3.20
2.60
-2 0 2 4 6 8 10 12 14
India
Indonesia
Thailand
Philippines
Singapore
Hong Kong
Taiwan
South Korea
Japan
Malaysia
Average Real Lending Rates: Selected Asian CountriesIn percent
Interest Rate Differentials The positive differentials between domestic and US T-bill rates, net of tax, widened during Q2 2009 from Q1 2009 because of the increase in domestic interest rates and the decline in US T-bill rates. Similarly, the after-tax differentials between domestic interest rates and the US LIBOR widened compared to Q1 2009 as the 91-day RP T-bill rates rose while the US LIBOR declined. The differential between the BSP's policy interest rate (overnight borrowing or RRP rate) and the US federal funds target rate28 narrowed from 450 basis points in end-Q1 2009 to 400 basis points in the same period, reflecting the 50-basis-point reduction in the BSP’s policy rate. Adjusted for the risk premium—which is measured by the differential between the 10-year Republic of the Philippines (ROP) note and the 10-year US Treasury note—the differential between the BSP’s policy rate and the US federal funds target rate widened to 99 basis points as of end-June 2009 from 4 basis points as of end-March 2009. This development may be traced partly to the decline in the risk premium, as the return on the 10-year US note increased whereas the return on the RP note declined. The wider risk-adjusted differential could potentially encourage foreign exchange inflows. The real lending rate, measured as the difference between the median bank lending rate and inflation, rose to 6.9 percent as of end-June 2009 from 2.0 percent as of end-March 2009. This was due mainly to lower inflation recorded in the second quarter of 2009 compared to the previous quarter. Among a sample of 10 Asian countries, the Philippines' real lending rate was the fourth highest.
28 Using the high end of the federa l funds target range of 0-0.25 percent.
Interest rate differentials between Philippine and US T-bills widen, while policy interest rate differentials narrow.
25
Financial Market Conditions
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
PSE Composite Index
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Oversubscription of T-bill AuctionsIn billion pesos
Stock Market Stock market activity was upbeat in Q2 2009, sparked by the positive investor perception that the global economic downturn is bottoming out. In particular, the Philippine Stock Exchange Composite Index (PSEi) averaged 2,310.3 index points during the quarter, higher by 21.9 percent than the previous quarter’s 1,894.5 index points. However, this was still 13.5 percent lower than the PSEi level in Q2 2008 of 2,670.7 index points. The composite index continued to trend upwards in the f irst half of June to peak at 2,612.9 index points on 15 June, which was 39.5 percent higher than the end-December 2008 closing index of 1,872.9 index points and the highest posted since 2 October 2008. This developed amid continued optimism that the global recession in major economies may be bottoming out, leading investors to discount the local overhang from the global crisis (i.e., the relatively low GDP growth of 0.4 percent in the first quarter). However, the index f luctuated within a narrow band for the remaining trading days of June following a two-day drop in Wall Street due to negative manufacturing data in the US and profit-taking in the local market. The PSEi closed the quarter at 2,438.0 index points. Government Securities
Investor appetite for government securities continued to be healthy as evidenced by the oversubscriptions in most of the auctions conducted by the BTr for the period April-June 2009. The continued oversubscriptions in T-bill offerings reflected the presence of ample liquidity in the market and investor preference for low-risk investments. Total oversubscriptions for the quarter amounted to around P41.1 billion, lower than the P52.0 billion registered in the previous quarter. .
The local stock market recovers.
26
Debt spreads narrow as financial markets show signs of stabilizing.
Sovereign bonds and CDS spreads Debt spreads narrowed at the end of Q2 2009 relative to the end of Q1 as financial markets showed signs of stabilization, with aggressive policy measures gaining traction. Announcements of better-than-expected emerging markets’ corporate earnings helped bolster investor confidence. Moreover, improved investor risk appetite was also reflected in the strengthening of the global equity, currency, and commodity markets. Meanwhile, Fitch Ratings aff irmed its rating and kept its outlook stable for Philippine debt issuances in May.29 The EMBI+ Philippine spread or the extra yield for holding Philippine bonds over US bonds narrowed to 323 basis points in end-June 2009 compared to 428 basis points at the end of the previous quarter, but widened compared to the 302 basis points recorded as of end-June 2008. Meanwhile, the spread of Philippine f ive-year credit default swaps (CDS) also narrowed to 424 basis points at the end of Q2 2009 from 636 basis points as of end-March 2009, but was higher compared to the 295 basis points posted as of end-June 2008. Emerging markets’ debt spreads continued to narrow on account of improved credit quality of most sovereign issuers, balanced supply and demand for sovereign debt and more rapid growth of emerging market economies. Compared to neighboring economies, the Philippine CDS spread has remained below Indonesia’s spread which stood at 610 bps. However, the cost of holding Philippine bonds was higher than those of Malaysia and Thailand.
29 Fitch Ratings kept the Philippines’ ‘BB’ rating for its long-term foreign currency-denominated issuances, ‘BB+’ for its peso-denominated long-term debt papers, ‘B’ short-term issuer default rating, and ‘BB+’ country ceiling.
27
Banking System Philippine banking system remains stable. Banks’ deposit base continues to increase.
Credit card receivables decline, indicating subdued consumer spending.
The Philippine banking system remained sound and stable as banks continued to perform their central role of channeling funds to productive uses as well as managing and distributing risks. The system’s asset base has been expanding steadily, supported by sustained growth in deposits. Furthermore, the profitability of the banking system was broadly sustained, despite some moderation. The banking system remained adequately capitalized at levels above both the BSP-regulatory requirement and the international standard of the Bank for International Settlements (BIS).
Savings Mobilization
Banks’ total peso denominated deposits as of end-May 2009 amounted to P3.1 trillion, 14.8 percent higher than its year-ago level of P2.7 trillion. Savings deposits, which accounted for almost half of the funding base, grew higher by 3.6 percent compared to the 1.6 percent growth registered at the end of the previous quarter. Time and demand deposits posted year-on-year growth of 28.3 percent and 20.9 percent, respectively, as of end-May.
Lending Operations
The combined credit card receivables (CCRs) of universal/commercial banks (U/KBs) and thrif t banks (TBs), inclusive of credit card subsidiaries, fell by 3.9 percent as of end-March 2009 to reach P125.7 billion compared to the level at the end of 2008, indicating that consumer spending may have been dampened by the slowdown in economic growth. The total loan portfolio (TLP) increased by 19.5 percent from its year ago level but declined by 1.6 percent compared to its level at the end of previous quarter. The ratio of CCRs to the TLP at 4.9 percent was slightly lower than the previous quarter’s 5.0 percent. Meanwhile, the non-performing CCRs of U/KBs and TBs, inclusive of credit card subsidiaries, grew by 0.4 percent to P15.4 billion from last quarter’s P15.3 billion. The ratio of non-performing CCRs to total CCRs also rose slightly to 12.2 percent from last quarter’s 11.7 percent as the growth in non-performing CCRs exceeded the reduction in total CCRs.
28
Auto loans rise as demand for vehicles increase due to the substantial drop in in oil prices.
Residential real estate loans (RRELs) rise, with TBs accounting for more than half of total RRELs.
Resources of the banking system expand due to the rise in cash and loan accounts.
The combined auto loans (ALs) of U/KBs and TBs, inclusive of non-bank subsidiaries, stood at P81.8 billion as of end-March 2009, an increase of 4.1 percent from the previous quarter’s P78.6 billion. The substantial drop in oil prices in the fourth quarter may have encouraged individuals to purchase vehicles. The proportion of total ALs to TLP, exclusive of interbank loans (IBL), went up to 3.2 percent from the previous quarter’s 3.0 percent ratio with the lower growth in TLP (net of IBL) at 1.6 percent. In terms of loan quality, the non-performing ALs to total ALs ratio rose to 5.2 percent from the previous quarter’s 4.9 percent ratio. As of end-March 2009, the combined residential real estate loans (RRELs) of U/KBs and TBs grew by 4.2 percent to P160.4 billion from the level at end-December 2008 of P153.9 billion. Meanwhile, the quarterly decline registered in the TLP resulted in a higher ratio of RRELs to TLP at 6.3 percent from the previous quarter’s 6.0 percent. TBs accounted for a slightly bigger slice of total residential real estate exposure at 53.3 percent (P85.5 billion) while U/KBs held the remaining 46.7 percent (P74.9 billion). In terms of loan quality, the ratio of non-performing RRELs to total RRELs of U/KBs and TBs went up to 7.5 percent from the previous quarter’s 7.0 percent. This development was due primarily to the 12.3 percent hike in non-performing RRELs, which reached P12.0 billion from the previous quarter’s P10.7 billion. Institutional Developments Total resources of the banking system rose by 9.4 percent to P5.8 trillion as of end-April 2009 from the year-ago level of P5.3 trillion. The increase was due mainly to the rise in the cash and loan accounts. Universal/commercial banks (U/KBs), continued to account for almost 90 percent of the total resources of the banking system.
29
Number of banks falls due to mergers and consolidations but operating network continues to expand. Asset quality of banks continues to improve.
The number of banking institutions (head off ices) fell further to 811 as of end-March 2009 from the year-ago level of 845, reflecting the continued consolidation of banks as well as the exit of weaker players in the banking system. By banking classif ication, banks (head offices) consisted of 38 U/KBs, 76 TBs, and 697 rural banks (RBs). Meanwhile, the operating network (including branches) of the banking system increased to 7,876 from 7,743 during the same period last year, reflecting mainly the increase in commercial and rural banks’ branches/agencies. The banking system’s asset quality continued to improve as the NPL ratio eased further to 4.3 percent as of end-May 2009 compared to 4.6 percent a year ago. However, the NPL ratio was relatively higher than the 4.1 percent posted at the end of the previous quarter. The year-on-year improvement in NPL ratio was due to the 4.6 percent decline in NPLs complemented by the 3.6 percent expansion in the industry’s TLP. NPLs declined to P120.6 billion from the previous year’s level of P126.4 billion, while TLP expanded to P2,823.8 billion from P2,726.6 billion during the same period. Meanwhile, the NPL ratio of U/KBs fell further to 3.7 percent as of end-May 2009, an improvement from the 4.2 percent ratio registered a year ago. The Philippine banking system’s NPL ratio of 4.3 percent was comparatively lower than Indonesia’s 4.7 percent but higher than Thailand’s 3.1 percent, Malaysia’s 2.2 percent and Korea’s 1.1 percent.36 The lower NPL ratios in Malaysia and South Korea may be traced to the creation of publicly-owned asset management companies (AMCs), which purchased the bulk of their NPLs, a practice which was not resorted to in the Philippines. The loan exposure of banks remained adequately covered as the banking system’s NPL coverage ratio was steady at 86.5 percent as of end-April 2009, reflecting banks’ diligent compliance with the loan-loss provisioning requirements of the BSP to ensure adequate buffers against unexpected losses.
36 Sources: Various central bank webs ites and GFSR, Indonesia (Banking system, May 2009); Malaysia (Banking system, May 2009); Thailand (Financial institutions, March 2009); and Korea (Financial system, December 2008).
30
Banks remain well capitalized.
The banking system remained adequately capitalized as of end-December 2008 with the average capital adequacy ratios (CAR) remaining strong at 14.7 percent on a solo basis and at 15.5 percent on a consolidated basis. The industry’s CAR continued to exceed the statutory level set by the BSP at 10.0 percent and the BIS standard at 8.0 percent. The higher CAR of banks, in particular for U/KBs, was due to the hike in the capital level arising from the issuances of non-cumulative preferred stock and unsecured subordinated debt by two UBs (on solo basis) and the growth in the qualifying capital vis-à-vis the growth in the risk-weighted assets (on consolidated basis). The Philippine banking system’s CAR remains higher than those of Malaysia (14.2 percent), and Korea (10.9 percent) but lower than Thailand (15.9 percent). Meanwhile, Indonesia posted the highest CAR in the region at 17.8 percent.21
21 Sources: Various central bank webs ites , Malaysia (Banking System, May 2009); Korea (Banking System, September 2008); Thailand (Average Full Branch, March 2009) and Indonesia (KBs, January 2009).
31
Exchange Rate
35
40
45
50
55
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
P/US$
Daily Peso-US Dollar Rate
Changes in Selected Dollar Rates
Appr./Depr. (-)Year-to-date
30 Jun 09* 31 Mar 09**
Philippine peso -1.3 -1.7
Thai baht (onshore) 2.2 -2.1
Chinese yuan 0.0 -0.1
Malaysian ringgit -1.4 -4.9
South Korean won -1.4 -8.9
Singaporean dollar -1.1 -5.9New Taiwan dollar -1.1 -3.3
Indonesian rupiah 9.2 -4.1Japanese yen -5.2 -7.8
Indian Rupee 1.8 -4.0
Source: Bloomberg, Reuters and PDEX*As of 4:00 p.m ., 30 June 2009**As of 4:00 p.m., 31 March 2009
The peso depreciated slightly by 0.3 percent to average P47.88/US$1 in the second quarter of 2009 from P47.75/US$1 in the previous quarter.37 However, compared with the P43.61/US$1 average in the second quarter of 2008, the peso depreciated significantly by 8.9 percent. Despite the sustained growth of OF remittances and the easing of recessionary pressures in major economies during the review period, concerns over weaker domestic growth prospects, a widening fiscal deficit, possible credit downgrade,38 and political noise associated with the proposed constitutional amendments, dragged the peso down toward the end of the review quarter. In April 2009, the peso appreciated by 0.5 percent to average P48.22/US$1 from the previous month’s P48.46/US$1 average. Positive market sentiment continued in the first two weeks of April following reports of increased orders at US factories for cars, household appliances, and other durable goods in February. This development boosted market appetite for regional stocks as the outlook for export-driven Asian economies improved, buoying the peso. However, the market turned bearish on the peso towards the end of April as global equity markets weakened and the NG’s fiscal deficit widened to P119.7 billion.39 Moreover, the slower growth in OF remittances40 and higher dollar demand of business firms to service end-month requirements, contributed to the weakness of the peso. The peso strengthened in May on improved investor appetite for regional assets. Moreover, market sentiment in the domestic financial markets further improved on lower inflation in April of 4.8 percent from 6.4 percent in March and Fitch Ratings’ stable credit outlook for the Philippines. Robust OF remittances ahead of the school opening in June, coupled with a weaker demand for the US dollar provided additional support for the peso until the end of the month.
37 Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change. Figures
were based on reference rates. 38 As mentioned earlier, Fitch Ratings affirmed its rating and kept its outlook stable for Philippine debt. 39 The January -March fiscal defic it of the National Government reached P119.7 billion, higher than the programmed
ceiling of P110.1 billion for the same period. 40 The cumulative remittances in the firs t four months of 2009 amounted to US$5.5 billion , or an annual growth of 2.6
percent which was lower than the 14.5 percent growth recorded in the same period in 2008.
The peso weakens.
32
Despite the release of data reflecting the lower-than-expected GDP growth in the first quarter, the peso continued to appreciate in the f irst week of June due to the strong remittance f lows and the weakness of the dollar. However, the weakening of the dollar against major currencies was tempered by market expectations of a possible rate hike by the US Federal Reserve towards the end of the year.42 From the second week until the end of June, the peso weakened relatively due to market concerns on prospects of a wider f iscal deficit, weak economic growth, and political noise surrounding the proposal to amend the constitution. On a year-to-date basis, the peso weakened against the US dollar by 1.3 percent as it closed at P48.13/US$1 on 30 June 2009.43 Most Asian currencies also depreciated, led by the Japanese yen (5.2 percent), Korean won (1.4 percent), Malaysian ringgit (1.4 percent), and Singaporean dollar (1.1 percent). Meanwhile, the Indonesian rupiah, the Thai baht, and the Indian rupee appreciated on a year-to-date basis by 9.2 percent, 2.2 percent, and 1.8 percent, respectively.
42 Better-than-expected employment data as well as improving consumer demand and manufacturing sector
performance suggested that the US economy might be starting to recover, which could prompt the US Federal Reserve to end its monetary easing cycle.
43 Based on the last done deal in the afternoon
33
Peso volatility is slightly lower.
Volatility, as measured by the coefficient of variation of the daily average exchange rates, was slightly lower at 1.0 percent in the second quarter of 2009 relative to 1.3 percent in the previous quarter. The volatility of the peso was 0.7 percent in April and May but rose to 1.1 percent in June following the marked depreciation of the peso during the last two weeks of the month. On a real, trade-weighted basis, the peso gained some external price competitiveness in the second quarter of 2009 relative to the previous quarter against the basket of currencies of major trading partners (MTPs) and competitor countries.44 The real effective exchange rate (REER) index of the peso against the basket of currencies of MTPs and competitor countries in the broad and narrow series decreased quarter-on-quarter by 0.9 percent, 5.1 percent and 6.4 percent, respectively.45 The nominal depreciation of the peso against the dollar negated the effects of widening inflation differentials relative to those of the MTPs and competitor countries. Meanwhile, on a year-on-year basis, the peso lost some external price competitiveness against the competitor countries in the broad series but remained broadly unchanged against the narrow series in the second quarter of 2009. The REER index of the peso against the basket of competitor countries in the broad series increased by 1.5 percent due mainly to the widening of the inflation differential relative to countries in this basket. However, the peso gained some external price competitiveness against the MTPs during the same period as the REER index of the peso against this basket of currency decreased by 3.2 percent. This developed as the nominal depreciation of the peso more than offset the widening inflation differentials between the Philippines and the countries in the MTP basket.
44 The basket of the major trading partners is composed of the currencies of US, Japan, the Euro area and the United
Kingdom. The broad basket of competitor countries comprises the currencies of Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia and Hong Kong while the narrow basket is composed of the currencies of Indonesia, Malaysia and Thailand only.
45 The REER index represents the Nominal Effective Exchange Rate (NEER) index of the peso, adjusted for inflation rate differentials with the countries whose currencies comprise the NEER index basket. A decrease in the REER index indicates some gain in the external price competitiveness of the peso, while a s ignificant increase indicates the oppos ite. The NEER index, meanwhile, represents the weighted average exchange rate of the peso vis -à-vis a basket of fore ign currencies.
34
Domestic Liquidity and Credit Conditions
Domestic liquidity or M3 sustained its growth at 15.0 percent year-on-year as of end-May 2009, from 15.6 percent as of end-March 2009. The increase in net foreign assets (NFA) of depository corporations continued to drive M3 expansion, albeit at a slower pace of 19.8 percent in end-May from 21.7 percent in end-March which, in turn, can be traced to the sustained growth in the NFA position of the BSP as well as of banks at 15.7 percent and 42.5 percent, respectively. The NFA rose as the BSP continued to build up its international reserves, while banks reduced their foreign liabilities as they paid off maturing obligations. The growth in net domestic assets (NDA) also contributed to the expansion in domestic liquidity. NDA grew by 8.4 percent year-on-year as of end-May from 9.7 percent as of end-March as net domestic credits expanded by 18.3 percent from 16.0 percent in end-March. Growth in credits extended to the private sector remained strong at 18.2 percent from 18.0 percent as of end-March. Likewise, growth in credits extended to the public sector accelerated to 18.7 percent from 12.2 percent as of end-March. Year-on-year growth in reserve money, a narrower measure of monetary aggregates, increased to 7.2 percent as of end-May 2009 from 6.5 percent as of end-March 2009. 50 Meanwhile, outstanding loans of commercial banks including reverse repurchase agreements (RRPs) rose by 10.2 percent year-on-year in May, lower than the 17.5 percent and 18.9 percent year-on-year growths recorded in December 2008 and March 2009, respectively. Bank lending, net of banks’ RRP placements with the BSP, likewise rose to 17.3 percent, also lower compared to the 20.5 percent and 17.8 percent growths posted at end-December 2008 and at end-March 2009. Quarter-on-quarter, however, bank lending gross of RRPs declined by 2.8 percent; net of RRPs, it grew by 1.9 percent.
50 Reserve money (RM) is defined as the sum of currency issue net of cash in vaults of the BTr and banks’ reserve
balances with the BSP.
Domestic liquidity sustains strong growth. Bank lending continues to expand.
35
Banks’ SDA placements increase, while RRP placements decline. Credit standards standards and demand for credit remain basically unchanged.
Banks’ special deposit account (SDA) placements went up year-on-year by P138.1 billion to P584.9 billion as of end-June 2009 from P446.8 billion recorded during the same period last year. Of the total SDA placements, trust entities accounted for 85.4 percent while the remainder was accounted for by banks. Meanwhile, the total volume of banks’ placements with the BSP under the RRP window amounted to P274.9 billion during the same period, lower by P32.4 billion compared to a year earlier. Preliminary results of the BSP Senior Bank Loan Officers’ Survey indicated that bank credit standards and demand for credit remained basically unchanged for enterprises and households for Q2 2009 from Q1 2009. Results of the previous survey indicated that overall credit standards tightened somewhat (reported by more than half of respondents or 13 banks out of 23) in Q1 2009 relative to Q4 2008. In the latest survey, only about a fifth of respondents (4 banks out of 18) reported that their credit standards tightened somewhat.
36
National Government Fiscal Performance*
January- June 2009In billion pesos
January - June Growth(%)
2009 Q1-Q2
Program
% to Q1-Q2
Program2009 2008Su rplus/(Deficit) -153.4 -18.0 752.2 -155.1 98.9
Reven ues 545.7 570.0 -4.3 581.4 93.9
Expenditures 699.1 588.0 18.9 736.5 94.9
*Totals may not add up due to roundingSource: Bureau of the Treasury
The January-June fiscal deficit reached P153.4 billion in 2009, more than eight times higher than the P18.0 billion deficit in the comparable period last year. This represented 98.9 percent of the P155.1 billion program deficit for the f irst semester. Revenue collections declined by 4.3 percent to P545.7 billion in January-June 2009 compared to P570.0 billion for the same period last year. Of this amount, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) contributed P375.6 billion and P104.8 billion. Their collections dropped by 3.6 percent and 10.4 percent, respectively, compared to the levels in the same period last year. On the other hand, revenue collections from the BTr increased by 2.0 percent to P30.1 billion from P29.5 billion in the comparable period last year. Revenues from other offices went up by 4.5 percent to P35.2 billion. Meanwhile, the cumulative expenditures for the first six months of 2009 amounted to P699.1 billion, 18.9 percent higher than the disbursements in the comparable period in 2008. Excluding interest payments, total disbursements increased by 24 percent to P554.4 billion. Interest payments also rose by 2.7 percent to reach P144.7 billion.
III. FISCAL DEVELOPMENTS
NG fiscal deficit for the first semester of 2009 is lower than the programmed ceiling.
-
37
IV.EXTERNAL DEVELOPMENTS The most recent indicators from the JP Morgan’s Global Purchasing Managers’ Index (PMI) point to a deceleration in the pace of decline in global economic activity. US manufacturing activity fails to grow in June, but the overall economy grows for the second consecutive month.
The PMI indices for manufacturing and services suggested that world GDP will stabilize by Q2 2009. At 48.1 percent in June, up by 4.1 points from 44.0 percent in May, the JP Morgan Global All-Industry Output Index moved closer to the recovery level of 50.0 percent.53 However, the Global All-Industry Input Prices Index rose markedly to reach 49.6 percent in June. This is due to the rise in services sector costs despite the fast pace of decline in manufacturing input prices. Meanwhile, global employment continued to fall in June, with job losses reported in both the manufacturing and services sectors. In the US, the manufacturing PMI failed to grow in June at 44.8 percent, while the overall economy grew for the second time this year based on the Institute for Supply Management's latest report. While the manufacturing sector continued to contract at a slower rate during the month, there were signs of further improvement as seven out of 18 industries reported growth in June. The prices that manufacturers pay for raw materials and services, or the Input Prices Index, was unchanged from the levels in May, an indicator that the supply/demand balance may be improving. These trends may be showing signs of a slow recovery for the US manufacturing sector. Nevertheless, inventory overhang is expected to continue to act as a deadweight to overall output in Q2 2009. Meanwhile, nonfarm payroll employment continued to decline in June, and the unemployment rate remained at 9.5 percent. The number of unemployed persons (at 14.5 million in May) was broadly unchanged in June (at 14.7 million). Job losses from April to June 2009 averaged 436,000 per month, relatively lower compared to losses averaging 670,000 per month from November 2008 to March 2009.54 However, job losses continued to be widespread across major industries in June.
53 A PMI reading above 50 percent indicates that manufacturing activity is generally expanding; below 50 percent indicates that it is generally contracting. For the US, an overall PMI in excess of the 41.2 percent threshold, over a period of time, generally indicates an expansion of the overall economy. Therefore, a PMI lower than the threshold indicates a contraction in the overall economy. Source of all PMI reports: http://ntc-research.com 54 The Employment Situation: June 2009, US Bureau o f Labor Statistics , http://www.bls .gov/cps/
38
The European Union’s (EU) first quarter GDP growth is more negative than previously anticipated. Japanese economic conditions continue to deteriorate, but there are some signs that the pace of decline is decelerating.
As regards price developments, the consumer price index for all urban consumers (CPI urban) increased by 0.1 percent month-on-month in June. This index has fallen 1.3 percent over the last 12 months, due primarily to the drop in energy prices, reflecting very strong base effects from lower commodity prices. Following the deceleration in price pressures and some improvements seen in the labor market, indicators for consumer confidence from the Conference Board and from the University of Michigan likewise improved in May. However, while the latter posted a further improvement, the former declined in June. The rate of decline in the EU GDP for the f irst quarter of 2009 was even larger than earlier anticipated at 4.8 percent year-on-year. While EU inflation rate went down to zero percent in May 2009, unemployment has worsened, rising to 9.2 percent in April from 8.9 percent in March. According to the IMF, the lack of coordinated and aggressive clean-up plan for EU banks is hampering economic recovery in the 16 member-countries. The IMF added that despite the laudable bank-rescue launched by the ECB and the discretionary fiscal stimulus packages implemented by governments of EU member countries, there is a need for the ECB and policy makers to take a more proactive stance in dealing with the financial sector vulnerabilities, as banking sector weakness across Europe is impeding economic recovery. The organization encouraged European authorities to follow more stringent US-style stress-testing for banks. Q1 2009 GDP in Japan fell further by 8.8 percent year-on-year from a decline of 4.3 percent in Q4 2008. On a quarter-on-quarter basis, GDP fell by 3.8 percent, the biggest contraction on record and marked the fourth consecutive quarter of negative growth. The weak economic performance in the f irst quarter was due mainly to the fall in exports, private investment, housing investment, and consumption. Owing to falling energy prices and increasing economic slack, overall consumer prices continued to fall, with inflation at -1.1 percent year-on-year in May from -0.1 percent in April.
39
Consumer prices excluding fresh food, the central bank’s key gauge of inflation, fell for the second month in April to -0.1 percent. Likewise, producer prices fell most steeply in May since 1987, adding to signs that deflation may take root. Some economists say the Japanese economy has already slipped into deflation, as postponed investments and a weak global demand may cause prices to continue to fall. The collapse in global demand has forced Japanese manufacturers to cut production by more than a third from last year’s peak. Expectations of lower prices ahead may prompt companies and consumers to delay purchases. Companies expressed reluctance to start spending again as plunging profits forced them to cut back on workers and salaries, dampening the prospect of a rebound in the world’s second largest economy.58 Nonetheless, reports released in May suggested that GDP may grow in the second quarter, after plummeting at a record pace in the first three months of the year. Japan’s manufacturers may get a boost from revived demand in China, where the Chinese government is spending $586 billion on roads, hospitals, and low-cost housing.59
58 Clenfield, Jason and Otsuma, Mayumi, Japan Machine Orders, Producer Prices Fall as Firms Cut Costs, Bloomberg, 10 June 2009 59 China’s Consumer Prices Dec line 1.4%, Bloomberg News, 10 June 2009
40
Concerns of a possible deflation in China looms, but the central bank is helping boost credit to aid growth.
China’s consumer prices fell for the fourth consecutive month, making it easier for the government to keep interest rates low and boost spending to revive the world’s third largest economy. Prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April. Producer prices fell a record 7.2 percent. Home prices also fell 0.6 percent in May from a year earlier.
Inflation may return, however, as the economy recovers and commodity prices climb from last year’s lows. The central bank triggered a surge in credit this year by removing restrictions on growth in new loans and keeping the one-year lending rate at a four-year low of 5.3 percent. While falling prices may help the economy by reducing costs for businesses and encouraging consumers to spend, continued deflation may further dampen demand, as people delay purchases, hoping for better deals in the future.64 However, the recent energy price increases, which may help end concerns on deflation and some global economic indicators, generally point to improving fundamentals.
The recent substantial easing in financial conditions and the policymakers’ bias in keeping monetary conditions relaxed will help boost China’s investment activity in both government-influenced as well as private sector investments. In addition, China’s impact on the global economic recovery is growing as evidenced by the substantial improvements in exports to China by developed and emerging economies.
64 Ibid.
41
V. MONETARY POLICY DEVELOPMENTS
Risks to inflation are tilted to the downside.
4
5
6
7
8
9
10
11
2002 2003 2004 2005 2006 2007 2008 2009
Overnight RRP Rate Overnight RP Rate
BSP Policy Interest RatesIn percent
During the policy meetings on 16 April and 28 May 2009, the BSP implemented its fourth and f if th rate cuts since December 2008, respectively, representing a cumulative reduction of 175 basis points in its key policy rates. The RRP rate at the end of Q2 at 4.25 percent was the lowest since 15 May 1992. As of April 2009, baseline forecasts indicated a lower inflation path over the policy horizon, with average inflation expected to settle within the target ranges in 2009 and 2010. The Monetary Board considered that, on balance, the risks to inflation were skewed to the downside given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices. Upside risks remained, however, and these were linked to the volatility in exchange rates and the prices of oil and some food products, as well as increases in utility rates. During the April policy meeting, an accommodative monetary policy was deemed effective in supporting demand to minimize the adverse effects from weakening economic and f inancial conditions in various ways. First, lower policy rates were expected to help reduce credit spreads, thereby helping promote credit to households and corporates amid a weakened f inancial sector. Second, bringing down the short-term market interest rate could help improve the profitability of lending activities by offsetting the negative impact of deleveraging. Third, in an environment where the availability of external financing has been significantly reduced, bringing down the cost of borrowing would help promote easier and wider access to domestic sources of f inancing.
The Monetary Board reduces the BSP’s key policy interest rates by another 50 basis points.
42
Lower inflation forecasts continue as weak domestic and global demand dampen price pressures. The major challenge is to help contain the risks associated with the global slowdown this year and keep the economy on a steady course until recovery is in sight.
During the May policy meeting, baseline forecasts continued to indicate that average inflation was likely to remain within the target ranges in 2009 and 2010. In addition, the downside risks to the inflation outlook continued to dominate as the decline in domestic and global demand dampened inflationary pressures. Inflation expectations also remained well-anchored. Nevertheless, the rebound in global oil prices and volatility in the foreign exchange market remained as possible sources of upside risks to future inflation. The global economic slowdown was expected to hit the country through the trade, remittance, investment, financial market, and investor confidence channels. As of May, remittances were holding up. The impact on the trade sector, however, had been more pronounced, as reflected in the precipitous drop in exports. Maintaining an expansionary policy stance was seen to support market confidence and spending decisions of households and businesses as economic agents were reassured that risks to macro-stability were being addressed decisively. The BSP observed as well that while there were encouraging signs that the global slowdown may be bottoming out, it was too early to conclude that global economic conditions were clearly moving towards normalcy. There were still large imbalances in the global financial markets which could prolong the adjustment process. Given the lower-than-expected GDP growth of 0.4 percent for the first quarter of 2009, the decision to lower policy rates in May was aimed at providing additional boost to spending and investment in the economy and supporting market confidence in an environment of subdued price pressures. Going forward, the BSP remains prepared to move quickly to address potential risks to price stability while continuing to support domestic activity consistent with a non-inflationary path.
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VI. INFLATION OUTLOOK Private Sector Economists’ Inflation Forecasts
4.1 4.2
6.1
6.5
4.5
4.0
3.5
4.84.9
4.84.64.9
4.8
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009
2009
2010
2011
MEAN INFLATION FORECASTS BY PRIVATE ECONOMISTS/ANALYSTSIn percent
57.7
26.6
36.9
0.0
10.0
20.0
30.0
40.0
50.0
60.0
<1 1.0-2.0 2.1-3.0 3.1-4.0 4.1-5.0 5.1-6.0 6.1-7.0 7.1-8.0 8.1-9.0 9.1-10.0 10.1-11 11.1-12 >12
2009 2010 2011
Probability Distribution For Analysts' Inflation Forecasts* 2009 -2011
*Probability distributions were averages of those provided by 11 respondents. (Source: BSP Survey)
Private Sector Forecasts for Inflation Annual Percent Change
2010 2011Q3 Q4 Full year Full year Full year
ATR Kim Eng Securities 1.4 3.3 3.7 4.2 4.0Banco de Oro 2.2 4.0 4.0 4.25 4.7Bank of the Philippine Islands 0.7 2.6 3.3 4.5-5.5 -Deutsche Bank Manila 1.4 3.4 3.7 6.0 6.0Economist Intelligence Unit 0 2.0 2.9 3.6 4.2HSBC 1.0 1.9 3.5 4.8 -IDEA 0.8 1.1 3.0 5.6 4.7ING Bank 1.8 2.1 3.6 4.0 4.9Metrobank 0.29 1.86 3.1 - -PEP/Bank of America-Meryll Lynch 1.0 3.5 3.6 5.0 -Royal Bank of Scotland 1.1 2.9 3.5 5.2 5.0RCBC 0.8-1.5 3.6-5.1 3.6-4.2 5.5-7.0 4.5-6.0UBS 0.7 2.6 3.3 3.8 4.5
Median Forecast 1.0 2.6 3.5 4.9 4.7Mean Forecast 1.0 2.7 3.5 4.8 4.8High 2.2 4.4 4.0 6.3 6.0Low 0.0 1.1 2.9 3.6 4.0Number of observations 13 13 13 12 9
Memo Item:Government Target 3.5±1.0 4.5±1.0
2009
The Asia Pacific Consensus (AP) forecasts show easing inflation expectations.
Based on the results of the BSP’s survey for June 2009, inflation is expected to be within the target ranges for both 2009 and 2010. The mean inflation forecast for 2009 stood at 3.5 percent, lower than the 4.0 percent forecast in the survey three months ago. Forecasts for Q3 2009 and Q4 2009 are 1.0 percent (from 1.7 percent last quarter) and 2.7 percent, respectively. For 2010, the average inflation forecast was also lower at 4.8 percent (from 4.9 percent a quarter ago). Inflationary pressures are expected to be dampened by subdued domestic demand, stable food supply, and soft labor market conditions. Base effects from high inflation rates in 2008 will also contribute to lower inflation in 2009. Some analysts noted, however, that the peso depreciation and the recent volatility in oil prices could temper any further downward pressure on inflation. A rebound in oil demand, if the global economy starts recovering, may exert upward pressure on prices. For 2011, the survey showed a mean inflation forecast of 4.8 percent (from 4.9 percent in Q1). Meanwhile, based on the probability distribution provided by 11 (out of 13) respondents, there is a 57.7 percent chance that average inflation for 2009 could be within 3.1-4.0 percent, well within the 3.5 ± 1.0 percent target for the year. The AP Consensus Forecasts for Philippine inflation in 2009 also showed easing expectations in April, May, and June 2009.
The BSP’s survey of private economists shows inflation will remain within the target ranges for 2009 and 2010.
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Latest results of BES and CES indicate broadly unchanged inflation expectations.
Meanwhile, the results of the Q2 2009 BES indicated broadly unchanged expectations as the proportion of respondents that anticipated inflation to move up in Q2 2009 increased only marginally. Relative to the Q1 2009 survey, a slightly bigger majority of respondents in Q2 (from a diffusion index of 14.0 percent to 14.1 percent) expected inflation to move up in Q2 2009. Results of the latest CES for Q2 2009 likewise showed a broadly unchanged inflation expectation for the next 12 months: from 8.6 percent in the previous survey to 8.7 percent. Higher inflation is expected in transportation (from 8.8 percent to 11.5 percent), light (from 8.4 percent to 10.7 percent), and clothing (from 5.7 percent to 6.2 percent). However, consumers expect rice inflation to decrease (from 12.1 percent to 11.0 percent) as well as those of house rentals (from 6.4 percent to 6.1 percent) and fruits and vegetables (from 12.5 percent to 11.7 percent). In terms of the diffusion index, a bigger majority of households nationwide expected increases in the prices of goods and services over the next 12 months: from 46.2 percent in Q1 2009 to 49.3 percent in Q2 2009.
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BSP Inflation Forecasts The BSP's latest baseline forecasts indicate inflation would settle at around the middle of the 2009 inflation target range and at the lower bound of the 2010 inflation target range. .
The latest baseline forecasts for 2009 indicated a possible bottoming out of inflation in Q3 when base effects from last year's peaks begin to wane, and a gradual increase in inflation in Q4 as economic growth picks up. Compared to 2009, inflation in 2010 would be broadly stable but settle at a higher average, with domestic and world economic activity expected to recover, consequently leading to a modest rise in global oil demand and possibly higher prices. Base effects from the lower projected inflation path in 2009 would also contribute to higher inflation in 2010. Relative to the previous report, the inflation path for 2009 and 2010 has shifted downwards due to the low but within-projected inflation turnouts in the second quarter of 2009 and the downward revision in real GDP growth projections. Based on data as of the second week of July, inf lation would settle at around the middle of the 3.5 percent +/- 1.0 percentage point target for 2009 and at the lower bound of the 4.5 percent +/- 1.0 percentage point target for 2010. Demand Conditions Relative to the previous report, domestic demand conditions have weakened considerably, led by the sharp deceleration in private consumption and the decline in exports and gross capital formation, as evident in the Q1 2009 National Income Accounts (NIA) data. Other indicators suggested that domestic demand continued to remain weak in Q2 2009 as the real economy felt the impact of the global financial crisis. Property vacancy rates increased, rental values declined, total vehicle and energy sales deteriorated, trade activity slackened, and manufacturing output declined. In addition, consumer confidence turned more bearish quarter-on-quarter in Q2 2009. Meanwhile, the unemployment rate eased, while business confidence improved.
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Latest projections indicate improving prospects for global and domestic cereal production. World crude oil production is expected to recover in 2010. Output gap estimate turns negative, indicating a slack in capacity utilization.
Supply Conditions The FAO expects world cereal production to remain favorable despite a projected 3.0 percent decline in 2009, with output estimated to be the second highest after last year's record. Global cereal supply would be sufficient to meet forecasted demand due to a large carryover of stocks from the previous season. In the domestic market, prospects for cereal production improved, with the BAS forecasting a 2.4 percent and 2.3 percent year-on-year growth in palay and corn supply for July-September 2009. Given the favorable outlook for third quarter production, the BAS expects a 3.2 percent expansion in palay output and a slight 0.5 percent contraction in corn output for January-September 2009. In the oil market, the latest assessments on global crude oil production by both the Energy Information Administration (EIA) and the International Energy Agency (IEA) indicate a year-on-year decline in 2009 and an increase in 2010. Meanwhile, OPEC members agreed to maintain current production quotas during their 28 May 2009 meeting. The balance of demand and supply conditions, as captured by the output gap (or the difference between actual and potential output) provides an indication of potential inflationary pressures in the near term. Inflation tends to rise (fall) when demand for goods and services exert pressure on the economy’s ability to produce goods and services, i.e., when the output gap is positive (negative). Based on revised GDP data, preliminary estimates yielded an output gap of -0.11 percent in Q1 2009. By contrast, the revised output gap estimate for Q4 2008 is 1.6 percent. The negative output gap for Q1 2009 marked the f irst time since Q2 2005 that actual output fell below the estimated potential output.
47
Risks from high inflation expectations have abated, as reflected in the decline in various indices of expected inflation.
Inflation Expectations Lower inflation expectations for 2009 and 2010 were evident in the results of the latest BSP survey among private sector analysts and the Asia Pacific Consensus Forecasts survey as of June 2009. Consistent with these survey results, secondary market yields on government securities declined in Q2 2009, reflecting investors’ expectations of reduced inflationary pressures. Meanwhile, the results of the CES and BES for Q2 2009 indicated broadly unchanged expectations as seen from the marginal increases in consumers’ expected inflation rate for the next 12 months and the business expectations indices for inflation for the current and next quarters (i.e., Q2 and Q3 2009). The decline in most measures of inf lation expectations can be attributed to subdued domestic and external demand conditions, stable commodity supply, and the more favorable inflation outlook. The possibility of second-round effects have also subsided and this would contribute to cementing inflation expectations.
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Key assumptions used to generate the BSP’s inflation forecasts The BSP's baseline inflation forecasts as of the second week of July 2009 showed a deceleration in inflation until Q3 2009 and a moderate uptrend thereafter but still within the 2009 and 2010 inflation target ranges. The forecasts are generated from the BSP’s single equation model (SEM) and the multi-equation model (MEM), and are based on the following assumptions: (a) endogenously-determined real GDP growth in the BSP multi-equation model; (b) a budget deficit of 3.2 percent of GDP for 2009 and 2.5 percent for 2010; (c) headline overnight RRP rate at 4.25 percent from June 2009 to December 2010; (d) 91-day T-bill rate which is consistent with the DBCC-approved macroeconomic assumptions and the Dubai crude oil price assumption which is consistent with the futures price of oil in the international market; (e) annual increase in nominal wage of 6.1-6.5 percent in 2009 and 2010; and (f) endogenously-determined exchange rate in the BSP’s multi-equation model through the purchasing power parity and interest rate parity relationships.
49
Risks to the Inflation Outlook The latest inflation fan chart shows a lower central projection and a risk profile slightly tilted to the downside.
The risks to the inflation outlook over the policy horizon may be presented graphically through a fan chart. The fan chart depicts the probability of different inflation outcomes based on the central projection (corresponding to the baseline forecast of the BSP) and the risks surrounding the inflation outlook. The central projection of the current fan chart indicates a possible bottoming out of inflation in Q3 2009, a gradual rise in the following quarter, and a broadly stable inflation in 2010. Based on data as of the second week of July 2009, annual average inflation is likely to settle around the middle of the 3.5 percent +/- 1.0 percentage point target range for 2009 and at the lower bound of the 4.5 percent +/- 1.0 percentage point target range for 2010. This outlook is subject to some uncertainty as depicted by the widening bands of the fan chart over time. Risks to the outlook for inf lation are slightly skewed to the downside, as shown by the moderately wider bands below the central projection than above it. The key downside risks to the inflation outlook are a further weakening of domestic demand conditions and a slower-than-expected global economic recovery, which could dampen inflation expectations and imported inflation. Meanwhile, upside risks consist of volatilities in the oil market, adverse weather conditions, and possible increases in electricity rates. An untimely unwinding of large stimulus programs could also lead to higher inflation in the medium term.
50
Latest Inflation Profile
The fan chart shows the probability of various outcomes for inflation over the forecast horizon. The darkest band depicts the central projection, which corresponds to the BSP’s baseline inflation forecast. I t covers 25 percent of the probability. Each successive pair of bands is drawn to cover a further 25 percent of probability, until 75 percent of the probability distribution is covered. The bands widen (i.e. “fan out”) as the time frame is extended, indicating increasing uncertainty about outcomes. The band in wire mesh depicts the inflation profile as of Q1 2009.
51
Downside risks to the inflation outlook consist of a later-than-expected recovery in global economic activity and its impact on commodity demand, higher-than-projected growth in oil and food supply, and potential decreases in utility rates. .
In the latest World Economic Outlook (WEO) report as of 8 July 2009, the IMF revised slightly downwards its global GDP growth projection for 2009 from -1.3 percent to -1.4 percent and adjusted upwards its 2010 growth forecast from 1.9 percent to 2.5 percent. The IMF stated that the world economy is stabilizing, albeit unevenly. The global recession has yet to end and the recovery is likely to be sluggish.69 The balance of risks to the world economic outlook remains tilted to the downside but the probability of extreme outcomes has declined. Among advanced economies, the key downside risks are concerns over public debt sustainability and rising unemployment and a further deterioration in market confidence, which could dampen asset prices anew. The IMF added that some emerging economies remain vulnerable to further f inancial stress which could also feed back on advanced economies. Given prospects of a sluggish recovery in the global economy, surges in world commodity prices over the policy horizon appear unlikely. While signs of stabilization have supported world oil prices in recent months and prompted upward revisions in global oil consumption forecasts for 2009-2010,70 the latest projections for world oil demand still showed a decline this year relative to 2008 and a modest growth in 2010.71 According to the EIA, high inventory levels and increased surplus production capacity within the OPEC could also moderate price increases, especially if the global economic recovery is delayed or becomes weaker than expected. There could also be downward pressures on inflation from reductions in utility rates due to the proposed cut in the system loss caps for power distribution utilities and from lower water tariffs in Q3 2009 due to the approval of foreign currency differential adjustments (FCDA).
69 International Monetary Fund, World Economic Outlook Update, July 2009, available at http://www.imf.org 70 In June 2009, the EIA revised upwards its projections for global oil consumption for 2009 and 2010 by 0.01 million barrels per day (mbl/d) and 0.02 mbl/d, respectively. Source: EIA, Short-Term Energy Outlook, 9 June 2009, available at http://www.eia.doe.gov 71 The OPEC likewise forecasts global oil consumption in 2009 to be about 2 percent lower than the 2008 level. Source: OPEC, Oil Marke t Report, June 2009, available at http://www.opec.orgIn.
52
On the other hand, an earlier rebound in economic activity, constraints to global oil supply, adverse weather conditions, increases in electricity rates, and an untimely unwinding of large stimulus programs could raise inflation above the central projection.
Upside risks to the inflation outlook remain. The IMF noted that a larger-than-expected drop in risk aversion and stronger domestic demand in major emerging economies could bring global GDP growth higher than what baseline forecasts show. Should world economic activity rebound earlier and stronger than expected, commodity prices could also take on a higher path than currently projected. Lower-than-expected supply from both OPEC and non-OPEC producers—the former possibly from stricter compliance to or further cuts in quotas—could also support world oil prices. Variations in weather conditions also raise the uncertainty about future consumer prices. Both statistical and dynamical models suggest a probable occurrence of a weak El Niño condition in the coming months according to PAGASA. The increasing sea surface temperatures (SST) across most parts of the equatorial Pacific Ocean points to a transition from El Niño Southern Oscillation (ENSO)-neutral to El Niño conditions.78 There could also be some upside pressures on electricity rates from NPC's petition to recover foreign exchange rate fluctuation costs under the 13th GRAM and the 12th ICERA, and from Meralco’s pending petition to retrieve under-recoveries from lifeline and inter-class cross subsidies. Other upside risks relate to the expectations that large stimulus programs could lead to higher inflation in the medium-term if not unwound in a timely fashion as the global economy recovers and as commodity prices, particularly oil, rebound amid tentative signs of stabilization.
78 Philippine Atmospheric, Geophysical, and Astronomical Services Administration, Monthly Weather Situation and Outlook, available at h ttp://www.pagasa.dost.gov.ph.
61
VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE
The continued favorable inflation outlook provides room for policy flexibility. Domestic demand remains weak. Monetary policy needs to remain focused on reinforcing confidence among banks, companies, and households.
The latest baseline forecasts continued to reflect a lower inflation path over the policy horizon, with average inflation expected to settle at around the middle of the target range for 2009 and at the lower bound of the target range for 2010. On balance, downside pressures on prices dominated and were due mainly to expectations of a marked deceleration in global economic activity, which was expected to continue to dampen imported inflation and inflation expectations, and weaker domestic demand conditions. Upside risks consisted of those relating to the expectations that large stimulus programs undertaken by the advanced economies could exert inf lationary pressures in the medium term, and the possibility that global commodity prices, particularly oil, could rebound amid tentative signs of stabilization. However, with recovery expected to be gradual as global deleveraging continues, prospects for a rapid rebound in commodity prices seem remote for the near term. Economic growth in the f irst quarter showed a sharper-than-expected slowdown, reflecting negative contributions from exports and gross capital formation and the significantly lower contribution from PCE. In addition, more recent information also continued to suggest weak domestic economic activity through the second quarter of 2009. Given the nature of the current macroeconomic environment, and more importantly the subdued inflation outlook, there could be some scope for monetary policy to balance any short-run trade-off between inflation and output variability. The global economy faces a period of weak demand. While there have been tentative signs of stabilization, the world economy remains under a possibly prolonged period of deleveraging. Moreover, the gradual recovery expected in 2010 may turn out to be muted, reflecting the lingering effects of the negative feedback between a strained financial and economic environment, the lags in the impact
53
62
Monetary policy works in tandem with fiscal policy to stimulate the economy. Sound and credible monetary policy action is an important factor in building market confidence.
of policy, and the expected slow recovery of private demand owing to substantial negative wealth effects. Therefore, confidence could be slow to return, and the rebalancing of global demand could take some time. Moreover, across the world, households have delayed their purchases and firms have cut down their expenses, building precautionary savings amid economic uncertainty. The challenge is for the f inancial system to channel these savings into investments that would increase the productive capacity of the economy. The BSP supports government actions to stimulate the economy, with a medium-term commitment toward fiscal consolidation. To anchor confidence, the rise in the f iscal deficit should be counterbalanced by a strong commitment to medium-term fiscal discipline. With nominal policy interest rates still far from the zero bound, the BSP still has considerable f lexibility in its policy actions. The decision to provide additional monetary stimulus will be carefully considered, taking into account the liquidity that has already been injected in the system, as well as the lags in monetary policy. To date, the measures undertaken by the BSP are fully consistent with the inflation targeting framework, and its primary objective of maintaining price stability provides the context and limits to its actions. [On 9 July 2009, the Monetary Board reduced the RRP and RP rates by 25 basis points to 4.0 and 6.0 percent, respectively. Given the continued benign inflation outlook, the Monetary Board believed that there was room for further easing in the monetary policy stance, which should also provide support to f inancial markets and the real economy.]
54
The BSP Inflation Report is published every quarter by the Bangko Sentral ng Pilipinas. The report is available as a complete document in pdf format, together with other general information about inflation targeting and the monetary policy of the BSP, on the BSP’s website:
www.bsp.gov.ph/monetary/inflation.asp If you wish to receive an electronic copy of the latest BSP Inflation Report, please send an e-mail to [email protected]. The BSP also welcomes feedback from readers on the contents of the Inflation Report as well as suggestions on how to improve the presentation. Please send comments and suggestions to the following addresses:
By post: BSP Inflation Report
c/o Department of Economic Research Bangko Sentral ng Pilipinas
A. Mabini Street, Malate, Manila Philippines 1004
By e-mail: [email protected]
1 2008 31-Jan-08 5.00 7.00
2 13-Mar-08 5.00 7.00
3 24-Apr-08 5.00 7.00
4 05-Jun-08 5.25 7.25
5 17-Jul-08 5.75 7.75
6 28-Aug-08 6.00 8.00
7 06-Oct-08 6.00 8.00
Number of Changes for
the YearLEVELS
RRP OVERNIGHT
BSP KEY POLICY RATES, 2008-2009
EFFECTIVITY DATE RP OVERNIGHT
Monetary Policy Decision
The Monetary Board increased by 25 basis points the BSP’s keypolicy interest rates to 6.0 percent for the overnight borrowing orreverse repurchase (RRP) facility and 8.0 percent for the overnightlending or repurchase (RP) facility. The interest rates on term RRPs,RPs, and SDAs were also increased accordingly. The MonetaryBoard noted that the impetus to tighten the monetary policy stanceremained present as latest forecasts continued to show above-targetinflation for 2009 as well as 2008.
The Monetary Board decided to reduce by 25 basis points the BSP’skey policy interest rates to 5 percent for the overnight borrowing orreverse repurchase (RRP) facility and 7 percent for the overnightlending or repurchase (RP) facility. The interest rates on term RRPs,RPs, and special deposit accounts were also reduced accordingly. Inits assessment of macroeconomic conditions, the Monetary Boardnoted that the latest inflation forecasts indicated that inflation wouldfall within the 4.0 percent ± 1 percentage point target range in 2008and the 3.5 ± 1 percentage point target range in 2009.
The Monetary Board kept the BSP’s key policy interest rates at 6.0percent for the overnight borrowing or reverse repurchase (RRP)facility and 8.0 percent for the overnight lending or repurchase (RP)facility. The interest rates on term RRPs and RPs were also leftunchanged. The Monetary Board approved on 17 October the openingof a US dollar repurchase agreement facility to augment dollarliquidity in the market and ensure availability of credit for imports andother qualified funding needs. The measure complemented existingBSP standing facilities such as the repurchase (RP) facility, therediscounting window, and the emergency loan facility.
The Monetary Board decided to increase by 50 basis points the BSP’skey policy interest rates to 5.75 percent for the overnight borrowing orreverse repurchase (RRP) facility and 7.75 percent for the overnightlending or repurchase (RP) facility. The interest rates on term RRPs,RPs, and SDAs were also increased accordingly. The BSP'sbaseline forecasts showed the risk of inflation exceeding the inflationtargets for 2008 and 2009, and for this reason, authorities believedthat more decisive monetary action was necessary.
The Monetary Board decided to increase by 25 basis points the BSP’skey policy interest rates to 5.25 percent for the overnight borrowing orreverse repurchase (RRP) facility and 7.25 percent for the overnightlending or repurchase (RP) facility. The interest rates on term RRPs,RPs, and SDAs were also increased accordingly. In its assessment,the Monetary Board noted that emerging baseline forecasts, whichreflected more recent data on inflation and output, indicated a likelybreach of the inflation target for 2008.
The Monetary Board decided to keep the BSP’s key policy interestrates at 5 percent for the overnight borrowing or reverse repurchase(RRP) facility and 7 percent for the overnight lending or repurchase(RP) facility. The interest rates on term RRPs and RPs were also leftunchanged
The Monetary Board decided to keep the BSP’s key policy interestrates at 5 percent for the overnight borrowing or reverse repurchase(RRP) facility and 7 percent for the overnight lending or repurchase(RP) facility. The interest rates on term RRPs and RPs were also leftunchanged.The Monetary Board also decided to implementimmediately the following refinements in the Special Deposit Account(SDA) facility: (1) the closure of existing windows for the two-, three-,and six-month tenors; and (2) the reduction of the interest rates on theremaining tenors.
8 20-Nov-08 6.00 8.00
9 18-Dec-08 5.50 7.50
1 2009 29-Jan-09 5.00 7.00
2 05-Mar-09 4.75 6.75
3 16-Apr-09 4.50 6.50
4 28-May-09 4.25 6.25
The Monetary Board reduced the BSP’s key policy interest rates byanother 25 basis points to 4.5 percent for the overnight borrowing orreverse repurchase (RRP) facility and 6.5 percent for the overnightlending or repurchase (RP) facility. Meanwhile, the interest rates onterm RRPs, RPs, and special deposit accounts (SDAs) were alsoreduced accordingly. The BSP considered the latest baselineforecasts which indicated a lower inflation path over the policyhorizon, with average inflation expected to settle within the targetranges in 2009 and 2010. In addition, the Monetary Boardconsidered that, on balance, the risks to inflation are skewed to thedownside given expectations of weaker global and domesticdemand conditions and a low probability of a significant near-termrecovery in commodity prices
The Monetary Board reduced the BSP’s key policy interest rates byanother 25 basis points to 4.25 percent for the overnight borrowingor reverse repurchase (RRP) facility and 6.25 percent for theovernight lending or repurchase (RP) facility. This RRP rate is thelowest since 15 May 1992. The interest rates on term RRPs, RPs,and special deposit accounts (SDAs) were also reducedaccordingly. This decision was based on the latest baselineforecasts which indicated that average inflation is expected toremain within the target ranges in 2009 and 2010. In addition, theMonetary Board considered that, on balance, the downside risks tothe inflation outlook continue to dominate as the decline in domesticand global demand has dampened inflationary pressures.
The Monetary Board kept the BSP’s key policy interest rates at 6.0percent for the overnight borrowing or reverse repurchase (RRP)facility and 8.0 percent for the overnight lending or repurchase (RP)facility. The interest rates on term RRPs and RPs were also leftunchanged. The Monetary Board approved on 6 November thereduction of the regular reserve requirement on bank deposits anddeposit substitutes by two percentage points effective 14November. The Board also increased the BSP budget for the pesorediscounting facility from P20 billion to P40 billion effectiveimmediately. The two measures were aimed at preemptivelyensuring the proper functioning of the interbank market andguarding against a possible liquidity or credit tightness arising fromthe global rise in risk aversion.
The Monetary Board reduced the BSP’s key policy interest rates to5.5 percent for the overnight borrowing or reverse repurchase (RRP)facility and 7.5 percent for the overnight lending or repurchase (RP)facility. The Monetary Board based its decision on the latestbaseline forecasts which reflected a decelerating inflation path overthe policy horizon, supported by the downward shift in the balanceof risks, following the easing of commodity prices, the moderation ininflation expectations, and the expected slowdown in economicactivity.
The Monetary Board reduced the BSP’s key policy interest rates by50 basis points to 5 percent for the overnight borrowing or reverserepurchase (RRP) facility and 7 percent for the overnight lending orrepurchase (RP) facility. The interest rates on term RRPs, RPs, andspecial deposit accounts (SDAs) were also adjusted accordingly.The Monetary Board based its decision on the latest inflationoutlook which shows inflation falling within the target range for 2009and 2010.
The Monetary Board reduced the BSP’s key policy interest rates by25 basis points to 4.75 percent for the overnight borrowing orreverse repurchase (RRP) facility and 6.75 percent for the overnightlending or repurchase (RP) facility. The interest rates on termRRPs, RPs, and special deposit accounts (SDAs) were alsoreduced accordingly. In its assessment of macroeconomicconditions, the Board noted that the latest baseline inflationforecasts continue to indicate within-target inflation in 2009 and2010 based on the latest data on, among others, oil prices, demandindicators, and inflation readings. In addition, inflation expectationsremain well anchored.
Number of Changes for
the Year
BSP KEY POLICY RATES, 2008-2009
EFFECTIVITY DATELEVELS
RRP OVERNIGHT
RP OVERNIGHT
Monetary Policy Decision
