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MPSS Form No. 03-012 * Version 0 * 06 March 2015 File/Ref. No.
MPRG-100715-03
i
FOREWORD
he primary objective of monetary policy is to promote a low and stable rate
of inflation conducive to a balanced and sustainable economic growth. The
adoption in January 2002 of the inflation targeting framework for monetary policy
was aimed at helping to fulfill this objective.
One of the key features of inflation targeting is greater transparency, which
means greater disclosure and communication by the BSP of its policy actions and
decisions. This Inflation Report is published by the BSP as part of its transparency
mechanisms under inflation targeting. The objectives of this Inflation Report are:
(i) to identify the risks to price stability and discuss their implications for monetary
policy; and (ii) to document the economic analysis behind the formulation of
monetary policy and convey to the public the overall thinking behind the BSP’s
decisions on monetary policy. The broad aim is to make monetary policy easier for
the public to understand and enable them to better monitor the BSP’s commitment
to the inflation target, thereby helping both in anchoring inflation expectations and
encouraging informed debate on monetary policy issues.
The government’s target for annual headline inflation under the inflation
targeting framework has been set at 3.0 percent ± 1.0 percentage point (ppt) for
2015-2018 by the Development Budget Coordination Committee (DBCC). This is
consistent with the desired disinflation path over the medium term, favorable
trends in the structure of inflation, and expected higher capacity of the economy for
growth under a low inflation environment.
The report is published on a quarterly basis, presenting a survey of the
various factors affecting inflation. These include recent price and cost
developments, inflation expectations, prospects for aggregate demand and output,
labor market conditions, monetary and financial market conditions, fiscal
developments, and the international environment. An entire section is devoted to a
discussion of monetary policy developments in the most recent quarter, while a
separate section provides a comprehensive analysis of the BSP’s view of the inflation
outlook for the policy horizon.
The Monetary Board approved this Inflation Report at its meeting on
15 October 2015.
AMANDO M. TETANGCO, JR.
Governor
23 October 2015
T
ii
List of Acronyms, Abbreviations, and Symbols
ABT
AL
Alcoholic Beverages and Tobacco
Auto Loans
BES
BGC
BIR
Business Expectations Survey
Bonifacio Global City
Bureau of Internal Revenue
BOC Bureau of Customs
BTr Bureau of the Treasury
CAMPI Chamber of Automotive Manufacturers of the Philippines, Inc.
CAR Capital Adequacy Ratio
CBD Central Business District
CES Consumer Expectations Survey
CDS Credit Default Swaps
CI
COV
Confidence Index
Coefficient of Variation
CPI
DBCC
DOE
DI
DOF
EIA
Consumer Price Index
Development Budget Coordination Committee
Department of Energy
Diffusion Index
Department of Finance
US Energy Information Administration
EM Emerging Market
EMBI
ERC
JP Morgan Emerging Market Bond Index
Energy Regulatory Commission
FAO
FCDA
Food and Agriculture Organization
Foreign Currency Differential Adjustment
GDP Gross Domestic Product
GNI
GOUR
Gross National Income
Generation over/under-recovery
GS Government Securities
IEA International Energy Agency
IMF International Monetary Fund
IPP
IRI
Independent Power Producer
International Research Institute for Climate and Society
LFS Labor Force Survey
LPG
LSOUR
Liquefied Petroleum Gas
Lifeline subsidy over/under recovery
LTFRB
MB
Land Transportation Franchising and Regulatory Board
Monetary Board
MEM
MENA
Multi-Equation Model
Middle East and North Africa
Meralco Manila Electric Company
MISSI Monthly Integrated Survey of Selected Industries
MTP
NBQBs
Major Trading Partner
Non-Bank Financial Institutions with Quasi-Banking
Functions
NDA
NEDA
Net Domestic Assets
National Economic and Development Authority
iii
NEER Nominal Effective Exchange Rate
NFA Net Foreign Assets; National Food Authority
NG
NGCP
NOAA
National Government
National Grid Corporation of the Philippines
National Oceanic and Atmospheric Administration
NPC National Power Corporation
NPI Net Primary Income
NPLs Non-performing loans
O&O Offshoring and Outsourcing
OECD Organization for Economic Cooperation and Development
OPEC
OF
Organization of the Petroleum Exporting Countries
Overseas Filipinos
PBR
PMI
PSA
PSALM
Performance-Based Rate
Purchasing Managers’ Index
Philippine Statistics Authority; Power Supply Agreement
Power Sector Assets and Liabilities Management
Corporation
PSEi Philippine Stock Exchange Composite Index
RB
RDA
Rural Banks
Reserve Deposit Account
REER Real Effective Exchange Rate
ROP Republic of the Philippines
RP
RR
Repurchase
Reserve Requirement
RREL Residential and Real Estate Loans
RRP
RWAs
Reverse Repurchase
Risk Weighted Assets
SDA
SEM
SLOUR
SMEs
SOFSM
Special Deposit Account
Single-Equation Model
System loss over/under-recovery
Small and Medium Enterprises
Society of Fellows in Supply Management, Inc.
TLP
TOUR
Total Loan Portfolio
Transmission over/under-recovery
U/KBs
VAPI
VOPI
Universal/commercial banks
Value of production index
Volume of production index
WEO
WESM
World Economic Outlook
Wholesale Electricity Spot Market
1
THE MONETARY POLICY OF THE
BANGKO SENTRAL NG PILIPINAS
The BSP Mandate
The BSP’s main responsibility is to formulate and implement policy in the areas of money,
banking and credit, with the primary objective of maintaining stable prices conducive to a
balanced and sustainable economic growth in the Philippines. The BSP also aims to
promote and preserve monetary stability and the convertibility of the national currency.
Monetary Policy Instruments
The BSP’s primary monetary policy instrument is its overnight reverse repurchase (RRP)
or borrowing rate. Other instruments to implement the desired monetary policy stance to
achieve the inflation target include (a) increasing/decreasing the reserve requirement;
(b) encouraging/discouraging deposits in the special deposit account (SDA) facility by
banks and trust entities of BSP-supervised financial institutions; (c) adjusting the
rediscount rate on loans extended to banking institutions on a short-term basis against
eligible collateral of banks’ borrowers; and (d) outright sales/purchases of the BSP’s
holdings of government securities.
Policy Target
The BSP’s target for monetary policy uses the Consumer Price Index (CPI) or headline
inflation rate, which is compiled and released to the public by the National Statistics
Office (NSO). The policy target is set by the Development Budget Coordination
Committee (DBCC)1 in consultation with the BSP. The inflation target for 2015-2018
is 3.0 percent ± 1.0 ppt.2
BSP’s Explanation Clauses
These are the predefined set of acceptable circumstances under which an
inflation-targeting central bank may fail to achieve its inflation target. These clauses
reflect the fact that there are limits to the effectiveness of monetary policy and that
deviations from the inflation target may sometimes occur because of factors beyond the
control of the central bank. Under the inflation targeting framework of the BSP, these
exemptions include inflation pressures arising from: (a) volatility in the prices of
agricultural products; (b) natural calamities or events that affect a major part of the
economy; (c) volatility in the prices of oil products; and (d) significant government policy
changes that directly affect prices such as changes in the tax structure, incentives, and
subsidies.
1 The DBCC, created under Executive Order (E.O.) No. 232 dated 14 May 1970, is an inter-agency committee tasked
primarily to formulate the National Government's fiscal program. It is composed of the Office of the President (OP),
Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the
Department of Finance (DOF). The BSP attends the Committee meetings as a resource agency. 2 The inflation target range for 2015-2018 was announced thru DBCC Resolution No.2015-1 dated 27 January 2015.
2
The Monetary Board
The powers and functions of the BSP, such as the conduct of monetary policy and
the supervision over the banking system, are exercised by its Monetary Board,
which has seven members appointed by the President of the Philippines. Starting in
2012, the Monetary Board will hold eight (8) monetary policy meetings in a year to
review and decide on the stance of monetary policy. Prior to 2012, monetary policy
meetings were held every six weeks while prior to July 2006, meetings were held
every four weeks during the 2002 – July 2006 period.
Chairman Amando M. Tetangco, Jr.
Members Cesar V. Purisima
Alfredo C. Antonio
Felipe M. Medalla
Armando L. Suratos
Juan D. De Zuñiga, Jr.
Valentin A. Araneta
The Advisory Committee
The Advisory Committee was established as an integral part of the institutional
setting for inflation targeting. It is tasked to deliberate, discuss, and make
recommendations on monetary policy to the Monetary Board. Like the Monetary
Board, the Committee will meet eight times a year (beginning in January 2012) but
may also meet between regular meetings, whenever deemed necessary.
Chairman Amando M. Tetangco, Jr.
Governor
Members Diwa C. Guinigundo
Deputy Governor
Monetary Stability Sector
Nestor A. Espenilla, Jr.
Deputy Governor
Supervision and Examination Sector
Ma. Ramona GDT Santiago
Assistant Governor
Treasury Department
Francisco G. Dakila, Jr.
Managing Director
Monetary Policy Sub-sector
3
2015 SCHEDULE OF MONETARY POLICY MEETINGS, INFLATION REPORT
PRESS CONFERENCE AND PUBLICATION OF MB HIGHLIGHTS
Period
Advisory
Committee (AC)
Meeting
Monetary Board
(MB)
Meeting
MB Highlights
Publication
Inflation Report
(IR) Press
Conference
2
0
1
5
Jan 8 (Thu)
(11 Dec 2014 MB meeting)
23 (Fri)
(Q4 2014 IR)
Feb 6 (Fri)
(AC Meeting No. 1)
12 (Thu)
(MB Meeting No. 1)
Mar 20 (Fri)
(AC Meeting No. 2)
26 (Thu)
(MB Meeting No. 2)
12 (Thu)
(12 Feb 2015 MB meeting)
Apr 23 (Thu)
(26 Mar 2015 MB meeting)
24 (Fri)
(Q1 2015 IR)
May 8 (Fri)
(AC Meeting No. 3)
14 (Thu)
(MB Meeting No. 3)
Jun 19 (Fri)
(AC Meeting No. 4)
25 (Thu)
(MB Meeting No. 4)
11 (Thu)
(14 May 2015 MB meeting)
Jul 23 (Thu)
(25 Jun 2015 MB meeting)
23 (Thu)
(Q2 2015 IR)
Aug 7 (Fri)
(AC Meeting No. 5)
13 (Thu)
(MB Meeting No. 5)
Sep 18 (Fri)
(AC Meeting No. 6)
24 (Thu)
(MB Meeting No. 6)
10 (Thu)
(13 Aug 2015 MB meeting)
Oct 22 (Thu)
(24 Sep 2015 MB meeting)
23 (Fri)
(Q3 2015 IR)
Nov 6 (Fri)
(AC Meeting No. 7)
12 (Thu)
(MB Meeting No. 7)
Dec 11 (Fri)
(AC Meeting No. 8)
17 (Thu)
(MB Meeting No. 8)
10 (Thu)
(12 Nov 2015 MB meeting)
4
Contents
OVERVIEW .................................................................................................................... 5
I. INFLATION AND REAL SECTOR DEVELOPMENTS ............................................................... 8
Prices .................................................................................................................... 8
Private Sector Economists’ Inflation Forecasts ............................................ 10
Energy Prices ................................................................................................ 11
Power ........................................................................................................... 12
Aggregate Demand and Supply .......................................................................... 14
Aggregate Demand ...................................................................................... 14
Other Demand Indicators ............................................................................ 16
Aggregate Supply ......................................................................................... 25
Labor Market Conditions ................................................................................... 26
II. MONETARY AND FINANCIAL MARKET CONDITIONS ........................................................28
Domestic Liquidity and Credit Conditions .......................................................... 28
Interest Rates ..................................................................................................... 34
Financial Market Conditions ............................................................................... 36
Banking System .................................................................................................. 39
Exchange Rate .................................................................................................... 42
III. FISCAL DEVELOPMENTS ............................................................................................45
IV. EXTERNAL DEVELOPMENTS ........................................................................................46
V. MONETARY POLICY DEVELOPMENTS ...........................................................................50
VI. INFLATION OUTLOOK ...............................................................................................52
BSP Inflation Forecasts ...................................................................................... 52
Risks to the Inflation Outlook ............................................................................. 56
VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE .......................................................59
SUMMARY OF MONETARY POLICY DECISIONS .....................................................................62
5
OVERVIEW
Inflation eases further. Headline inflation continued its downward trend in Q3 2015, decelerating to
0.6 percent from the quarter- and year-ago rates of 1.7 percent and 4.7 percent, respectively
– a record low using the 2006-based CPI series. This brought the year-to-date average inflation rate
to 1.6 percent which is below the Government’s inflation range target of 2.0-4.0 percent for 2015.
Lower prices of rice and corn along with moderate price increases for other food items helped push
down headline inflation. Similarly, non-food inflation eased further on lower prices of electricity and
domestic petroleum products. Core inflation likewise declined to 1.6 percent in Q3 2015 from
2.2 percent in Q2 2015 and 3.3 percent in Q3 2014. All three alternative measures of core inflation
estimated by the BSP were also lower during the review period relative to the rates registered in the
previous quarter. At the same time, the number of CPI items with inflation rates greater than the
upper end of the 2015 inflation target declined to 22 items in Q3 2015 from 30 items in the previous
quarter. These items accounted for 9.2 percent of the CPI basket.
Inflation expectations breach the lower end of the 2015 target band. Results of the BSP’s survey of
private sector economists for September 2015 yielded lower mean inflation forecasts for 2015-2017
relative to the results in June 2015. The lower inflation expectations were attributed mainly to lower
international food and oil prices. These factors are seen to outweigh the potential upside risks
brought about by the stronger El Niño phenomenon, the possible US Federal Reserve rate hike,
increased expenditures associated with the upcoming election, holiday spending, and the
normalization of oil prices. Similarly, the results of the September 2015 Consensus Economics inflation forecast survey showed lower inflation forecasts for 2015 and 2016 at 1.9 percent and
3.2 percent, respectively.
Domestic demand remains intact. Real gross domestic product grew by 5.6 percent in Q2 2015,
higher than the 5-percent growth recorded in the previous quarter but lower than the 6.7-percent
growth in Q2 2014. Accelerated consumer and government spending as well as increased
investments, particularly in construction, boosted Q2 growth. Robust household spending on the
expenditure side and resilient service sector growth on the production side supported the economy
during the review quarter. Moreover, demand indicators reported positive signals, reflecting brisk
economic activity. Vehicle sales continued to post double-digit growth on sustained consumer
spending amid attractive financing packages, while the composite Purchasing Managers’ Index
remained above the 50-point expansion threshold. Business confidence for the next quarter turned
upbeat, supported by bright holiday prospects while consumer sentiment strengthened amid
favorable macroeconomic conditions.
Global economic prospects continue to vary across regions. Growth in the US accelerated,
reflecting upturns in exports, personal and government consumption as well as non-residential fixed
investment. Similarly, economic activity in the euro area remained firm as leading indicators showed
new incoming businesses. In contrast, Asian economies showed more subdued activity, with Japan
registering modest economic recovery while China and India easing slightly. The softer economic
activity in emerging markets served to drag down global output growth to which a number of central
banks responded by easing their monetary policy settings to support domestic economic activity
amid lower oil and commodity prices.
6
Domestic financial market conditions remain sound despite external uncertainties. The favorable
domestic outlook continued to be supported by ample liquidity and credit growth during the review
quarter. However, external headwinds emanating from the slowdown in the Chinese economy and
uncertainty surrounding the US interest rate lift-off have contributed to an increase in investor risk
perception and a consequent search for safe-haven assets. The Philippine equities market, for
example, saw dampened activity during the review period, with the benchmark index falling by
6.1 percent relative to the average registered in the preceding quarter. Bond spreads also widened
as investors priced in the potential spillover effects of a slowing emerging market growth as well as
China’s devaluation moves. However, the country’s sovereign CDS remained lower compared to its
Asian neighbors. Investor appetite for local currency government securities remained healthy as
evidenced by the continued oversubscription in the scheduled GS auctions. In addition, the banking
system remained sound and resilient, marked by sustained growth in assets, lending, and deposits,
and with capital adequacy ratios comfortably above the BSP’s and Bank for International
Settlements’ prescribed levels. Moreover, bank lending standards for both loans to enterprises and
household were also broadly unchanged during the quarter, indicating that banks continue to
prudently manage their risks.
The BSP maintains monetary policy settings during the quarter. During its monetary policy
meetings on 13 August and 24 September, the BSP decided to maintain its key policy interest rates
at 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending
or RP facility. The interest rates on term RRPs, RPs, and SDAs were also kept steady. Similarly,
reserve requirement ratios were left unchanged. The policy decisions were based on the BSP’s
assessment of the dynamics and risks in the inflation environment over the policy horizon.
Authorities were of the view that the benign inflation outlook and the economy’s underlying growth
momentum provide ample room to keep monetary policy settings unchanged at this time.
Authorities likewise view the prevailing monetary policy settings as being appropriately
calibrated. Latest forecasts suggest that inflation will settle slightly below the government’s target
range of 3.0 percent ± 1.0 percentage point for 2015 before approaching the midpoint of the
target range in 2016-2017. The forecasts are supported by a firm underlying growth momentum.
Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate
adjustments and the impact of stronger-than-expected El Niño weather conditions on food and
utility prices present upside risks to inflation. Meanwhile, slower global economic activity is seen as
a key downside risk to inflation.
Inflation expectations remain within the inflation target range over the policy horizon while falling
below the lower bound of the target range for 2015. Nevertheless, domestic economic activity
remains intact and continues to expand at a solid pace. Credit activity is recording sustained growth
overall, as liquidity growth continues to keep pace with the overall requirements of the economy.
Over the period ahead, volatilities in the global financial market resulting from a slowdown in China
and policy normalization in the US could be important considerations for the inflation outlook in the
quarters ahead to the extent that they can influence inflation expectations and market sentiment
on the domestic front. Going forward, the BSP will continue to monitor domestic and external
developments to ensure that the monetary policy stance remains consistent with its price and
financial stability objectives.
7
In addition, the BSP announced on 30 September 2015 its plan to implement an interest rate
corridor (IRC) system by Q2 2016. The IRC system will introduce key changes in the framework for
monetary operations designed to enhance the effectiveness of monetary policy. The shift to IRC will
not represent a change in the BSP’s monetary policy stance and is not expected to have a significant
impact on the general level of interest rates. Nevertheless, the IRC system will help improve the
transmission of policy rate adjustments through the conduct of active liquidity management
operations to effectively implement the monetary policy stance. Moreover, the IRC is expected to
support the development of capital markets by providing an enabling environment for increased
money market transactions.
8
I. INFLATION AND REAL SECTOR DEVELOPMENTS
Prices
Inflation eases on lower food and non-food
prices
0
1
2
3
4
5
6
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
in p
erc
en
t
Food
Non-Food
Non-Alcoholic Beverages
Alcoholic Beverages and Tobacco
Headline Inflation
Q3 2015
0.6 pct
Quarterly Headline Inflation (2006-100)
Core inflation and its alternative measures
ease Alternative Core Inflation Measures
Quarterly averages of year-on-year change
Quarter
Official
Headline
Inflation
Official
Core
Inflation
Trimmed
Mean 1/
Weighted
Median 2/
Net of
Volatile
Items 3/ *
2013
Q1
Q2
Q3
Q4
2014
Q1
Q2
Q3
Q4
2015
Q1
Q2
Q3
3.0
3.2
2.7
2.4
3.4
4.1
4.1
4.4
4.7
3.6
1.6
2.5
1.7
0.6
2.9
3.8
2.9
2.1
2.9
3.0
3.0
3.0
3.3
2.7
2.1
2.5
2.2
1.6
2.5
3.0
2.3
2.1
2.6
3.5
3.3
3.6
3.8
3.3
2.1
3.0
2.1
1.3
2.3
2.8
2.3
2.0
2.2
2.9
2.6
3.2
3.1
2.7
2.1
3.0
2.2
1.2
3.1
3.9
3.2
2.4
2.9
2.6
2.8
2.6
2.8
2.4
1.9
2.3
1.9
1.51/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest
to-highest ranking of year-on-year inflation rates for all CPI components.
2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50
percent) in a lowest-to-highest ranking of year-on-year inflation rates.
3/ The net of volatile items method excludes the following items: bread and cereals, meat, fish, fruit,
vegetables, gas, solid fuels, fuels and lubricants for personal transport equipment, and passenger
transport by road, which represents 39.0 percent of all items.
r/ Revised.
* The series has been recomputed using a new methodology that is aligned with PSA’s method of
computing the official core inflation, which re-weights remaining items to comprise 100 percent of the core
basket after excluding non-core items. The previous methodology retained the weights of volatile items in the
CPI basket while keeping their indices constant at 100.0 from month to month.
Source: PSA, BSP estimates
0
10
20
30
40
50
60
70
0
5
10
15
20
25
30
35
40
45
Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
CPI Items with Inflation Rates Above Threshold
Cumulative weight in % (LHS)
No. of Items Above Threshold (RHS):
4% (2015); 5% (2009-2014)
22 items
Source: Philippine Statistics Authority, BSP staff estimates
We
igh
t in
pe
rce
nt
Nu
mb
er
of
ite
ms
Headline and Core Inflation
Headline inflation dropped further to 0.6 percent
year-on-year (y-o-y) in Q3 2015, lower than the
quarter- and year-ago rates of 1.7 percent and
4.7 percent, respectively. This brought the
year-to-date average inflation rate to 1.6 percent,
which is below the Government’s inflation range
target of 3.0 percent ± 1.0 percentage point (ppt)
for 2015.
The continued deceleration of headline inflation
can be attributed mainly to slower price increases
of food items. Likewise, non-food items further
decelerated due to downward adjustments in
domestic petroleum products, electricity rates,
and transport.
Similarly, core inflation, which excludes certain
volatile food and energy items to better capture
underlying price pressures, eased further to
1.6 percent in Q3 2015 from 2.2 percent in
Q2 2015 and 3.3 percent in Q3 2014.
All alternative measures of core inflation
estimated by the BSP also fell during the review
period relative to the previous quarter.
In particular, the measures for trimmed mean,
weighted median, and net of volatile items edged
lower to 1.3 percent, 1.2 percent, and 1.5 percent,
respectively, from the quarter-ago rates of
2.1 percent, 2.2 percent, and 1.9 percent.
The number of items with inflation rates greater
than the threshold of 4.0 percent (the upper end
of the 2015 inflation target) dropped to 22 items
in Q3 2015 from 30 items in the previous quarter.
These items accounted for 9.2 percent of the CPI
basket, lower than the quarter-ago share of
14.9 percent.
Grouping the CPI basket into food and non-food
components, the number of food—which
includes alcoholic beverages and tobacco—and
non-food items with inflation rates above the
4.0-percent threshold was lower at 9 items and
13 items, respectively, in Q3 2015 from 13 items
and 17 items in Q2 2015.
9
Adequate domestic supply of key food items
drives down food inflation
Inflation Rates for Selected Food Items
Quarterly averages in percent (2006=100)
Commodity2014 2015
Q3 Q1 Q2 Q3
Food and Non-alcoholic
Beverages8.0 4.8 3.0 1.1
Food 8.3 5.0 3.1 1.1
Bread and Cereals 10.3 5.7 2.6 -0.5
Rice 12.7 7.2 3.3 -0.9
Corn 8.4 2.4 0.2 -0.6
Meat 5.7 4.2 1.3 0.4
Fish 6.3 5.1 5.3 3.2
Milk, Cheese and Eggs 4.1 4.4 3.3 1.9
Oils and Fats 7.3 2.7 0.9 -0.3
Fruit 8.1 11.4 9.6 4.9
Vegetables 13.6 1.1 0.4 0.2
Sugar, Jam, Honey 7.5 3.8 4.2 2.9
Food Products N.E.C. 10.0 4.8 4.6 3.8
Non-alcoholic Beverages 1.9 2.1 2.2 1.8
Alcoholic Beverages and 3.5 4.0 3.8 3.7
Tobacco
Source of Basic Data: PSA, BSP
Lower prices of electricity and domestic
petroleum products continue to drive non-food
inflation downward
Inflation Rates for Selected Non-Food Items
Quarterly averages in percent (2006=100)
Commodity2014 2015
Q3 Q1 Q2 Q3
Non-Food 2.4 0.6 0.5 0.1
Clothing and Footwear 3.4 3.1 2.6 2.3
Housing, Water, Electricity, 2.4 -1.1 -1.1 -1.7
Gas and Other Fuels
Electricity, Gas, and Other
Fuels3.5 -8.7 -8.2 -9.8
Furnishings, Household 2.7 2.2 2.1 1.7
Equipment
Health 3.4 2.7 2.3 1.7
Transport 1.1 -0.7 0.0 -0.5
Operation of Personal
Transport Equipment2.2 -10.5 -8.6 -9.7
Communication 0.0 -0.1 -0.1 0.0
Recreation and Culture 1.3 1.1 1.1 1.0
Education 5.1 5.1 4.7 3.6
Restaurant and Miscellaneous 1.7 1.6 1.2 1.2
Goods and Services
Source of Basic Data: NSO, BSP
Food Inflation
Food inflation continued to ease in Q3 2015 at
1.1 percent from 3.1 percent in Q2 2015
attributed largely to lower prices of rice, corn, oils
and fats along with moderate price increases y-o-y
for the rest of the major food items. Despite the
lean season, rice prices remained subdued due
mainly to adequate domestic supply brought
about by the arrival of additional rice importation
in August.3
Similarly, non-alcoholic beverages decelerated in
Q3 to 1.8 percent from 2.2 percent in the previous
quarter. Alcoholic beverages and tobacco (ABT)
inflation was slightly lower at 3.7 percent in
Q3 2015 from 3.8 percent in the previous quarter
Non-food Inflation
Non-food inflation eased further during the
review quarter to 0.1 percent in Q3 2015
compared to 0.5 percent in the previous quarter.
The decline can be traced mainly to lower
oil-related CPI items such as electricity, gas, and
other fuels and transport prices which posted
negative outturns in Q3 2015. International oil
prices, which remained lower than year-ago
levels, resulted in price rollbacks of domestic
petroleum products during the quarter while
electricity rates were adjusted downward owing
to lower generation charges from energy
suppliers.
Except for communication and restaurants and
miscellaneous goods and services, all non-food
items recorded lower inflation rates in Q3 2015.
3 As of 14 August 2015, the 250 TMT government-to-government (G-to-G) contract awarded by the National Food
Authority to Thailand and Vietnam in June 2015 has arrived.
10
Private Sector Economists’ Inflation Forecasts
Mean inflation forecasts for 2015-2017 are
lower
1.0
2.0
3.0
4.0
5.0
Jan Feb Mar Apr MayJuneJuly Aug Sep Oct Nov Dec Jan Feb Mar Apr MayJuneJuly Aug Sep
2014 2015
2015 2016 2017 target range
BSP Private Sector Economists' Survey Mean forecast for full year, in percent
2015: 1.7
2016: 2.7
2017: 2.9
2016 2017
Q4 FY FY FY
1) Al-Amanah Islamic Bank 0.50 1.60 1.80 2.00
2) Asia ING 0.90 1.40 2.20 3.20
3) Bangkok Bank 1.00 1.50 3.50 3.00
4) Bank of Commerce 0.77 0.94 1.51 -
5) Bank of China 2.00 1.80 2.50 3.00
6) Banco de Oro 1.33 2.00 3.53 4.91
7) Bank of the Philippine Islands 2.10 2.00 3.50 2.50
8) Barclays Capital 1.50 1.60 2.70 -
9) Chinabank 2.10 1.80 3.10 3.20
10) Citibank 1.10 1.50 1.05 1.65
11) CTBC Bank 1.25 1.50 2.50 3.00
12) Deutsche Bank - 1.50 3.10 -
13) Eastwest Bank 1.20 1.50 2.10 2.50
14) IDEA, Inc. 1.70 1.80 4.20 3.90
15) Korea Exchange Bank 2.90 2.90 3.00 3.00
16) Land Bank of the Phils 1.40-1.70 1.70-2.00 2.10-2.40 2.10-2.40
17) Maybank 1.20 1.50 3.00 3.25
18) Maybank-ATR KimEng 1.40 1.60 2.00 -
19) Metrobank - 1.80 3.60 3.60
20) Multinat'l Inv. Banc 1.40 1.60 2.60 -
21) Mizuho 1.00 1.50 1.50 1.75
22) Nomura 2.30 2.00 3.20 3.10
23) Philippine Equity Partners 1.57 1.60 3.15 -
24) Robinsons Bank 1.00-1.75 1.50-2.00 2.00-3.00 2.00-3.00
25) Security Bank 1.80 1.50 3.10 3.30
26) Standard Chartered 2.00 1.90 2.90 3.80
27) UBS 1.30 1.50 3.30 -
28) Union Bank of the Phils. 1.80 1.70 2.20 2.10
Median Forecast 1.4 1.6 2.8 3.0
Mean Forecast 1.5 1.7 2.7 2.9
High 2.9 2.9 4.2 4.9
Low 0.5 0.9 1.1 1.7
Number of observations 26 28 28 21
Government Target 3.0±1.0 3.0±1.0 3.0±1.0 3.0±1.0
Private Sector Forecasts for Inflation, September 2015
Annual Percent Change
2015
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
<1 1.0 – 1.99 2.0 – 3.0 3.1 – 4.0 4.1 – 5.0 5.1 – 6.0 6.1 – 7.0
Probability Distribution For Analysts' Inflation Forecasts*
2015-2017
2015 2016 2017
*Probability distributions were averages of those provided by 23 out of 28 respondents.
(Source: BSP Survey)
Results of the BSP’s survey of private sector
economists for September 2015 yielded lower
mean inflation forecasts for 2015-2017 relative to
the results in June 2015.4 In particular, the mean
inflation forecast for 2015 was lower at
1.7 percent (from 2.3 percent in June 2015).
Similarly, the average annual inflation forecasts
for 2016 and 2017 declined to 2.7 percent and
2.9 percent (from 3.1 percent and 3.0 percent),
respectively.
The analysts attributed their lower inflation
expectations mainly to lower international food
and oil prices. These are likely to outweigh the
upside risks brought by the El Niño phenomenon,
the possible Federal rate hike, increased
expenditure from the upcoming election, holiday
spending, and the normalization of oil prices.
Based on the probability distribution on the
forecasts provided by 23 out of 28 respondents,
there is a 62.8-percent chance that average
inflation for 2015 will settle within the
1.0-1.99 percent range, which is below the
2-4 percent target range for the year.
Furthermore, the respondents said that there is a
19.8-percent chance that 2015 inflation rate will
fall within the 2-4 percent target range in 2015.
Meanwhile, for 2016, the respondents said that
there is a 64.3 percent chance that inflation will
fall within the 2-4 percent target band.
Results of the September 2015 Consensus
Economics inflation forecast survey for the
country also showed lower mean inflation
forecast for 2015 and 2016 at 1.9 percent
(from 2.4 percent in June 2015) and 3.2 percent
(from 3.5 percent), respectively.5
4 There were 28 respondents in the BSP’s survey of private sector economists in September 2015. The survey was
conducted between 3 to 22 September 2015. 5 There were 18 respondents in the Consensus Economics’ survey in September 2015.
11
Q3 2015 BES results indicate that more
respondents expect inflation to increase for the
current and next quarter
Consumers expect inflation to be stronger over
the next 12 months
Relative to the previous Business Expectation
Survey (BES), a lower majority of respondents in
Q3 2015 expect inflation to move up in the
current quarter (from a diffusion index of
11.6 percent to 10.2 percent). Meanwhile, the
number of respondents that expect inflation to
rise in the next quarter (from 15.7 percent to
26.4 percent) increased.
Given the higher spending outlook on basic goods
and services in Q3 2015, more respondents in the
Q3 2015 BSP Consumer Expectation Survey (CES)
anticipated prices to go up. The mean inflation is
expected to be higher at 4.2 percent in 2015
compared to the year-end inflation expectation in
Q2 2015 which was at 3.7 percent, indicating that
inflation is likely to be stronger in the next
12 months.
International oil price declines in Q3 2015
20
40
60
80
100
120
140
2012 2013 2014 2015 2016 2017
Pri
ce i
n U
S d
oll
ars
pe
r b
arr
el
Spot and Estimated Future Prices of Dubai Crude Oil*
*Futures prices derived using Brent crude futures data.
30 June 2015
30 September 2015
Mixed forecasts on oil demand for 2015-2016
Energy Prices
The average price of Dubai crude oil dropped
anew in Q3 after posting an increase in the
previous quarter. International oil price declined
by 18.8 percent quarter-on-quarter (q-o-q) in
Q3 2015 on expectations of weaker global
demand amid concerns of a possible economic
slowdown in China. Furthermore, prospects of an
oversupplied oil market intensified over
indications that Iran would increase oil
production regardless of depressed prices to
defend its market share, which could further
exacerbate the global supply glut.
At the same time, estimated futures prices of
Dubai crude oil, which are based on movements
in Brent crude oil futures, in Q3 2015 showed a
lower path for 2015 to 2017 compared to the
estimates in Q2 2015.
In September 2015, the global oil demand
forecast for 2015 of both the International Energy
Agency (IEA)6 and OPEC7 were adjusted upward
to 1.7 million barrels per day (mmbd) from
1.4 mmbd and 1.5 mmbd from 1.2 mmbd,
respectively. The IEA estimated the oil demand
growth forecast for 2016 at 1.4 mmbd.
6 IEA, September 2015 Oil Market Report, www.iea.org 7 OPEC, September 2015 Monthly Oil Market Report, www.opec.org
12
Domestic prices of petroleum products track
movement of global oil prices
Quarter Gasoline Kerosene Diesel LPG
2014
Q1 53.75 50.87 44.25 41.73
Q2 54.95 51.54 43.70 40.44
Q3 52.15 47.99 40.70 38.74
Q4 41.20 37.39 30.05 33.87
2015
Q1 42.60 35.59 28.85 31.19
Q2 45.90 37.49 29.65 30.18
Q3 42.25 33.44 26.80 28.00
Q-o-Q (3.65) (4.05) (2.85) (2.18)
Y-o-Y (9.90) (14.55) (13.90) (10.74)
Domestic Retail Pump Prices (peso/liter)*End-quarter prices
* Average retail pump price for the Big Three oil
companies—Caltex, Petron, and Shell, Metro Manila prices
only.
Source: Department of Energy (DOE)
Lower generation charges lead to decreased
retail electricity prices
In contrast, the US Energy Information
Administration (EIA)8 global demand projections
were revised downward to 1.2 mmbd for 2015
from 1.3 mmbd in June 2015. For 2016, US EIA
maintained its projected global oil demand at
1.3 mmbd.
In Q3 2015, the domestic prices of gasoline,
kerosene, diesel, and LPG decreased by P3.65 per
liter, P4.05 per liter, P2.85 per liter, and P2.18 per
liter, respectively, relative to their end-Q2 2015
levels.
Comparing prices to year-ago levels, domestic
pump prices of gasoline, kerosene, diesel, and
LPG prices went down by P9.90 per liter,
P14.55 per liter, P13.90 per liter, and P10.74 per
liter, respectively.
Power
Overall electricity rates went down in Q3 2015
due to lower generation costs. During the review
period, average generation charge dropped by
P0.42 per kilowatt hour (kWh) to P4.47per kWh
from P4.89 per kWh in Q2 2015. According to
Meralco, the decline was driven mainly by the
lower generation cost from all suppliers.
In August and September, the average costs of
Independent Power Producers (IPPs) and cost of
power from the Wholesale Electricity Spot
Market (WESM) decreased due to the decline in
fuel cost. Likewise, the cost of power from the
Power Supply Agreements (PSAs) in September
went down due to improved dispatch levels.
The lower transmission charges and other bill
components also contributed to the downward
adjustments in the electricity rates during the
review quarter. However, generation charge went
up in July due to higher settlement rates driven
by numerous power plant outages; the increase
was offset by a decrease in the distribution
charge.
8 EIA, September 2015 Short-Term Energy Outlook, www.eia.doe.gov
13
MWSS implements rates adjustments for
concessionaires due to FCDA
There are potential sources of upside pressures
on electricity charges. Meralco has existing
petitions for rate increases with the Energy
Regulatory Commission (ERC) which include the
petition to implement the Maximum Average
Price for 2012, 2013, 2014, and 2015, amended
application for a rate increase in the January 2014
billing (consisting of incremental fuel costs and
deferred generation cost to be collected monthly
for six months); and petitions for the refund of
generation over/under recovery (GOUR),
transmission over/under recovery (TOUR), system
loss over/under recovery (SLOUR), and lifeline
subsidy over/under recovery (LSOUR) for the
period January-December 2011. In addition,
the Power Sector Assets and Liabilities
Management (PSALM) has several pending
petitions with ERC for the recovery of True-Up
Adjustments of Fuel and Purchased Power Costs
(TAFPPC), Foreign Exchange Related Costs
(TAFxA) and Purchased Power Costs and Foreign
Exchange Related Costs by the National Power
Corporation (NPC), and NPC’s Stranded Debt
portion of the universal charge. Likewise,
the National Grid Corporation of the Philippines
(NGCP) also filed several petitions to recover
connection charges and residual sub-transmission
charges for 2011-2013 and the costs of repair on
damages caused by force majeure events such as
earthquake, flooding, landslides, and lightning
incidents in 2011-2012.
Water
Effective 1 July 2015, foreign currency differential
adjustment or FCDA by Maynilad Water Services,
Inc. (MWSI) increased by P0.03 per cubic meter
while Manila Water Company, Inc. (MWCI)
decreased by P0.01 per cubic meter, respectively.
The Metropolitan Waterworks and Sewerage
System-Regulatory Office (MWSS-RO) reported
that the all-in-water rate charged by MWSI to its
customers this April 2015 rose by P0.05/cu.m. to
P45.73/cu.m. from P45.68/cu.m. while MWCI fell
by P0.01/cu.m. to P33.96/cu.m. from
P33.98/cu.m. The said adjustments were a result
of the foreign exchange movements in the third
quarter.
14
Aggregate Demand and Supply
The Philippine economy gained momentum in
Q2 2015
0
1
2
3
4
5
6
7
8
9
10
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2
ye
ar-
on
-ye
ar
gro
wth
in
pe
rce
nt
GDP GNI
5.6 pct 5.0 pct
Source: Philippine Statistics Authority
Gross Domestic Product (GDP) and Gross National Income (GNI)(at constant prices)
Household consumption remains robust on
improved employment conditions
-30
-20
-10
0
10
20
30
40
50
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2
ye
ar-
on
-ye
ar
gro
wth
in
pe
rce
nt
HH Consumption Govt Spending Capital Formation
6.2 pct 3.9 pct 17.4 pct
Source: Philippine Statistics Authority
Gross Domestic Product By Expenditure Shares(at constant prices)
The country’s real gross domestic product (GDP)
grew by 5.6 percent in Q2 2015, higher than the
5-percent growth in the previous quarter but
lower than the 6.7-percent growth in Q2 2014.
Accelerated consumer and government spending
as well as increased investments, particularly in
construction, drove the second quarter growth.
Meanwhile, the services and industry sectors
continued to be the main drivers of growth on
the production side.
On a seasonally-adjusted basis, q-o-q GDP growth
accelerated to 1.8 percent in Q2 2015 from
0.4 percent in Q1 2015.
For the first semester of 2015, GDP grew by
5.3 percent, which is below the Government’s
growth target of 7.0–8.0 percent for 2015.
Nevertheless, the year-to-date GDP growth
remains above the long-term average growth of
4.9 percent.9
Gross national income (GNI) growth accelerated
to 5 percent in Q2 2015 from previous quarter’s
growth of 4.2 percent. Likewise, growth in net
primary income improved to 2.2 percent in
Q2 2015 (from 0.8 percent in Q1 2015).
Aggregate Demand
Household spending, which accounted for more
than half of the country’s output at
66.6 percent, rose by 6.2 percent in Q2 2015 from
a revised 6.0-percent growth in the previous
quarter. Household spending has remained
robust, benefiting from a low-inflation and
low-interest rate environment. The top
contributors to the growth of this sector are food
and non-alcoholic beverages (2.3 ppts),
miscellaneous goods and services (1.3 ppts) and
transport (0.9 ppts).
Capital formation likewise expanded by
17.4 percent in Q2 2015 from an 11.6-percent
growth in Q1 2015, due to higher accumulated
inventories and sustained growth in fixed capital
investments. Growth in fixed capital can be
9 Real GDP growth average for the period Q1 1999-Q2 2015.
15
ECONOMIC PERFORMANCE
at constant 2000 pricesgrowth rate in percent
Q2 Q1 Q2
Household Consumption 5.7 6.0 6.2
Government Consumption 0.0 1.7 3.9
Capital Formation 8.3 11.6 17.4
Fixed Capital Formation 6.9 10.0 8.9
Exports 7.9 6.4 3.7
Imports 4.9 8.7 12.7
20152014
BY EXPENDITURE ITEM
SECTOR
Source: Phi l ippine Statistica l Authori ty (PSA)
attributed to the expansion of investments in
construction by 13.1 percent from a 6.7-percent
growth a quarter ago. Meanwhile, durable
equipment, which was the main driver of growth
of fixed capital last quarter, grew by 6.6 percent
in Q2 2015 from 13.5 percent in Q1 2015.
This slowdown was due mainly to the higher
contraction of air transport by 64.7 percent in
Q2 2015 from a decline of 26.6 percent in the
previous quarter.
Government expenditures recorded a faster
growth of 3.9 percent in Q2 2015 from
1.7 percent in Q1 2015 owing to the sustained
growth in maintenance and other operating
expenses for the implementation of programs
and projects, specifically for the requirements of
social protection programs.
The overall exports growth slowed down to
3.7 percent in Q2 2015, lower than the
quarter-ago and year-ago growth rates of
6.4 percent and 7.9 percent, respectively.
The 31.1-percent growth in exports of services
was pulled down by the contraction in exports of
goods by 3 percent. The decline in exports of
goods was due to the negative performance of
the following export commodities: electronic data
processing (-17.8 percent); bananas, including
plantains, fresh or dried (-64.7 percent); and
others (-27.1 percent). Meanwhile, exports of
services growth accelerated by 31.1 percent in
Q2 2015 (from 14.1 percent in Q1 2015)—driven
by the 42.6 percent growth in miscellaneous
services from 18.4 percent a quarter ago.
Meanwhile, overall imports posted a 12.7-percent
growth in Q2 2015, higher than the quarter- and
year-ago growth rates of 8.7 percent and
4.9 percent, respectively; owing to the
double-digit growth in imports of services at
26.3 percent and the sustained growth in imports
of goods at 9.5 percent. Imports of
components/devices (106.8 percent) and
electronic data processing (26.6 percent)
contributed mainly to the growth of imports of
goods. Meanwhile, growth in imports of services
was driven by the 73.3 percent increase in
miscellaneous services (from 16.7 percent
a quarter ago).
16
Demand indicators show positive signals
Implied land values continue to trend higher
Office vacancy rate slightly lower amid
continued strong demand for office space
Other Demand Indicators
Demand indicators reported positive prints during
the review quarter with vehicle sales sustaining
its double-digit growth while composite PMI
remaining above the 50-point expansion
threshold in August, indicating continued firm
domestic demand. Moreover, while external
uncertainties dampened slightly current business
sentiments, next-quarter business confidence
turned upbeat on prospects of the coming
holidays. Meanwhile, consumer sentiment
showed optimistic trends, supported by favorable
macroeconomic conditions.
Property Prices
Land Values, Metro Manila
Data from Colliers International indicated that
implied land values10 in the Makati CBD and
Ortigas Center appreciated in Q2 2015 from
quarter- and year-ago levels. Implied land values
in the Makati CBD reached P452,500/sq.m.
in Q2 2015, higher by 2.0 percent and
23.5 percent relative to the levels recorded in
Q1 2015 and Q2 2014, respectively. Similarly,
implied land values in the Ortigas Center rose by
2.2 percent q-o-q and 10.5 percent y-o-y to
P165,000/sq.m.
Land values in the Makati CBD were above their
1997 levels in nominal terms, but only about
46.7 percent of their 1997 levels in real terms.
Meanwhile, land values in the Ortigas Center
were about 84.6 percent of their 1997 level in
nominal terms and 37.1 percent in real terms.
Vacancy Rates, Metro Manila
The office vacancy rate in the Makati CBD was
lower at 1.8 percent in Q2 2015 relative to
quarter-ago level of 2.2 percent. The office
vacancy rate in Q2 2015 was also lower than the
2.1 percent recorded a year ago. The continued
strong office demand in the Makati CBD amid the
lack of new supply has kept office vacancy rate at
record low. Office vacancy rate is estimated by
10 In the absence of reported closed transactions, implied land values based on trends are used by Colliers International
to monitor prices.
17
Strong take up of high-rise projects decreased
residential vacancy rate in Q1 2015
Office rental values rise further
Residential rental values increase slightly
Colliers to narrow further to 1.3 percent in
Q2 2016.
The residential vacancy rate in the Makati CBD
decreased to 7.6 percent in Q2 2015 from
8.0 percent in the previous quarter. Likewise, the
residential vacancy rate in Q2 2015 was lower
than the year-ago level of 10.6 percent due to the
strong take-up of high-rise residential projects
amid limited supply. However, the delivery of
new residential units within the next 12 months is
expected to increase vacancy rates to
11.8 percent by Q2 2016.
Rental Values, Metro Manila11
Monthly Grade A office12 rents in the Makati CBD
reached P894/sq.m. in Q2 2015, representing an
increase of 1.9 percent from the previous quarter.
Similarly, monthly Grade A office rents in the
Makati CBD were higher by 9.4 percent relative to
Q2 2014. Office rental values for Grade A offices
were above their 1997 levels in nominal terms. In
real terms, office rental values were about half of
the comparable levels in 1997.
Monthly rents for luxury three-bedroom
condominium units in the Makati CBD rose to
P863/sq.m. in Q2 2015 or a 1.7 percent growth
from the previous quarter. Likewise, monthly
rents for the 3-bedroom segment were higher by
5.2 percent compared to the year-ago levels.
Residential rental values for luxury
three-bedroom high-rise units were above their
1997 levels in nominal terms but were only about
79.6 percent of their 1997 levels in real terms.
11 Actual rentals for housing account for 13.8 percent of the 2006-based CPI basket. The NSO presently surveys rentals
only ranging from around P300-P10,000/month to compute rent inflation. However, the rental values discussed in this
section pertain to high-end rented properties, which may be considered as indicators of wealth and demand. 12 Grade A refers to office space with capital values between P65,000 and P75,000/sq.m..
18
Capital values for office and residential
buildings are higher
Capital Values, Metro Manila
Capital values13 for office buildings in the Makati
CBD in Q2 2015 were higher in nominal terms
than their quarter- and year-ago levels. Grade A
office capital values in the Makati CBD rose to
P103,500/sq.m., higher by 1.5 percent and by
10.2 percent compared to the quarter- and
year-ago levels, respectively. Grade A office
capital values were also higher than the 1997
levels in nominal terms. Nevertheless, in real
terms, office capital values were about
57.1 percent of the comparable levels in 1997.
Capital values for luxury residential buildings14 in
Makati CBD in Q2 2015 rose to P149,000/sq.m.
from their quarter- and year-ago levels. Average
prices for three-bedroom luxury residential
condominium units increased by 1.1 percent
quarter-on-quarter and 7.9 percent year-on-year.
Capital values for luxury residential buildings
were above their 1997 levels in nominal terms.
In real terms, residential capital values were
about 67.0 percent of the comparable levels in
1997.
13 Probable price that the property would have fetched if sold on the date of the valuation. The valuation includes
imputed land and building value. 14 In terms of location, luxury residential units are located within the CBD core and have quality access to/from and
have superior visibility from the main avenue. Meanwhile, in terms of general finish, luxury residential units have
premium presentation and maintenance.
19
Sales of new vehicles continue to grow albeit at
a slower rate
Total energy sales increase
-10
-5
0
5
10
15
20
25
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
No
v
De
c
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
e
July
Au
g
Se
p
Oct
No
v
De
c
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
e
July
Au
g
Se
p
Oct
No
v
De
c
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
e
July
Au
gu
st
2012 2013 2014 2015
Energy Sales
Year-on-year Growth (in Percent)
Total Energy Sales Residential Commercial Industrial
Q3 (July - August) 2015
Total Energy Sales: 9.3%
Residential: 11.7%
Commercial: 9.7%
Industrial: 6.5%
Vehicle Sales
Sales of new vehicles15 grew by 19.8 percent y-o-y
in the first two months of Q3 2015 from a
35.6-percent growth recorded in the same period
a year ago. The Chamber of Automotive
Manufacturers of the Philippines, Inc. (CAMPI)
attributed the continued growth in car sales to
the introduction of new car models, continuous
marketing efforts and attractive financing
programs of industry players.
Passenger car sales from CAMPI members grew
by 25.8 percent y-o-y in July-August 2015,
accruing to a total of 20,555 units from
16,336 units sold in the same period in 2014.
Similarly, commercial vehicles, which accounts for
about 60 percent of total vehicle sales, expanded
by 15.7 percent in the first two months of
Q3 2015. Commercial vehicles sold during the
quarter reached 27,195 units from 23,510 units in
the same period in 2014. Energy Sales
Meralco’s total energy sales for Q3 2015
(July-August) grew by 9.3 percent, higher
compared to the 1.0 percent growth reported in
the same period a year ago. Energy sales from all
sectors expanded with y-o-y growth rates of
11.7 percent, 9.7 percent and 6.5 percent for the
residential sector, commercial sector and
industrial sector, respectively.
15 Vehicle sales data is gathered on a monthly basis by the Chamber of Automotive Manufacturers of the Philippines
(CAMPI). CAMPI represents the local assemblers and manufacturers of vehicle units in the Philippine automotive
industry. The following are the active members of CAMPI: (1) Asian Carmakers Corp., (2) CATS Motors, Inc.,
(3) Columbian Autocar Corp., (4) Honda Cars Philippines, Inc., (5) Isuzu Philippines Corp., (6) Mitsubishi Motors
Philippines Corp., (7) Nissan Motor Philippines Corp., (8) Suzuki Philippines Inc., (9) Toyota Motor Philippines Corp.
and (10) Universal Motors Corp.
20
Capacity utilization in manufacturing remains
above 80 percent
81.8
82.0
82.2
82.4
82.6
82.8
83.0
83.2
83.4
83.6
83.8
Jan
20
12
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
20
13
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
20
14
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
20
15
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
g
in p
erc
en
t
Source: Philippine Statistics Authority
Monthly Average of Capacity Utilization for Manufacturing
Manufacturing output shows mixed trends
-15
-10
-5
0
5
10
15
20
25
Jan
20
12
Feb
Ma
rA
pr
Ma
yJu
nJu
lA
ug
Se
pO
ctN
ov
De
cJa
n 2
01
3Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
20
14
Feb
Ma
rA
pr
Ma
yJu
nJu
lA
ug
Se
pO
ctN
ov
De
cJa
n 2
01
5Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
g
ye
ar-
on
-ye
ar;
in p
erc
en
t
VAPI VOPI
Source: Philippine Statistics Authority
Volume and Value Indices of Manufacturing Production
Capacity Utilization
The average capacity utilization rate of the
manufacturing sector was unchanged at
83.3 percent in August 2015 from the month-ago
level based on the PSA’s Monthly Integrated
Survey of Selected Industries (MISSI). Of the
636 respondent-establishments, 59.2 percent of
which operated at least at 80.0 percent capacity
in August 2015. Data show that the
manufacturing companies have been operating
above the long-term average of 80.0 percent
since 2010.
Volume and Value of Production
Preliminary results of the MISSI showed that
volume of production index (VoPI) increased in
August 2015 by 3.7 percent year-on-year from a
0.3 percent (revised) slump in July 2015. The VoPI
showed positive growth for the first time after
contracting for three consecutive months since
May. This was led by the double-digit increments
in the production of miscellaneous manufactures
(75.9 percent), tobacco products (24.0 percent),
electrical machinery (14.6 percent), and
fabricated metal products (11.6 percent).
The expansion in factory output—as measured by
the VoPI—may be owed to the vigorous
construction activity and increased demand for
automotive products. However, the August 2015
number is still below the growth recorded in the
same month last year at 5.7 percent. Thus, to
ensure that the manufacturing sector will
continuously show output gains, NEDA said that
the government needs to boost domestic
demand by strengthening the link between the
agriculture and manufacturing sectors, which
could help balance off the weakening global
demand.16
In contrast, the value of production index (VaPI)
dipped in August 2015 by 4.6 percent from a
contraction of 7.1 percent (revised) in the
previous month. The VaPI has been in the
16 Based on the National Economic and Development Authority (NEDA) press statement dated 9 October 2015.
21
negative territory since January 2015 except in
March 2015. The drop in VaPI was driven by
double-digit declines in the following sub-sectors:
furniture and fixtures (-41.4 percent), wood and
wood products (-35.2 percent), basic metals
(-32.4 percent), petroleum products
(-22.0 percent), food manufacturing
(-13.9 percent), and printing (-10.5 percent).
Business sentiment declines in Q3 2015…
BUSINESS EXPECTATIONS SURVEY
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Current Quarter 37.8 50.7 34.4 48.3 45.2 49.2 41.4
Next Quarter 50.8 48.9 52.9 43.1 58.2 47.3 53.1
BUSINESS
OUTLOOK INDEX
2014 2015
Source: Bangko Sentra l ng Pi l ipinas (BSP)
…but turns more upbeat in Q4 2015
Business Expectations
Results of the Q3 2015 BES17 indicated a less
optimistic outlook for the current quarter as the
overall confidence index (CI) declined to
41.4 percent compared to 49.2 percent in
Q2 2015. This indicates that the number of
optimists declined but continued to be greater
than the number of pessimists during the quarter.
According to respondents, their less upbeat q-o-q
outlook was due to the following: (a) expected
slack in demand during the rainy season,
(b) lower crop production as a result of the
El Niño, (c) closed fishing season in Davao Gulf
from July to September, and (d) lower consumer
spending in view of increased expenditures on
education. The sentiment of businesses in the
Philippines mirrored the less buoyant business
outlook in the US, but was in contrast to the more
bullish views of those in the UK, Germany, Korea,
Singapore, Hong Kong, and India.
For the quarter ahead (Q4 2015), business
outlook turned more upbeat as the next-quarter
index rose to 53.1 percent from 47.3 percent in
the previous quarter’s survey. Respondents’ more
positive outlook for Q4 2015 was on account of:
(a) the expected uptick in consumer demand
during the holiday, harvest and milling seasons,
(b) increase in sales and orders translating to
higher volume of production, (c) business
expansion in retail trade, manufacturing, finance
and business process outsourcing (BPO) services,
(d) new and improved procedures/methods that
increase production in agriculture (e.g., poultry,
tuna fishing), (e) opening of high seas/fishing
operations in October, (f) steady flow of overseas
17 The Q3 2015 BES was conducted from 1 July to 17 August 2015 among 1,516 firms nationwide, drawn from the
Securities and Exchange Commission’s Top 7000 Corporations in 2010 and Business World’s Top 1000 Corporations in
2013.
22
Consumer confidence improves in Q3 2015…
CONSUMER EXPECTATIONS SURVEY
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Current Quarter -18.8 -17.3 -26.3 -21.8 -10.0 -16.2 -11.6
Next 3 Months 5.4 0.0 -1.0 0.7 4.4 -0.4 5.8
Next 12 Months 19.3 15.9 9.7 9.6 17.3 16.4 15.8
2014 2015
Source: Ba ngko Sentral ng Pi l ipinas (BSP)
CONSUMER
OUTLOOK INDEX
…and turns robust for Q4 2015
Filipinos’ (OFs) remittances, especially during the
holiday season, and (g) election-related spending
for the 2016 national elections. Respondents also
cited that the prevailing favorable
macroeconomic conditions (i.e., low inflation
partly as a result of declining oil prices and lower
peso) boosted their business confidence for the
next quarter.
Consumer Expectations
Results of the Q3 2015 CES18 show improved
consumer outlook as the overall CI rose to
-11.6 percent from -16.2 percent for Q2 2015.
The higher but still negative CI for Q3 2015 means
that the number of households with an optimistic
view increased but was less than those who think
otherwise. Respondents cited the following
reasons for their increased optimism:
(a) availability of more jobs; (b) increasing family
income due to salary increases and better
harvest, high production of goods, and stronger
business activity; and (c) lesser debt payments.
Respondents also cited that assistance from
government such as the Pantawid Pamilyang
Pilipino Program (4Ps), less corruption and good
governance also helped boost consumer
confidence for the current quarter. The outlook
of consumers in the Philippines mirrored the
upward sentiment of consumers in Australia, Euro
Area, South Korea, United Kingdom and the
United States but was in contrast to the less
optimistic views of those in Canada, China,
Indonesia, Japan, Thailand, and Taiwan for
Q3 2015.
For the next quarter (Q4 2015), consumer
confidence turned robust as the CI moved into
positive territory at 5.8 percent from -0.4 percent
a quarter ago. Similarly, consumers’ confidence
was sustained for the next 12 months as the
CI was broadly steady at 15.8 percent compared
to the previous quarter’s survey results.
18 The Q3 2015 CES was conducted during the period 1-15 July 2015 covering 5,894 households, of which 2,866
(48.6 percent) were from NCR and 3,028 (51.4 percent) from areas outside NCR.
23
PMI remains above the 50-point expansion
threshold
45
50
55
60
65
70
75
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
gS
ep
Oct
No
vD
ec
Jan
Fe
bM
ar
Ap
rM
ay
Jun
Jul
Au
g
2011 2012 2013 2014 2015
Composite Manufacturing Retail/Wholesale Services
Purchasing Managers' IndexJanuary 2011 - August 2015
Purchasing Managers’ Index19
The composite PMI remained firmly above the
50-point expansion threshold20 at 56.01 in
August 2015, lower than the previous month’s
58.26 level. All the sectors posted modest
performance during the month that pulled down
the overall PMI. It has been the case that the
overall PMI decelerates in Q3 prior to the holiday
onths.21 In Q4 2015, respondent-companies
expect the index to show faster expansion.
The manufacturing PMI in August 2015
decelerated by 2.45 points to 53.5 from the
55.9 level in July 2015. The August 2015 PMI was
also lower than last year’s level which was at
56.4. Manufacturing companies reported that
weaker demand, lower overall production, fewer
number of new hires, and the decline in the level
of stockpiles contributed to the sluggish
performance of the sector compared to last
month. In addition, suppliers took a longer time
delivering production inputs in August from July.
Nine of the twelve manufacturing subsectors
grew at a slower pace compared to the
month-ago levels namely, textiles, paper
manufactures, fuel, rubber and plastic,
non-metallic minerals, basic metals, fabricated
metal, machinery, and communication and
medical equipment.
Likewise, the services PMI decreased to 57.9 in
August 2015 from 60.0 in July 2015. Nevertheless,
all sub-indices remained above the 50-point
expansion threshold. However, slower expansion
was noted in five of the six indices during the
month due to slower business activity, reduction
in new services contracted, lower number of task
orders in progress, smaller amount paid for
materials and services, and fewer number of job
positions actually filled up.
19 Data based on the monthly purchasing managers’ index report of the Philippine Institute for Supply Management. 20 The actual formula used to calculate the PMI assigns weights to each common element and then multiplies them by
1.0 for improvement, 0.5 for no change, and 0 for deterioration. As a result, an index above 50 indicates economic
expansion, and an index below 50 implies a contraction. PMI surveys are conducted on the last week of the month. 21 The composite PMI has been observed to expand at a slower rate during August (compared to July) in the last five
years, except in 2013 when the composite PMI rose by 0.21 index points.
24
Export performance remains negative on lower
external demand
EXPORTS OF GOODS
growth rate in percent
Q2 Q1 Q2
Coconut Products 14.7 25.9 -19.6
Sugar and Products -63.4 -74.6 -69.2
Fruits and Vegetables 39.2 -36.2 -45.5
Other Agro-Based Products 23.3 -6.5 -15.3
Forest Products 16.5 -11.8 -18.1
Mineral Products 48.1 19.2 -41.9
Petroleum Products -66.2 -63.2 -15.1
Manufactures 10.5 -0.1 -1.9
Special Transactions 76.8 143.8 -45.4
Total Exports 12.9 -0.2 -8.3
COMMODITY GROUP2014 2015
Source: BSP s taff computations based on data from the
Phi l ippine Stati s tica l Authori ty (PSA)
Goods imports continue to contract on
declining fuels prices
IMPORTS OF GOODS
growth rate in percent
Q2 Q1 Q2
Capital Goods -17.6 10.3 17.4
Raw Materials and
Intermediate Goods 12.9 2.1 2.2
Lubricants -3.9 -39.1 -36.2
Consumer Goods 3.7 6.6 12.3
Special Transactions -23.2 -4.0 28.2
Total Imports -0.3 -4.0 -1.6
Source: BSP sta ff computations bas ed on data from the
Phi l ippine Sta tis tica l Authori ty (PSA)
Mineral Fuels and
COMMODITY GROUP2014 2015
The retail and wholesale PMI also declined in
August to 52.6 from 55.1 in July. The purchases
and sales revenues sub-indices contributed
significantly to the sector’s lackluster
performance. The supplier deliveries index also
declined although this meant that trade activities
of retailers took lesser lead time in August from
the month-ago level. In contrast, the employment
and inventories sub-indices showed faster
expansion in August. Both the retail and
wholesale subsectors decelerated in August to
53.6 and 50.03 from 56.2 and 52.7 in July,
respectively.
External Demand
Exports
Exports of goods in Q2 2015 fell by 8.3 percent
y-o-y, a reversal from the year-ago growth of
12.9 percent and lower than the previous
quarter’s 0.2 percent decline. The decline in
exports is attributed to lower demand from the
country’s Asian trading partners22 which account
for the bulk of the country’s exports. Foreign
shipments across all export commodities
decreased except for manufactures which grew
by 15.7 percent.
Imports
Imports of goods declined by 1.6 percent in
Q2 2015, albeit an improvement from the
4.0-percent decline in the previous quarter. The
contraction in imports was due to the continued
decline in inward shipments of mineral fuels and
lubricants, which posted a double-digit
contraction of 36.2 percent y-o-y during the
quarter. Meanwhile, other commodities recorded
gains namely, capital goods (17.4 percent), raw
materials and intermediate goods (2.2 percent),
and consumer goods (12.3 percent).
22 East Asia (includes China, Hong Kong, Japan, Macau, Mongolia, North Korea, South Korea and Taiwan) and ASEAN
(includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam)
25
Services sector remains the main driver of
output growth on the production side
-4
-2
0
2
4
6
8
10
12
14
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2
ye
ar-
on
-ye
ar
gro
wth
in
pe
rce
nt
Agriculture Industry Services
-0.5 pct 6.1 pct 6.2 pct
Source: Philippine Statistics Authority
Gross Domestic Product by Industrial Origin(at constant prices)
ECONOMIC PERFORMANCE
at constant 2000 pricesgrowth rate in percent
Q2 Q1 Q2
Agri., Hunting, Forestry and Fishing 3.4 1.1 -0.5
Agriculture and Forestry 4.5 1.9 -0.3
Fishing -1.6 -2.9 -1.5
Industry Sector 9.1 5.5 6.1
Mining and Quarrying 2.1 -3.1 2.4
Manufacturing 11.1 6.0 4.6
Construction 7.2 5.4 14.6
Electricity, Gas and Water Supply 3.0 5.1 3.0
Service Sector 5.9 5.4 6.2
Transport, Storage and
Communication 6.9 8.3 5.9
Trade and Repair of Motor Vehicles,
Motorcycles, Personal and
Household Goods 6.5 5.5 6.1
Financial Intermediation 6.1 4.3 5.8
Real Estate, Renting and
Business Activities 8.5 6.3 6.8
Public Administration and Defense;
Compulsory Social Security 1.2 -3.5 -0.3
Other Services 3.1 6.6 9.0
SECTOR2014 2015
Source: Phi l ippine Stati s ti ca l Authori ty (PSA)
BY INDUSTRIAL ORIGIN
Aggregate Supply
The services sector expanded by 6.2 percent in
Q2 2015, higher than the 5.4 percent growth in
Q1 2015 and the 5.9 percent growth in Q2 2014.
Major contributors to the sector’s growth were
trade and repair of motor vehicles, motorcycles,
personal and household goods (1.7 percentage
points), other services (1.6 percentage points),
and real estate, renting and business activities
(1.4 percentage points). Growth in trade and
repair of motor vehicles, motorcycles, personal
and household goods can be attributed mainly to
accelerated growth of retail trade to 5.3 percent
in Q2 2015 from 3.0 percent in the previous
quarter. Meanwhile, the growth in other services
is due largely to the accelerated increase of
recreational, cultural and sporting activities
(22.3 percent from 5.7 in Q1 2015). Similarly,
real estate, renting and business activities picked
up on higher growth of renting and other
business activities (10.9 percent from 4.9 percent
in Q1 2015).
Similarly, the industry sector grew by 6.1 percent
in Q2 2015, higher compared to the 5.5 percent
rise in Q1 2015 but lower compared to the
9.1 percent growth in Q2 2014. This is due mainly
to the following: (a) growth of manufacturing by
4.6 percent, albeit slower compared to the
6 percent growth in Q1 2015 and 11.1 percent
growth in Q2 2014; and (b) growth of
construction by 14.6 percent, higher than the
quarter- and year-ago growth rates of 5.4 percent
and 7.2 percent, respectively. Growth in
manufacturing came mainly from food
(3.3 percent) and chemical and chemical products
(12.8 percent) but was largely pulled down by the
decline in petroleum and other fuel products
(-7.9 percent); basic metal industries
(-16.3 percent); and office, accounting and
computing machinery (-8 percent). Meanwhile,
the upsurge in construction can be attributed to
the upturn of public construction (20.4 percent in
Q2 2015 from -24.0 percent in Q1 2015) and the
sustained positive growth of private construction
(10.2 percent in Q2 2015 from 15.3 percent in
Q1 2015).
26
In contrast, agriculture, hunting, forestry and
fishery (AHFF) contracted by 0.5 percent in
Q2 2015, lower than the 3.4 percent in Q2 2014
and 1.1 percent growth in Q1 2015. The sector’s
slowdown was attributed mainly to the
contraction of fishing and forestry, as well as the
decline in agricultural crops such as corn, palay,
coconut including copra and other crops. Fishing
dropped by 1.5 percent as production of fish
varieties like skipjack, roundscad, tilapia and
milkfish declined.
Labor Market Conditions
Unemployment rate improves
0
5
10
15
20
25
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
in p
erc
en
t
Unemployment Underemployment
Source: Philippine Statistics Authority
Unemployment and Underemployment
Based on the Labor Force Survey (LFS) as of
July 2015, the Philippine labor market registered
an improvement but only in terms of
unemployment rate.23 In contrast, the country’s
level of employment declined while
underemployment and youth unemployment
rates both increased compared to the same
period in 2014.
Employment decreased by 0.3 percent in
July 2015 which resulted in job losses of 109,000,
a reversal from the 1.1 million employment
created in July 2014. The decline in the
employment level was due mainly to a
7.6-percent decline in employment in agriculture
sector (vs. 0.5 percent growth in July 2014) and
slower employment growth rate in services sector
at 2.5 percent (vs. 3.9 percent).
Agricultural employment, which accounted for
almost 30 percent of the country’s total
employment, was adversely affected by the
prolonged dry spell and drought caused by
El Nino.24 Meanwhile, employment growth in
services sector decelerated due to employment
losses in wholesale and retail trade and repair of
motor vehicles and motor cycles. In contrast, the
industry sector posted strong employment
growth of 4.1 percent (from 3.8 percent) during
the period, attributed mainly to the 8.8-percent
expansion in construction employment, which
offset the weak 0.6 percent growth in
manufacturing sub-sector.
23 Excludes Leyte. The Philippine Statistics Authority already released preliminary estimates incorporating the new
Leyte Master Sample for July 2015. However, the data used in this report still excludes Leyte to be comparable with the
July 2014 Labor Force Survey (LFS). 24 NEDA (2015), “Number of unemployed Filipinos down in July 2015,” 9 September. www.neda.gov.ph
27
Since the decline in the labor force was lower
than the drop in the employment level, the
country’s unemployment rate declined to
6.5 percent in July 2015 from 6.7 percent a year
ago. However, the unemployment rate among
the youth (15-24 years old) went up to
16.4 percent from 15.8 percent in the same
period last year as the decline in the level of
youth unemployment was offset by a larger
decline in youth labor force.25 Similarly,
underemployment rate also increased to
20.8 percent from 18.3 percent in July 2014 due
mainly to full-time workers who still want
additional hours of work.26 Nevertheless, the
increase in the mean hours of work in July 2015
to 42.4 (from 40.9) still indicates a pick-up in
economic activity during the period. 27
25 The youth composed half of the unemployed in July 2015. 26 NEDA (2015). 27 NEDA (2015).
28
II. MONETARY AND FINANCIAL MARKET CONDITIONS
Domestic Liquidity and Credit Conditions
Domestic liquidity grows at a broadly stable
pace…
...while bank lending decelerates slightly but
remains at double-digit growth
Money supply or M3 grew by 9.0 percent as of
August 2015 from 9.3 percent in end-Q2 2015.
Money supply continued to expand due mainly to
robust demand for credit. Domestic claims rose
by 13.0 percent as of August, faster than the
10.8-percent increase at end-Q2 2015 on
sustained bank lending growth. Meanwhile, net
public sector credit grew by 15.2 percent as of the
review period from 1.1 percent at the end of the
previous quarter.
The growth in net foreign assets (NFA) was
broadly steady at 8.0 percent y-o-y as of August,
the same pace as it was at end-Q2 2015.
The BSP’s NFA position continued to expand
during the month on the back of robust foreign
exchange inflows coming mainly from overseas
Filipinos’ remittances and business process
outsourcing receipts. The NFA of banks likewise
increased as banks’ foreign assets expanded at a
faster pace relative to that of their foreign
liabilities. Banks’ foreign assets rose due mainly to
the growth in their investments in marketable
debt securities, while banks’ foreign liabilities
grew on account of higher deposits and
placements made by foreign banks with other
banks.
As of August 2015, outstanding loans of
commercial banks, net of banks’ reverse
repurchase (RRP) placements with the BSP, grew
by 14.1 percent y-o-y relative to the 14.5 percent
and 20.5 percent growth posted at end-Q2 2015
and end-Q3 2014, respectively.
The sustained expansion of bank lending was
driven largely by loans for production activities,
which expanded by 13.8 percent y-o-y as of
August. The expansion in production loans was
due to the increased lending to the following
sectors: real estate activities; electricity, gas,
steam and airconditioning supply; wholesale and
retail trade, and repair of motor vehicles and
motorcycles; financial and insurance activities;
and, manufacturing. Meanwhile, loans for
household consumption grew by 14.0 percent as
of August 2015, higher than the 17.7 percent and
29
14.9 percent growth registered in end-Q2 2015
and end-Q3 2014, respectively.
Most respondent banks maintain credit
standards for loans to enterprises
Credit Standards
Results of the Q3 2015 Senior Bank Loan Officers’
Survey (SLOS)28 showed that most of the
respondent banks maintained their credit
standards for loans to both enterprises and
households during the quarter based on the
modal approach.29 This is the 26th consecutive
quarter since Q2 2009 that majority of banks
reported broadly unchanged credit standards.
Similarly, the diffusion index (DI) approach30,31
pointed to basically unchanged overall credit
standards for loans to enterprises in Q3 2015 as
the number of respondent banks reporting
tighter credit standards equaled the number of
respondent banks reporting easier credit
standards. Meanwhile, the DI-based results
showed slight net easing of credit standards for
loans to households. In the previous quarter,
credit standards for both corporate lending and
household loans were unchanged based on the DI
approach.
Lending to Enterprises
Most banks (87.5 percent of banks that
responded to the question) indicated that credit
standards for loans to enterprises were kept
steady during the quarter using the modal
approach. Respondent banks attributed their
unchanged credit standards to their unchanged
tolerance for risk and stable economic outlook. In
terms of specific credit standards, the results
were mixed. On the one hand, some respondent
28 The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of
universal/commercial banks (U/KBs) in the Philippines, as well as to factors affecting the supply of and demand for
loans by both enterprises and households. Survey questionnaires were sent to all commercial banks, except for one
bank that requested not to be included in the survey since it does not engage in corporate and retail lending.
Thirty-four banks responded to the current survey representing a response rate of 97.1 percent. As of June 2015,
U/KB loans accounted for about 85.9 percent of the banking system’s total outstanding loans. 29 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of
responses. 30 In the diffusion index approach, a positive diffusion index (DI) for credit standards indicates that the proportion of
banks that have tightened their credit standards are greater compared to those that eased (“net tightening”), whereas
a negative DI for credit standards indicates that more banks have eased their credit standards compared to those that
tightened (“net easing”). 31 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the DI approach in the analysis of survey results.
Beginning in Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.
30
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Tightened considerably 3.7 3.6 0.0 0.0 3.4 0.0 0.0
Tightened somewhat 0.0 3.6 3.2 3.2 13.8 3.2 6.3
Remained basical ly unchanged 88.9 85.7 93.5 93.5 79.3 93.5 87.5
Eased somewhat 7.4 7.1 3.2 3.2 3.4 3.2 6.3
Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Diffusion Index for Credit Standards -3.7 0.0 0.0 0.0 13.8 0.0 0.0
Number of banks responding 27.0 28.0 31.0 31.0 29.0 31.0 32.0
General Credit Standards for Loans to Enterprises (Overall)
2015
Note: A positive diffusion index for credit standards indicates that more banks have tightened their credit standards
compared to those that eased (“net tightening”), whereas a negative diffusion index for credit standards indicates
that more banks have eased their credit standards compared to those that tightened (“net easing”).
2014
banks reported wider loan margins, increased
credit line sizes, and longer loan maturities. On
the other hand, several banks reported stricter
collateral requirements and loan covenants as
well as increased use of interest rate floors.32
By borrower firm size, overall credit standards for
top corporations and micro enterprises showed
slight net easing based on the DI approach.
Meanwhile, credit standards for large middle-
market enterprises and small and medium
enterprises (SMEs) showed a slight net tightening.
For the next quarter, most of the respondent
banks still expect credit standards for loans to
enterprises to remain unchanged. However, the
percentage of banks expecting a slight easing of
overall credit standards for loans to businesses
was higher compared to those expecting the
opposite, particularly for top corporations and
large middle-market enterprises. Respondent
banks cited expectations of higher risk tolerance,
more favorable economic outlook, and
improvement in banks’ portfolio as among the
reasons behind the expected net easing of credit
standards.
Most respondent banks report unchanged
credit standards for loans to households
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Tightened considerably 5.0 5.0 4.8 0.0 0.0 0.0 0.0
Tightened somewhat 10.0 0.0 9.5 14.3 10.5 9.5 4.2
Remained basically unchanged 80.0 95.0 81.0 85.7 84.2 81.0 87.5
Eased somewhat 5.0 0.0 4.8 0.0 5.3 9.5 8.3
Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Diffusion Index for Credit Standards 10.0 5.0 9.5 14.3 5.3 0.0 -4.2
Number of banks responding 20.0 20.0 21.0 21.0 19.0 21.0 24.0
2014
General Credit Standards for Loans to Households (Overall)
2015
Note: A positive diffusion index for credit standards indicates that more banks have tightened their
credit standards compared to those that eased (“net tightening”), whereas a negative diffusion index
for credit standards indicates that more banks have eased their credit standards compared to those
that tightened (“net easing”).
Lending to Households
The survey results likewise showed that most of
the respondent banks (87.5 percent) continued to
report unchanged overall credit standards for
loans extended to households. However, the DI
approach showed a slight net easing of credit
standards for household loans in Q3 2015,
reflecting banks’ increased tolerance for risk and
improved profile of borrowers. In particular,
banks’ responses indicated increased credit line
sizes, less strict collateral requirements and loan
covenants, and less use of interest rate floors
along with unchanged margins on loans and loan
maturities.
32 The survey questionnaire identified six specific credit standards: (1) loan margins (price-based); (2) collateral
requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) interest rate floors.
A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises,
under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking
certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, an
interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while
less use indicates otherwise.
31
Loan demand from both enterprises and
households is unchanged
Most of the respondent banks foresee
maintaining their overall credit standards over
the next quarter. However, some banks expect
overall credit standards to ease slightly,
particularly for housing and personal/salary loans,
due largely to expectations of banks’ increased
tolerance for risk, improvements in banks’
portfolio and borrowers’ profile, more aggressive
competition from banks and non-bank lenders,
and less strict financial system regulations.
Loan demand
Responses to the survey question on loan
demand indicated that majority of the
respondent banks continued to see unchanged
overall demand for loans from both enterprises
and households. Using the DI approach, however,
the results continued to show a net increase in
overall demand33 for loans from both enterprises
and households. The net increase in loan demand
of firms was attributed by banks to increased
inventory and accounts receivable financing
needs of borrower firms and clients’ improved
economic outlook, among others. Meanwhile, the
net increase in overall demand for household
loans reflected higher housing investment and
household consumption.
Looking ahead, most of the respondent banks
expect unchanged loan demand for loans to both
firms and households. However, a larger
proportion of respondents expect overall demand
for loans to increase further in the next quarter
relative to those who indicated the opposite.
Expectations of higher inventory and accounts
receivable financing needs of borrower firms
along with the improved economic outlook of
clients were cited by respondent banks as key
factors behind the anticipated increase in
demand for business loans. Meanwhile, the
expected net increase in household loan demand
was attributed by respondent banks to the banks’
more attractive financing terms and lower
interest rates.
33 The “DI for loan demand” refers to the percentage difference between banks reporting an increase in loan demand
and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan
demand compared to those stating the opposite, whereas a negative DI for loan demand implies that more banks
reported a decrease in loan demand compared to those reporting an increase.
32
Credit standards for real estate loans are
steady
Real Estate Loans
Most of the respondent banks (86.4 percent) in
Q3 2015 indicated unchanged overall credit
standards for commercial real estate loans using
the modal approach. However, based on the DI
approach, a net tightening of overall credit
standards was noted for commercial real estate
loans for the 13th consecutive quarter. The net
tightening of overall credit standards for
commercial real estate loans was attributed by
respondent banks largely to perceived stricter
oversight of banks’ real estate exposure. In
particular, respondent banks reported stricter
collateral requirements and loan covenants along
with wider loan margins, reduced credit line sizes,
shorter loan maturities, and increased use of
interest rate floors for commercial real estate
loans. For the next quarter, most of the
respondent banks expect to maintain their credit
standards for commercial real estate loans.
However, banks that anticipate a tightening of
their credit standards outnumbered those
expecting the opposite.
Demand for commercial real estate loans was
also unchanged in Q3 2015 based on the modal
approach. A number of banks, however, indicated
increased demand for the said type of loan on the
back of clients’ improved economic outlook and
increased customer investment in plant or
equipment. Over the next quarter, although most
of the respondent banks anticipate generally
steady loan demand, a number of banks expect
demand for commercial real estate loans to
continue increasing in the following quarter.
Similarly, most of the respondent banks
(78.9 percent) reported unchanged credit
standards for housing loans extended to
households. Using the DI approach, however,
a slight tightening of credit standards for housing
loans was noted in Q3 2015. The net tightening of
credit standards for housing loans was attributed
by respondent banks to deterioration in the
profile of borrowers. For the next quarter,
although most respondent banks foresee
maintaining their credit standards for housing
loans, a number of banks expect a slight net
33
easing of credit standards for this type of loan
amid expectations of higher tolerance for risk.
At the same time, results continued to show
increased demand for housing loans in Q3 2015
as well expectations of continued increase in
demand for the said type of loan in the next
quarter.
34
Interest Rates
T-bill rates in the primary market decrease
0
1
2
3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
91-day T-bill Rate 182-day T-bill Rate 364-day T-bill Rate
Treasury Bill Rates
2012
in p
erc
en
t
2013 2014 2015
The yield curve declines
0
1
2
3
4
5
6
3Mo 6Mo 1Yr 2Yr 3yr 4Yr 5Yr 7Yr 10Yr 20Yr 25Yr
Sep 2014 Jun 2015 Sep 2015
Yields of Government Securities in the Secondary Market
Maturity
in p
erc
en
t
Interest rate differentials narrows
-50
0
50
100
150
200
250
300
350
400
450
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
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 Differentials
2012
qu
art
erl
y a
ve
rag
es;
in
ba
sis
po
ints
2013 2014 2015
Primary Interest Rates
In Q3 2015, the average 91-day, 182-day, and
364-day T-bill rates in the primary market
decreased to 1.861 percent, 1.922 percent, and
2.131 percent from 1.940 percent, 2.169 percent,
and 2.172 percent, respectively, in Q2 2015. The
decrease in T-bill rates reflected the market
players’ strong appetite for lower-tenored papers
amid global uncertainties.
Yield Curve
The secondary market yield of GS declined
generally, except for the 1-year, 3-year, 7-year,
20-year and 25-year GS, as of end-September
2015 relative to the end-June 2015 levels. The
yields for shorter maturities declined amid buying
activity as banks serviced their clients’
requirements.
Debt paper yields were lower by a range of
4.5 bps (4-year GS) to 55.6 bps (10-year GS)
compared to end-June 2015 levels. By contrast,
the interest rate for the 1-year, 3-year, 7-year,
20-year, and 25-year GS rose by 11.7 bps, 7.4 bps,
44.3 bps, 48.3 bps, and 472.8 bps, respectively.
Relative to year-ago levels, the secondary market
yields of GS increased generally by a range of
4.7 bps for the 6-month GS to 82.3 bps for the
1-year GS except for the 5-year, 10-year, and
25-year GS which declined by 50.8 bps, 39.5 bps,
and 32.1 bps.
Interest Rate Differentials
The average differentials between domestic and
US interest rates, gross and net of tax, narrowed
in Q3 2015 relative to the previous quarter.
The average 91-day RP T-bill rate declined q-o-q
by 8.8 bps to 1.861 percent in Q3 2015 from
1.949 percent in Q2 2015. Meanwhile, the
average US 90-day LIBOR and US 90-day T-bill
rate increased by 3.5 bps and 4.0 bps,
respectively to 0.314 percent and 0.108 percent
in Q3 2015. Foreign interest rates rose on
investor optimism after European leaders
reached an agreement over the bailout terms for
35
-1
0
1
2
3
4
5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
BSP RRP Rate US Federal Funds Target Rate
2012
BSP RRP Rate and US Federal Funds Target Ratein
pe
rce
nt
2013 2014 2015
150
175
200
225
250
275
300
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Risk-Adjusted Differentials
2012
in b
asis
po
ints
2013 2014 2015
Real lending rate increases
-1
0
1
2
3
4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
(Aug)
Philippines' Real Lending Rate
2012
in p
erc
en
t
2013 2014 2015
Greece and the renewed expectation of an
interest rate hike by the US Fed in 2015.
The positive differential between the BSP's
overnight borrowing or RRP rate and the US
federal funds target rate was unchanged at
375 bps in Q3 2015, as the policy settings for both
central banks were kept steady. Meanwhile, the
interest rate differential between the BSP’s
overnight RRP rate and the US federal funds
target rate adjusted for country risk premium34
narrowed to 238 bps as of end-September 2015
from 275 bps in end-June 2015. This development
could be traced to the higher risk premium given
the decrease in the 10-year US note, relative to
the increase in the 10-year ROP yield, to
1.99 percent and 3.36 percent, respectively.
The 10-year US note declined following the
release of weaker-than-expected data on US
manufacturing, consumer spending, and
employment during the quarter, as well as the
continued decline in global oil prices and a
weakening Chinese economy. Meanwhile, the
increase in the 10-year ROP note reflected the
risk-off sentiment across the Asian financial
market.
The real lending rate35 rose to 3.2 percent in
August 2015 from 2.7 percent in June 2015.
This was due to the 60-bp decline in inflation to
0.6 percent in August 2015 from 1.2 percent in
June 2015 and the 10-bp decline in the actual
bank lending rate36 to 3.8 percent. The Philippines
posted the fifth lowest real lending rate in a
sample of 10 Asian countries, with Thailand
recording the highest real lending rate at
7.7 percent and Japan the lowest at 1.0 percent.
34 The difference between the 10-year ROP note and the 10-year US Treasury note is used as proxy for the risk
premium. 35 Real lending rate is measured as the difference between actual bank lending rate and inflation. 36 The actual bank lending rate for the Philippines is the weighted average interest rate charged by reporting
commercial banks on loans and discounts granted during the period.
36
Financial Market Conditions
Domestic financial market conditions reflect
external uncertainties
External headwinds saw the benchmark index
dip in Q3
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
ind
ex p
oin
ts
Q3 2015
7,285.93
Source: Philippine Stock Exchange, BSP
Quarterly Average PSEi
Other stock market indicators reflected
investors’ bearish sentiments
The favorable domestic outlook continues to be
supported by ample liquidity and credit growth
during the review quarter. However, external
headwinds emanating from the slowdown in the
Chinese economy and the uncertainties
surrounding the US interest rate lift-off have
contributed toward the uptick in investor risk
perception and a search for safe haven assets.
Nonetheless, the performance of the domestic
financial market remained favorable compared to
other countries in the region.
Stock Market
The Philippine Stock Exchange index (PSEi)
averaged 7,285.93 index points in Q3 2015, about
6.1 percent lower than the average of
7,760.08 index points registered in the preceding
quarter. Sentiments turned bearish during the
review quarter as concerns over the weakening
Chinese economy and uncertainty about the US
interest rate lift-off wiped out the stock gains
posted in the early months of the year. Hence,
from the 27th all-time high of 8,127.48 index points
posted on 10 April, the PSEi retreated to close
15.2 percent lower at 6,893.98 index points on
30 September.
In July, stocks declined on concerns over the
imminent hike in the US interest rate and signs of a
slowdown in the Chinese economy. The decline
was partly tempered by the Greek bailout deal
reached and the Chinese government’s
unprecedented intervention to boost its economy
and stock market. However, the index fell sharply
in August after the PBOC devalued the yuan,
reinforcing fears of a weakening Chinese economy
and resulting in a global sell-off on 24 August as
investors searched for safer havens. Furthermore,
the weaker manufacturing numbers reported by
China, the US and the Euro Zone in September
further deepened fears of another global
economic slowdown and escalated the turmoil in
global financial markets.
Mirroring the retreat of the benchmark index,
foreign investors continued to post net sales
amounting to P61.1 billion from July-September.
37
0
20
40
60
80
100
120
140
160
180
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
in b
illi
on
pe
sos
Q3 2015
P101.3B
Source: Bureau of the Treasury
Total Oversubscription of T-bill Auctions
Debt spreads widen due to uncertainties on
the external front
0
50
100
150
200
250
Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
in b
asi
s p
oin
ts
Quarterly Philippine Sovereign 5-Year CDS Spreads
Philippines Indonesia Thailand Malaysia109.3 bps 210.5 bps 129.0 bps 166.7 bps
Source: Bloomberg
Total stock market capitalization as of
end-September stood at P13.4 trillion, falling by
8.6 percent from P14.6 trillion registered in
end-June and by 6.5 percent from P14.3 trillion
posted a year ago. Moreover, data from
Bloomberg indicated that the price-earnings ratio
of listed issues declined from 21.4x posted in
end-June to 19.5x in end-September. Philippine
shares remained the second most expensive in the
ASEAN5, after Indonesia’s 22.7x.
Government Securities
Results of the T-bill auctions conducted in
Q3 2015 (July-September) continued to show
robust demand for T-bills with total
oversubscription for the quarter amounting to
P161.3 billion, about 2.7 times the P60.0 billion
total offered amount. The total oversubscription
for the quarter at P101.3 billion was higher than
the P34.4 billion oversubscription in the previous
quarter. Accordingly, the Auction Committee
awarded in full the total offering in the last two
auctions of the review quarter. In contrast, during
the 6-July auction, the Auction Committee made
full awards for the 91-day and 182-day T-bills,
respectively, while bids for the 364-day T-bills
were partially awarded to prevent a sharper
increase in interest rates for the tenor. The results
of the auction reflected government’s
expectations that interest rates would go up in the
near term as the market braces for the increase in
yields in the US.
Sovereign Bond and CDS Spreads
The cost of insuring Philippine sovereign debt
increased in Q3 2015. The country’s 5-year
sovereign credit default swap (CDS) spreads
averaged 109 basis points (bps) in 3Q 2015, up
from 2Q 2015 average of 89 bps. Against those of
neighboring economies, the Philippine CDS traded
lower than Indonesia’s average of 210 bps,
Malaysia’s 167 bps and Thailand’s 129 bps. The
risk premium from holding a Philippine sovereign
bond over a similarly tenured US Treasury bond
likewise climbed as indicated by the wider EMBIG
Philippine spreads which averaged 117 bps, higher
than the previous quarter’s 106 bps.
38
0
50
100
150
200
250
300
350
400
450
Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
in b
asis
poi
nts
Quarterly JPMorgan EMBI+ Sovereign Bond Spreads
EMBI+Philippines
119.4 bps
EMBI+Global
414.1 bps
Source: Bloomberg
The widening trend persisted during the entire
quarter with some episodes of temporary easing.
In July, debt spreads expanded as market
uncertainties grew over the potential negative
spillover effects from Greece’ debt issues and
China’s stock market sell-off. Likewise, the stock
market rout in China raised concerns on the
implications of a sharp slowdown in the Chinese
economy. The IMF’s downward revision in the
world growth outlook added further to market
fears that pushed bond yields higher and bond
spreads wider. By mid-July, debt spreads started
to ease as perceived risk of a “Grexit” softened
following the authorization of €7 billion bridge
loan and an extra €900 million in emergency
liquidity assistance (ELA) funding for Greek banks.
The turnaround in debt spreads was also helped
by the modest recovery in Chinese equities.
However, these developments were not enough
to sustain a narrowing trend.
Debt spreads continued to widen in August as
China decided to devalue its currency which
jolted financial markets in the region. The move
by the Chinese government resulted in negative
investor sentiment which pushed bond yields
higher and bond spreads wider. The widening in
debt spreads persisted and recorded an all-year
high in 24 August as a result of global market sell-
off triggered by concerns on the possible
slowdown in the Chinese economy and the slump
in commodity prices.
In the first half of September, debt spreads
slightly eased as investors traded on a
wait-and-see stance, awaiting for the result of the
US Fed policy meeting on 17 September.
After the meeting, debt spreads climbed by about
10 bps as investors fled to safe-haven trading,
bidding up prices of US Treasury bonds which
pushed yields down and widened spreads with
emerging market bonds. Debt spreads continued
to climb towards the end of the month driven
largely by the continued uncertainty over US Fed
lift-off combined with worries over slowing
emerging market growth and continuing decline
in global commodity prices.
39
By 30 September, the Philippines 5-year
sovereign CDS stood at 134 bps, higher than the
2Q’s end of 91.4 bps but remained lower than
Indonesia’s 270 bps, Malaysia’s 232 bps and
Thailand’s 162 bps. The EMBIG Philippines also
ended the quarter wider at 145 bps compared to
the previous quarter’s closing of 118 bps.
Banking System
Philippine banking system sustains growth
U/KBs account for the largest share in the
resource base
The Philippine banking system remains solid.
Banks’ balance sheets were marked by a
sustained growth in assets and deposits. Asset
quality indicators also continued to improve,
while capital adequacy ratios remained above
international standards, even with the
implementation of the tighter Basel III
framework.
Savings Mobilization
Savings and time deposits remained the primary
sources of funds for the banking system. Banks’
total deposits37 as of end-July 2015 amounted to
P6.8 trillion, 7.3 percent or P0.5 trillion higher
than the year-ago level. The growth in deposits
recorded in end-July 2015 was slower than the
8.2 percent growth posted in the previous month.
Savings and demand deposits expanded by
9.0 percent and 12.3 percent, respectively.38
Time deposits, however, declined marginally by
0.2 percent or by P4.2 billion during the review
period. Meanwhile, foreign currency deposits
(FCD-Residents) owned by residents, grew by
9.6 percent, y-o-y, to P1.4 trillion.39
Institutional Developments
The increase in the resources of the banking
system slowed down significantly to 8.6 percent
to P11.5 trillion as of end-June 2015 relative to
the year-ago growth of 18.7 percent. However,
the Q2 growth was a mild deceleration from the
previous quarter’s 8.7 percent owing to the
37 This refers to the total peso-denominated deposits of the banking system. 38 The domestic liquidity or M3 growth in March 2015 also reflects statistical base effects associated with the
significant increase in domestic liquidity a year ago of 35.3 percent, following the operational adjustments involving
access of trust entities to the BSP SDA facility, which were completed in November 2013. Along with the savings, time
and demand deposits, M3 includes currency in circulation and deposit substitutes. 39 M4 is the sum of M3 and FCD-Residents. Along with savings, time and demand deposits, M3 includes currency in
circulation and deposit substitutes.
40
reduced pace in bank lending. Meanwhile, U/KBs
continued to account for 90 percent of the total
resources of the banking system. As a percent of
GDP, total resources remained steady at
88.8 percent relative to Q1 2015.
The number of banking institutions (head offices)
fell to 638 as of end-June 2015 from the year- and
quarter- ago levels of 664 and 646, respectively,
indicating continued consolidation of banks as
well as the exit of weaker players in the banking
system. By banking classification, banks (head
offices) consisted of 36 universal and commercial
banks (U/KBs), 70 thrift banks (TBs), and 532 rural
banks (RBs). Meanwhile, the operating network
(head offices and branches/agencies) of the
banking system expanded to 10,528 offices in
Q2 2015 from 10,120 offices during the same
period in the previous year and 10,456 offices in
Q1 2015, due mainly to the increase in the
branches/agencies of U/KBs, and TBs.
The Philippine banking system’s gross
non-performing loan (GNPL) ratio, at 2.4 percent
as of end-June 2015, was an improvement
relative to the 2.7 percent and 2.5 percent posted
a year- and a quarter- ago, respectively.40 Banks’
initiatives to improve their asset quality along
with prudent lending regulations helped maintain
the GNPL ratio to a level below its pre-Asian crisis
at 3.5 percent.41 Compared with the previous
quarter, the Q2 2015 GNPL ratio reflected the
combined effect of the GNPL decline by
P0.6 billion, from P141.4 billion in Q1 2015 to
P140.8 billion in Q2 2015, and the banking
system’s total loan portfolio (TLP) expansion by
P155.7 billion, from P5.7 trillion in Q1 2015 to
P5.9 trillion. Similarly, the net non-performing
loan (NNPL) ratio decreased slightly to
0.6 percent from 0.7 percent posted a year- and
a quarter-ago. In computing for the NNPLs,
specific allowances for credit losses42 on TLP are
deducted from the GNPLs. The said allowances
increased to P102.9 billion in end-June 2015 from
the P102.8 billion posted a quarter ago.
40 For comparative purposes, computations for periods prior to January 2013 are aligned with Circular No. 772. Certain
ratios were rounded-off to the nearest hundredths to show marginal movements. 41 The 3.5 percent NPL ratio was based on the pre-2013 definition. 42 This type of provisioning applies to loan accounts classified under loans especially mentioned (LEM),
substandard-secured loans, substandard-unsecured loans, doubtful accounts and loans considered as loss accounts.
41
Asset quality of Philippine banks continues to
improve
Banks remain well-capitalized amidst tighter
capital requirements
The Philippine banking system’s GNPL ratio of
2.4 percent was higher relative to Indonesia
(2.1 percent), South Korea (1.5 percent) and
Malaysia (1.2 percent), and at par with Thailand
(2.4 percent).43
The loan exposures of banks remained
adequately covered as the banking system
registered an NPL coverage ratio of
117.9 percent. The Q2 2015 ratio was higher
than the 116.4 percent posted in end-March 2015
and the 116.3 percent posted a year-ago. The
ratio is indicative of banks’ continued compliance
with the loan-loss provisioning requirements of
the BSP to ensure adequate buffers against
potential credit losses.
Compliance with the BSP capital framework for
U/KBs under the Basel III framework44 took effect
in 1 January 2014. The new Basel III regime
incorporates adjustments to the treatment of
bank capital in ways that enhance the use of the
CAR as a prudential measure.
The CARs of U/KBs stood at 15.1 percent and
16.1 percent on solo and consolidated bases at
end-March 2015. These figures are well-above
the BSP regulatory threshold of 10.0 percent and
international minimum of 8.0 percent.
The CAR figures slid from 15.2 percent on solo
and 16.2 percent on consolidated bases posted in
the previous quarter.
The industry’s capital position remains driven by
Common Equity Tier 1 (CET 1), which is the
highest quality among instruments eligible as
bank capital. The CET 1 of U/KBs represented
12.4 percent and 13.5 percent of risk weighted
assets (RWA) on solo and consolidated bases at
end-March 2015. Meanwhile, the banks’ Tier 1
ratios stood at 12.6 percent and 13.7 percent on
43 Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q4 2014);
Malaysia (banking system [impaired loans/net loans], Q2 2015); Thailand (commercial banks, Q2 2015); and South
Korea (domestic banks, Q2 2015). 44 Basel III no longer counts towards “bank capital” those Basel II-compliant capital instruments that do not have the
feature of loss absorbency. Loss absorbency refers to the ability of bank-eligible capital instruments other than
common equity to behave and act in the same way as common equity shares at the point where the bank takes losses
and becomes non-viable. In addition, Basel III now deducts from capital the investments of banks in non-allied
undertakings, defined benefit pension fund assets, goodwill and other intangible assets.
42
Exchange Rate
Peso weakens due to confluence of factors
contributing to global uncertainties
39
40
41
42
43
44
45
46
47
48
Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Q2 Q3 Q4 Q1
2015
Q2 Q3
Ph
p/U
S$
Q3 2015
P46.05/US$1
Source: Reference Exchange Rate Bulletin, Treasury Department, BSP.
Quarterly Peso-Dollar Rate
solo and consolidated bases during said period.
Tier 1 is composed of common equity and
qualified capital instruments.
The decrease in the end-March CAR was due to a
slight reduction in the U/KBs’ qualifying capital
brought about by a rise in capital adjustments
related to the banks’ investments in non-allied
businesses. This increase in capital adjustments
refers to specific exclusions that are no longer
allowed. With this change, the capital position of
banks can be better compared with the risks that
they take.
Nevertheless, the CAR of U/KBs on a consolidated
basis at 16.1 percent was higher than those of
Malaysia (15.2 percent) and South Korea
(14.1 percent), although lower compared to those
of Indonesia (18.7 percent) and Thailand
(16.7 percent).45
The peso depreciated against the US dollar in
Q3 2015. On a q-o-q basis, the peso weakened by
3.0 percent to average P46.05/US$1 from the
previous quarter’s average of P44.67/US$1.
Meanwhile, the peso depreciated by 5.0 percent
relative to the P43.77/US$1 average in the third
quarter of 2014.46 The weakness of the peso was
due primarily to global uncertainties stemming
from the prospect of rising US interest rates, the
slowdown in the Chinese economy, and the
devaluation of the yuan.
In July 2015, the peso depreciated to average
P45.26/US$1 relative to the previous month’s
average as strong US economic data bolstered
expectations that the US Fed will hike interest
rates this year.47,48 The peso further weakened in
August, averaging to P46.14/US$1, as concerns
over China’s slowing economic growth and
45 Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q4 2014);
Thailand (commercial banks, Q2 2015); Malaysia (banking system, Q2 2015); and Korea (bank holding companies,
Q2 2015). 46 Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change. 47 Consumer price index (CPI) rose 0.3% last month after increasing 0.4% in May. Last month’s increase pushed the
year-on-year CPI rate into positive territory for the first time since December. (Source: Bureau of Labor Statistics) 48 Groundbreaking for new homes increased 9.8% to a seasonally adjusted annual pace of 1.17 million units in June.
Permits for future home construction increased 7.4% to a 1.34 million-unit rate, the highest level since July 2007.
(Source: www.census.gov)
43
2012 2013 2014 2015*
Chinese Yuan 1.00 2.60 -2.70 -2.40
Philippine Peso 6.80 -7.00 -0.70 -4.30
Singapore Dollar 6.10 -2.70 -4.50 -6.90
Thai Baht (Onshore) 3.00 -4.60 -0.70 -9.50
New Taiwan Dollar 4.30 -1.90 -6.20 -3.70
Japanese Yen -10.90 -16.30 -12.50 -0.20
Korean Won 7.70 1.10 -4.30 -7.80
Malaysian Ringgit 3.50 -5.50 -6.30 -20.60
Indonesian Rupiah -5.90 -19.10 -2.10 -15.40
Indian Rupee -3.10 -11.40 -2.90 -4.10
YEAR-TO-DATE CHANGES IN SELECTED DOLLAR RATES Appreciation/(-Depreciation), in percent
Notes :
- Negative va lue represents depreciation of the currency agai nst the US dol lar
- YTD changes are computed as the percent change between the clos ing pri ces
for the year indicated versus the cl os i ng prices for the preceding year (i .e.,
clos ing prices are based on Bl oomberg data as of 31 December except for the
Phi l i ppine peso which used cl os i ng price for the la s t tradi ng day of the year).
*Based on Bl oomberg data as of 4:00 p.m., 30 September 2015
China’s unexpected move to devalue its currency
painted a bleak outlook for emerging Asia’s
financial markets, which boosted the appeal of
the US dollar as safe haven. In September, the
peso depreciated further to average P46.75/US$1
due to weak exports data for July, reflecting
sluggish external environment.
On a year-to-date basis, the peso depreciated
against the US dollar by 4.3 percent on
30 September 2015 as it closed at P46.74/US$1,
moving in tandem with the rest of Asian
currencies.49
Meanwhile, volatility, as measured by the
coefficient of variation (COV) of the peso’s daily
closing rates stood at 0.99 percent during the
third quarter, higher compared with 0.65 percent
in the previous quarter.50
On a real trade-weighted basis, during the period
July to August 2015, the peso gained external
price competitiveness against the basket of
currencies of all trading partners (TPI), trading
partners in advanced countries (TPI-A), and
trading partners in developing countries (TPI-D)
as the real effective exchange rate (REER) index
of the peso decreased by 2.01 percent,
2.76 percent, and 1.47 percent, respectively,
relative to Q2 2015. These are due to the
combined effects of the nominal depreciation of
the peso and narrowing inflation differential
against these currency baskets.51,52
Relative to Q2 2014, the peso lost external price
competitiveness against the basket of currencies
of TPI, TPI-A, and TPI-D as the peso appreciated in
real terms by 4.71 percent, 9.34 percent, and
49 Based on the last done deal in the afternoon. 50 The coefficient of variation is computed as the standard deviation of the daily closing exchange rate divided by the
average exchange rates for the period. 51 The Trading Partners Index (TPI) measures the nominal and real effective exchange rates of the peso across the
currencies of 14 major trading partners of the Philippines, which includes US, Euro Area, Japan, Australia, China,
Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand.
The TPI-Advanced measures the effective exchange rates of the peso across currencies of trading partners in advanced
countries comprising of the US, Japan, Euro Area, and Australia. The TPI-Developing measures the effective exchange
rates of the peso across 10 currencies of partner developing countries which includes China, Singapore, South Korea,
Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand. 52 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 significant increase indicates the
opposite. The NEER index, meanwhile, represents the weighted average exchange rate of the peso vis-à-vis a basket of
foreign currencies.
44
1.50 percent, respectively, due mainly to the
effect of the nominal appreciation of the peso
against these currency baskets.
45
III. FISCAL DEVELOPMENTS
NG posts lower deficit as of end-July 2015
NATIONAL GOVERNMENT FISCAL PERFORMANCE
in billion pesos
Jan-Jul Jan-Jul
Surplus -55.7 -18.5 -67.0
Revenues 1,100.5 1,264.2 15.0
Expenditures 1,156.2 1,282.7 11.0
Growth
Rate
(in percent)
Source: Bureau of the Treasury (BTr)
* Tota ls may not add up due to rounding
2014 2015
The National Government’s (NG) fiscal deficit for
the period January to July 2015 was lower at
P18.5 billion compared to the P55.7-billion deficit
incurred during the same period in 2014. This was
a reversal from the surplus recorded in the first
half of the year. Netting out the interest
payments in the expenditures, the primary
surplus amounted to P190.7 billion, P38.5 billion
or 25.0 percent higher than the level recorded in
the same period a year ago.
Revenue collection increased by 15.0 percent to
P1,264.2 billion as of end-July compared to
P1,100.5 billion in the same period in 2014, due
largely to higher revenues from other offices.
Income from other offices rose by 138 percent to
P150.2 billion, reflecting the previously remitted
P60.1 billion Coco Levy fund. Similarly, the Bureau
of Internal Revenue contributed P824.1 billion to
total revenues, representing an increase of
8.0 percent from its year-ago level. The income
generated and collected by the Bureau of the
Treasury and Bureau of Customs also increased
by 15.3 percent and 2.4 percent to P81.2 billion
and P208.7 billion, respectively.
Expenditures in the period January-July 2015
amounted to P1,282.7 billion, 10.9 percent higher
than the expenditures in the same period in 2014.
Excluding interest payments, expenditures went
up by 13.2 percent to P1,073.5 billion.
Meanwhile, interest payment was P1.2 billion
higher compared to its year-ago level, reaching
P209.2 billion as of end-July 2015.
46
IV. EXTERNAL DEVELOPMENTS Softer economic activity in emerging markets
drags down global output growth
Growth in the US accelerates
Growth in the advanced economies has found
greater traction. By contrast, economic activity
across emerging markets weakens further.
The JP Morgan Global All-Industry Output Index
fell to 52.8 in September from 53.9 in August,
as output expansion in both the manufacturing
and services sector eased. Output growth in the
US, euro area, and Japan remained firm, while
activity continued to soften across emerging
markets, particularly in China and Brazil.53
US real GDP increased by 3.9 percent q-o-q in
Q2 2015 after expanding by 0.6 percent in the
previous quarter. On a y-o-y basis, real output
growth was slightly slower at 2.7 percent
compared to 2.9 percent in Q1 2015. The faster
q-o-q expansion during the quarter reflected an
upturn in exports, personal consumption
expenditures, state and local government
spending, and nonresidential fixed investment, as
well as a deceleration in imports.54
Meanwhile, the manufacturing PMI continued to
signal an expansion in manufacturing output even
as it declined to 50.2 in September from 51.1 in
August.55 Business sentiment remained largely
upbeat mainly on expectations of modest to
strong growth across sectors, although concerns
remain over a potential slowdown in exports.
Inflation on a y-o-y basis averaged 0.2 percent in
August, the same rate as in the previous month.
The index for gasoline declined sharply during the
month, while the food index rose as the indices
for eggs and fruits and vegetables increased
notably. Meanwhile, unemployment held steady
at 5.1 percent for the second consecutive month
in September. Total nonfarm payroll employment
increased by 142,000 during the month, with
gains noted in health care and information.
By contrast, the mining sector shed jobs.
53 JP Morgan Global Manufacturing & Services PMI, http://www.markiteconomics.com/ 54 US Bureau of Economic Analysis, “National Income and Product Accounts Gross Domestic Product: Second Quarter
2015 (Third Estimate),” news release, 25 September 2015.
http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp2q15_3rd.pdf 55 Institute for Supply Management, “September 2015 Manufacturing ISM Report On Business”, 1 October 2015,
https://www.instituteforsupplymanagement.org
47
Economic activity in the euro area remains
firm
Indicators point to a modest recovery of
economic activity in Japan
Measures of consumer confidence continued to
indicate a generally optimistic outlook by
households on account of improved economic
prospects, suggesting a favorable outlook for
household spending. The Conference
Board Consumer Confidence Index rose to 103.0
in September from 101.3 in the previous month,56
while the Thomson-Reuters/University of
Michigan Index of Consumer Sentiment eased to
87.2 in September from 91.9 in August.57
Similarly, in the euro area, on a q-o-q basis, real
GDP grew by 0.4 percent in Q2 2015 in Q2 2015,
slightly slower than the 0.5-percent expansion in
the previous quarter. On a y-o-y basis, real GDP
growth was faster at 1.5 percent in Q2 2015
compared to 1.2 percent in Q1 2015.58
The composite PMI for the euro area eased
slightly from 54.3 in August to 53.6 in September,
with new incoming business continuing to grow
at a solid clip.59
The seasonally adjusted unemployment rate was
steady at 11.0 percent in July and August.60
Meanwhile, inflation declined to negative
0.1 percent in September from 0.1 percent in the
previous month.61
The European Commission’s Economic Sentiment
Indicator for the euro area increased to 105.6 in
September from 104.1 in August, as confidence in
industry, services, and retail trade improved.
Consumer confidence was broadly stable.62
In contrast, Japan’s real GDP decreased by
0.3 percent, q-o-q, in Q2 2015 after expanding by
1.1 percent in the previous quarter.63 The q-o-q
contraction was due to the drop in industrial
production, reflecting weaker external demand
owing to the slowdown in overseas economies.
56 “Consumer Confidence Increased Moderately in September.” 29 September 2015. http://www.conference-
board.org/ 57 “Volatile Stock Prices and Persistent Job and Income Growth.” 25 September 2015.
http://press.sca.isr.umich.edu/press/press_release 58 Eurostat news release 152/2015 dated 8 September 2015. 59 Markit Eurozone Composite PMI – final data, http://www.markiteconomics.com/ 60 Eurostat news release 167/2015 dated 30 September 2015. 61 Flash estimate. Eurostat news release 168/2015 dated 30 September 2015. 62 European Commission. http://ec.europa.eu/ 63 Department of National Accounts, Economic and Social Research Institute, Cabinet Office.
http://www.esri.cao.go.jp/
48
Chinese manufacturing activity slows down
further
Growth eases in India
However, real GDP expanded by 0.8 percent y-o-y
in Q2 2015 following the 0.8-percent decline in
Q1 2015.
Meanwhile, the seasonally adjusted
manufacturing PMI declined to 51.0 in September
from 51.7 in August, as production expanded at a
slower pace. While domestic demand remained
firm, new export orders declined mainly on
reduced trade volumes with China.64
Inflation was stable at 0.2 percent y-o-y in August
from the same rate in July. The seasonally
adjusted unemployment rate increased to
3.4 percent in August from 3.3 percent in July.
Meanwhile, China’s real GDP grew by 7.0 percent,
y-o-y, in Q2 2015, the same pace as in the
previous quarter. Agricultural and industrial
production showed steady growth, while
investment in fixed assets slowed down. The
seasonally adjusted manufacturing PMI fell
marginally to 47.2 in September from 47.3 in
August as total new domestic and export orders
continued to decline, indicating softer demand
conditions.65
Inflation rose to 2.0 percent in August from
1.6 percent in the previous month. The prices of
food, particularly fresh vegetables as well as
meat, poultry and related products (especially
pork) drove inflation.
Finally, India’s real GDP increased by 7.0 percent,
y-o-y, in Q2 2015, slower than the 7.5-percent
expansion in the previous quarter.66 Meanwhile,
the composite PMI decreased to 51.5 in
September from 52.6 in August, reflecting a
slower increase in both output in both the
manufacturing and services sectors owing to
weaker domestic demand.
Inflation based on the consumer price index (CPI)
remained at 3.7 percent for the second
consecutive month in August.
64 Nikkei Japan Manufacturing PMI, http://www.markiteconomics.com/ 65 Caixin China General Manufacturing PMI, http://www.markiteconomics.com/ 66 Central Statistics Office of India. http://mospi.nic.in/Mospi_New/Site/home.aspx
49
Several central banks decided to ease their
monetary policy settings to support domestic
economic activity amid a benign inflation
environment
On 15 July 2015, the Bank of Canada reduced its
overnight rate by 25 bps to 0.5 percent from
0.75 percent to provide further stimulus to the
economy, prompted by the downward revision in
Canadian growth figures due to soft export
figures as well as by a below-target inflation
environment.
The Reserve Bank of New Zealand (RBNZ) also cut
its official cash rate by 25 bps each on
23 July 2015 and 9 September 2015 to
2.75 percent to support economic growth and to
steer inflation towards the announced target.
GDP growth, which was projected at around
2 percent in 2015, was below the 3.3-percent
average in 2014. Meanwhile, CPI headline
inflation was at 0.4 percent for Q2 and was
projected to stay on a downward path for the rest
of the year, well below the government of New
Zealand’s annual inflation target of 1-3 percent.
On 26 August 2015, the PBoC reduced the
one-year RMB benchmark loan interest rate and
deposit rate by 25 bps each to 4.60 percent and
1.75 percent, respectively, to reduce borrowing
costs of the corporate sector in a move to
support the domestic economy. The PBoC also
reduced the headline reserve requirement ratio
by 50 bps to ensure sufficient liquidity in the
banking system. The reserve requirement ratios
for targeted sectors such as rural banks and
financing companies were likewise reduced to
support the agricultural sector and small and
medium enterprises as well as boost domestic
consumption.
On 24 September 2015, the Central Bank of the
Republic of China (Taiwan) (CBC) reduced its
discount rate by 12.5 bps to 1.75 percent from
1.875 percent, effective 25 September 2015. This
is the first policy rate adjustment by the CBC since
2011. The CBC lowered its output growth
projections for the second semester of 2015 to
1.01 percent from 2.14 percent amid a
contraction in exports and manufacturing activity.
Meanwhile, CPI inflation remained negative due
mainly to declining prices of energy-related items.
On 29 September 2015, the Reserve Bank of India
lowered its policy repo rate by 50 bps to
50
6.75 percent from 7.25 percent in an effort to
steer headline inflation towards their midpoint
target. As of August 2015, India’s CPI inflation
stood at 3.66 percent in August—the lowest rate
since November 2014 but still within the target of
4.0 percent ± 2 percentage points. Meanwhile,
underlying economic activity has been weak due
largely to weak exports, adverse weather (rainfall
deficiency), and sluggish industrial production
and investment.
V. MONETARY POLICY DEVELOPMENTS
The BSP maintains monetary policy settings
during the quarter
0
1
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in p
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Overnight RRP Rate Overnight RP rate SDA rate
BSP Policy Rates
During its monetary policy meetings on 13 August
and 24 September, the BSP decided to maintain
its key policy interest rates at 4.0 percent for the
overnight borrowing or RRP facility and
6.0 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs, and
SDAs were also kept steady. The reserve
requirement ratios were left unchanged as well.
The Monetary Board’s (MB) decision was based
on its assessment of the dynamics and risks in the
inflation environment over the policy horizon.
Latest baseline forecasts show that inflation could
fall below the inflation target range of 3 percent
± 1 percentage point for 2015 due to the
successive low inflation outturns in recent
months. Nevertheless, inflation is projected to
return gradually to a path consistent with the
inflation target for 2016-2017. Meanwhile,
inflation expectations remain anchored within the
inflation target band over the policy horizon.
The MB likewise noted that upside risks could
come from the impact of stronger and protracted
El Niño dry weather conditions on food prices and
utility rates as well as pending petitions for power
rate adjustments. In addition, the MB considered
the weakness in the global economy and the
continuing uncertainty in the global financial
markets.
In deciding to keep the BSP’s monetary policy
settings unchanged, the MB observed that the
recent benign inflation outturns have been the
result of favorable supply-side conditions, which
are seen as largely transitory. Over the policy
horizon, inflation is projected to rise gradually
51
and stabilize within the lower half of the inflation
target range. At the same time, the MB noted
that domestic demand conditions remain firm
despite the lower-than-expected second-quarter
output growth, supported by buoyant business
and consumer sentiment and ample domestic
liquidity.
Given these considerations, the MB believes that
the benign inflation outlook and the economy’s
underlying growth momentum provide ample
room to keep monetary policy settings
unchanged at this time. Going forward, the BSP
will continue to monitor emerging price and
output conditions to ensure that the monetary
policy stance stays in line with maintaining price
and financial stability.
In addition, the BSP announced on
30 September 2015 its plan to implement an
interest rate corridor (IRC) system by Q2 2016.
The IRC system will introduce key changes in the
framework for monetary operations designed to
enhance the effectiveness of monetary policy.
The shift to IRC will not represent a change in the
BSP’s monetary policy stance and is not expected
to have a significant impact on the general level
of interest rates. Nevertheless, the IRC system
will help improve the transmission of policy rate
adjustments through the conduct of active
liquidity management operations to effectively
implement the monetary policy stance.
Moreover, the IRC is expected to support the
development of capital markets by providing an
enabling environment for increased money
market transactions.
52
VI. INFLATION OUTLOOK
BSP Inflation Forecasts 67
Latest BSP forecasting exercises indicate
inflation could settle slightly below the low-end
of the 2015 target range and approach the
midpoint of the target range in 2016 – 2017
The latest BSP baseline forecasts show that
inflation could settle slightly below the
government’s target range of 3.0 percent ± 1.0
percentage point for 2015 before approaching
the midpoint of the target range in 2016 – 2017.
The inflation projection for 2015 is lower
compared to the previous quarter’s forecast due
mainly to the lower global crude oil prices as well
as the lower-than-projected Q2 2015 GDP
growth. Meanwhile, the slightly higher inflation
forecast for 2016 reflected a weaker peso and the
possibility of a longer El Niño episode.
Demand Conditions
Domestic growth fundamentals remain intact.
Following the lower-than-expected real GDP
growth in the previous quarter, the domestic
economy accelerated to post a 5.6-percent
expansion in Q2. Growth was driven mainly by
steady increase in private consumption and
marked improvement in investment. This brought
the first semester real output growth to
5.3 percent.
Other real sector indicators support the view of a
firm underlying growth momentum. More than
half of all major manufacturing sectors continued
to operate above 80 percent of their capacity.
The composite PMI has consistently remained
above the 50-point mark at 51.4 in June 2015.
There have also been improvements in labor
market conditions with the unemployment rate
lower compared to a year ago, based on the
results of the July 2015 LFS.
The optimistic outlook for real economic activity
has also been reflected in the results of the BSP
business expectations survey. While business
confidence may have been less buoyant in
Q3 2015, it showed a more bullish outlook for the
next quarter due to expectations of brisker
business during the holiday season and the
67 The inflation forecast path in this report refers to the forecasts presented during the 24 September 2015 Monetary
Policy Meeting. In the discussions, these forecasts are compared to the forecasts presented in the Q2 Inflation Report
(or the forecasts during the 25 June 2015 Monetary Policy Meeting).
53
Favorable supply prospects point to
manageable inflation environment over the
policy horizon
generally favorable macroeconomic conditions.
Meanwhile, in anticipation of more jobs and
higher income, consumer confidence rose in Q3
2015 as indicated by the results of the third
quarter BSP Consumer Expectations Survey. For
the fourth quarter, consumer expectations
likewise point to a more favorable outlook as
consumer confidence turned robust due to
expectations of higher family income, increased
employment opportunities, and brisker
businesses.
Supply Conditions
Commodity prices are likely to remain subdued,
reflecting ample supply conditions. Food inflation
is likely to remain benign over the near term
given prospects of good harvest of key
agricultural commodities. However, a
strengthening of the ongoing El Niño weather
disturbance could affect production, potentially
translating to higher food prices. Similarly,
international oil prices are likely to remain below
2014 levels as suggested by futures prices of oil
and forecasts by multilateral agencies with
modest gains over the medium term.
Global agricultural prices are expected to decline
in 2015 and remain at moderate levels over the
medium term. Forecasts by the IMF and the
World Bank suggest a continued decline in
benchmark prices of key grains (wheat, maize,
and rice) for 2015 and 2016. Despite the ongoing
El Niño weather phenomenon, ample supply
conditions should keep food price pressures at
bay.
In the domestic front, the 0.3-percent contraction
in agriculture output in Q2 was driven largely by
the 2.8-percent and 15.6-percent decline in palay
and corn production, respectively. However,
Q3 palay and corn production could strengthen
by 11.7 percent and 4.3 percent, respectively,
based on farmers’ planting intentions.
The anticipated growth in palay and corn output
in the third quarter could be traced to the likely
increase in harvest areas, attributable to
government interventions, such as the provision
of high-yielding seeds and the on-going
54
rehabilitation of water supplies.68
The intensifying El Niño levels, which could last
until the first half of 2016, could lead to moderate
to severe drought conditions during the said
period. The latest assessment of the Philippine
Atmospheric, Geophysical and Astronomical
Services Administration (PAGASA) showed that
slightly warmer average temperature and
significant reduction in rainfall could result in
moderate to severe drought conditions over the
forecast horizon. The weather bureau noted that
46 provinces are likely to experience drought,
14 provinces are likely to experience dry spell,
and nine provinces are likely to experience dry
conditions by December 2015. By February 2016,
provinces that could experience drought could
increase to 65, while those that could experience
dry spell and dry conditions will fall to one and
two provinces, respectively. Stronger El Niño
conditions could provide upside pressures on the
prices of agricultural commodities and utilities.
To help mitigate the impact of El Niño on
agricultural production, the Department of
Agriculture (DA) has activated its National El Niño
Task Force to coordinate the various response
measures. These programs include cloud seeding
operations, installation of alterative irrigation
systems, crop rotation, the use of hybrid crop
varieties, and other government assistance for
farmers.
In the oil market, international oil prices have
decreased compared to the previous quarter’s
level. The decline in crude oil prices could be
traced to a combination of ample supply, sluggish
demand, and a strong dollar.
Looking ahead, futures prices of oil as well as
forecasts by multilateral agencies suggest that oil
prices are likely to remain below 2014 levels.
Forecast by the EIA suggests that Brent crude oil
price could fall to US$ 54.07 per barrel in 2015 to
increase slightly to US$ 58.57 per barrel in 2016.
Similarly, projections by the IMF and the World
Bank show that crude oil prices could settle
below the 2014 levels. There is, however,
substantial uncertainty in its outlook with
68 PSA, Rice and Corn Situation Outlook Update, June 2015, available online at http://www.bas.gov.ph
55
Output gap estimate widens
concerns over the re-entry of Iran in the export
market, the strength of oil consumption growth,
and the responsiveness of non-OPEC production
to the current low prices. Nonetheless, the lower
prices of oil could imply a decline in input costs as
well as reduced demand for biofuels.69,70
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. 71
Given the latest GDP data, preliminary estimates
by the BSP show a higher positive output gap in
Q2 2015 relative to the previous quarter. The
output gap widened as the q-o-q expansion in
actual output outpaced estimated potential
output growth during the review period.72
Key assumptions used to generate the BSP’s
inflation forecasts
The BSP's baseline inflation forecasts generated
from the BSP’s single equation model (SEM) and
the multi-equation model (MEM) are based on
the following assumptions:
1) BSP’s overnight RRP rate at 4.00 percent
from October 2015 to December 2017;
2) BSP’s reserve requirement at
20.0 percent from October 2015 to
December 2017;
3) NG fiscal deficits for 2015 to 2017, which
are consistent with the DBCC-approved
estimates;
4) Dubai crude oil price assumptions, the
trend of which is consistent with the
trend of the futures prices of oil in the
international market;
5) Increase in nominal wage of 5.6 percent
in April 2016 and April 2017;
69 IMF, Commodity Price Outlook and Risks, 12 August 2015, available online at http://www.imf.org 70 World Bank, Commodity Markets Outlook, July 2015, available online at http://www.worldbank.org 71 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). 72 Based on the seasonally-adjusted GDP growth
56
Risks to the Inflation Outlook
Latest projected inflation path is lower for
2015, but slightly higher for 2016
Upside risks could come from the impact of
stronger and protracted El Niño dry weather
conditions on food prices and utility rates as
well as pending petitions for power rate
adjustments while the weakness in the global
economy could provide downside risk to
inflation
6) Real GDP growth is endogenously
determined in the BSP’s MEM; and
7) Foreign exchange rate is endogenously
determined in the BSP’s MEM through
the purchasing power parity and interest
rate parity relationships.
The risks to the inflation outlook 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.
Compared to the previous quarter, the latest fan
chart presents a downward shift in the inflation
projections for 2015 and a slightly higher path for
2016. The reduction in the inflation projections
for 2015 could be attributed mainly to the lower
global crude oil prices as well as the
lower-than-projected Q2 2015 GDP growth.
Meanwhile, inflation forecasts for 2016 increased
due to the projected depreciation of the peso
along with the impact of a protracted El Niño
episode.
The latest fan chart also shows that there are
uncertainties further out as shown by the
widening bands of the chart over time.
The BSP’s review of current price trends suggests
that there are risks surrounding the inflation
outlook. This assessment is captured in the latest
fan chart by the projected bands above and
below the central projection.
Pending petitions for power rate adjustments and
the impact of stronger and protracted El Niño dry
weather conditions on food prices and utility
rates represent upside risks to inflation. The
ongoing weakness in the global economy could
provide downside risk to inflation.
57
The occurrence of stronger-than-expected El Niño
weather disturbance could adversely impact
domestic food supply. The said weather condition
is expected to manifest as stronger-than-usual
typhoons, which could impact negatively the
planting season, ultimately posing a risk to food
prices. In addition, drier weather conditions as a
result of the El Niño weather phenomenon could
adversely affect hydro-powered generation plants
and raise the cost of electricity and water.
The pending petition of Meralco on the
December 2013 rate adjustment, which is still
under the temporary restraining order of the
Supreme Court, also continues to pose an upside
risk to the inflation outlook.
Meanwhile, the possibility of a slower global
economic growth could imply weaker demand-
related price pressures as well as further
uncertainties in the global oil market. Financial
market turbulence, particularly due to surprises in
the US Federal Reserve policy actions, re-
emergence of weakness in the euro area, dollar
appreciation, geopolitical tensions in the Middle
East, and weaker-than-expected performance of
China represent downside risks to the global
growth prospects.
58
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. It
covers 25 percent of the probability distribution. Each successive pair of bands is drawn to cover a
further 25 percent of probability, until 75 percent of the probability distribution is covered. Lastly, the
lightest band covers the lower and upper 90 percent of the probability distribution. 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 in the previous report.
The shaded area, which measures the range of uncertainty, is based on the forecast errors from the past
years. In greater detail, it can be enhanced by adjusting the level of skewness of the downside and
upside shocks that could affect the inflationary process over the next two years in order to change the
balance of the probability area lying above or below the central projection.
59
VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE
The average headline inflation is projected to
be within the inflation target range over the
2016-2017 period
Inflation expectations reflected in forecast
surveys of private sector economists remain
well-anchored
Headline inflation and other price indicators
ease further
The latest baseline inflation forecasts have shifted
downward to average slightly below the target
range for 2015 but continue to move close to the
3.0 percent ± 1.0 ppt inflation target range for
2016-2017. The reduction in the forecasted
inflation path for 2015 could be attributed mainly
to lower global crude oil prices and
lower-than-expected Q2 2015 GDP growth.
Meanwhile, forecasted inflation is higher in
2016-2017 mainly due to a weaker peso and the
possibility of a longer El Niño episode.
Risks to the inflation outlook continue to be
broadly balanced. Potential adjustments in
electricity rates given pending petitions and the
impact of stronger-than-expected El Niño
conditions are seen as the key upside risks to
inflation. Slower global economic activity poses
downside risk.
Inflation expectations based on surveys of private
sector economists have remained within the
inflation target range over the policy horizon
while falling below the lower bound of the target
range for 2015. Results of the September 2015
BSP’s survey of private sector economists yielded
lower mean inflation forecasts at 1.7 percent for
2015 (from 2.3 percent in June), 2.7 percent for
2016 (from 3.1 percent), and 2.9 percent for 2017
(from 3.0 percent). Results of the September
2015 Consensus Economics inflation forecast
survey for the country also showed lower mean
inflation forecasts at 1.9 percent for 2015
(from 2.4 percent in June) and 3.2 percent for
2016 (from 3.5 percent).
In Q3 2015, the headline inflation slowed down to
0.6 percent from 1.7 percent in the previous
quarter. This brought the year-to-date average
inflation rate to 1.6 percent, which is below the
low end of the inflation target range of
3.0 percent ± 1.0 ppt for 2015. Similarly, core
inflation along with the three alternative
measures of core inflation estimated by the BSP
was lower in Q3 2015 relative to the previous
quarter. The lower inflation readings were traced
mainly to the deceleration in food and energy
inflation.
60
Domestic demand conditions remain firm
The global economy is expanding at a
moderate pace but recent market volatility has
created broader uncertainty
The Q2 2015 GDP data showed some recovery in
growth momentum, with the economy expanding
year-on-year by 5.6 percent. The second-quarter
performance was supported by growth in all
expenditure items, notably household
consumption, capital formation, and government
spending. However, while domestic sources of
growth continued to improve, weak global
demand, which affected the performance of
trade-in-goods sector, weighed on overall GDP
growth in Q2 2015.
Overall prospects for the domestic economy
remain favorable for the rest of the year.
Private domestic demand is expected to continue
to support the economy, aided by low inflation.
Continued and broad-based expansion in bank
lending is expected to continue to underpin
domestic economic activity. In addition, higher
capital formation should contribute to economic
growth as investments in durable equipment and
construction continued to expand. Stepped-up
fiscal spending in the third quarter should help
sustain faster growth momentum. While the
results of the most recent Business Expectations
Survey showed less optimistic business sentiment
for Q3 2015, business outlook appears to be more
upbeat for the fourth quarter. Meanwhile,
consumer sentiment has remained negative for
Q3 2015, albeit less so than in the previous
survey. Consumer confidence, however, is seen to
turn positive for the next quarter and is expected
to remain broadly steady over the next
12 months.
Recovering growth momentum in the US as well
as lower level of oil prices and accommodative
global financial conditions continue to support
global economic conditions. However, the growth
slowdown in China and soft conditions in the rest
of East Asia have clouded the outlook for the
global economy. Financial markets have been
considerably more volatile of late, associated with
developments in China and uncertainties arising
from the expected start of monetary policy
tightening in the US.
61
Current monetary policy settings remain in
view of the emerging outlook for inflation and
demand conditions
Inflation is projected to remain consistent with
the target while inflation expectations remain
well-contained over the policy horizon.
Deflationary risks are still seen to be minimal,
given firm demand-side conditions, and that
favorable supply-side factors continue to largely
underpin benign inflation readings.
At the same time, the BSP has some room to keep
monetary policy levers steady as most of the
newly available information continue to indicate
broad buoyancy in domestic demand. Thus, the
economy does not need further monetary
stimulus at the moment to drive domestic
consumption. Credit activity is recording
sustained growth, as liquidity growth continues to
keep pace with the overall requirements of the
economy. Notwithstanding the uncertainty in the
external environment, prevailing monetary policy
settings are expected to support aggregate
demand by providing insurance against global
economic headwinds. The current stance of
monetary policy is also deemed appropriately
aligned in terms of minimizing the risk of asset
price bubbles and maintaining financial stability.
Finally, it would be prudent to maintain present
monetary policy settings for the time being to
better gauge the impact of the expected US Fed
normalization. Over the period ahead, emerging
market economies (EMEs) could face the
challenge of potential capital flow reversals and
renewed volatility in financial markets. Keeping
policy settings unchanged will allow authorities to
consider further information on economic and
financial conditions that will become available the
period ahead, and provide flexibility in
responding to future monetary policy challenges
resulting from the critical early stages of policy
normalization in the US.
Going forward, the BSP will continue to monitor
domestic and external developments to ensure
that the monetary policy stance remains
consistent with its price and financial stability
objectives.
62
SUMMARY OF MONETARY POLICY DECISIONS
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2008 JAN 31 5.00 7.00 The Monetary Board (MB) decided to reduce
by 25 basis points (bps) the BSP’s key policy
interest rates to 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, RPs, and special deposit accounts
(SDAs) were also reduced accordingly. In its
assessment of macroeconomic conditions, the
MB noted that the latest inflation forecasts
indicated that inflation would fall within the
4.0 percent ± 1 percentage point target range
in 2008 and the 3.5 ± 1 percentage point target
range in 2009.
MAR 13 5.00 7.00 The MB decided to keep the BSP’s key policy
interest rates at 5 percent for the overnight
borrowing or RRP facility and 7 percent for the
overnight lending or RP facility. The MB also
decided to implement immediately the
following refinements in the 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 the
remaining tenors. The interest rates on term
RRPs and RPs were also left unchanged.
APR 24 5.00 7.00 The MB kept the BSP’s key policy interest rates
at 5.0 percent for the overnight borrowing or
RRP facility and 7.0 percent for the overnight
lending or RP facility. The interest rates on
term RRPs and RPs were also left unchanged.
JUN 5 5.25 7.25 The MB decided to increase by 25 bps the BSP’s
key policy interest rates to 5.25 percent for the
RRP facility and 7.25 percent for RP facility as
emerging baseline forecasts indicate a likely
breach of the inflation target for 2008 along
with indications that supply-driven pressures
are beginning to feed into demand. Given the
early evidence of second-round effects, the MB
recognized the need to act promptly to rein in
inflationary expectations. The interest rates on
term RRPs, RPs, and SDAs were also increased
accordingly.
JUL 17 5.75 7.75 The MB increased by 50 bps the BSP’s key
policy interest rates to 5.75 percent for the
overnight borrowing or RRP facility and
7.75 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also increased accordingly.
AUG 28 6.00 8.00 The MB increased by 25 bps the BSP’s key
policy interest rates to 6.0 percent 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, RPs, and SDAs were also
increased accordingly.
63
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2008 OCT 6 6.00 8.00 The MB kept the BSP’s key policy interest rates
unchanged at 6.0 percent for RRP facility and
8.0 percent for the RP facility. The interest
rates on term RRPs, RPs, and SDAs were also
left unchanged.
NOV 6 6.00 8.00 The MB decided to keep the BSP’s key policy
interest rates steady at 6 percent for the
overnight borrowing or RRP facility and
8 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also left unchanged.
DEC 18 5.50 7.50 The MB decided to reduce the BSP’s key policy
interest rates by 50 bps to 5.5 percent for the
overnight borrowing or RRP facility and
7.5 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also adjusted accordingly.
Latest baseline forecasts showed a decelerating
inflation path over the policy horizon, with
inflation falling within target by 2010. This
outlook is supported by the downward shift in
the balance of risks, following the easing of
commodity prices, the moderation in inflation
expectations, and the expected slowdown in
economic activity.
2009 JAN 29 5.00 7.00 The MB decided to reduce the BSP’s key policy
interest rates by another 50 bps to 5 percent
for the overnight borrowing or RRP facility and
7 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also adjusted accordingly.
Latest baseline forecasts showed a decelerating
inflation path over the policy horizon, with
inflation falling within target by 2010. The MB
based its decision on the latest inflation
outlook which shows inflation falling within the
target range for 2009 and 2010. The Board
noted that the balance of risks to inflation is
tilted to the downside due to the softening
prices of commodities, the slowdown in core
inflation, significantly lower inflation
expectations, and moderating demand.
MAR 5 4.75 6.75 The MB decided to reduce the BSP’s key policy
interest rates by 25 bps to 4.75 percent for the
overnight borrowing or RRP facility and
6.75 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also reduced accordingly. Given
possible upside risks to inflation, notably the
volatility in oil prices and in exchange rates,
increases in utility rates, and potential price
pressures coming from some agricultural
commodities, the MB decided that a more
measured adjustment of policy rates was
needed.
64
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2008 APR 16 4.50 6.50 The MB reduced key policy rates by another
25 bps to 4.5 percent for the overnight
borrowing or RRP facility and 6.5 percent for
the overnight lending or RP facility, effective
immediately. This rate cut brings the
cumulative reduction in the BSP’s key policy
rates to 150 bps since December last year. The
current RRP rate is the lowest since 15 May
1992. Meanwhile, the interest rates on term
RRPs, RPs, and SDAs were also reduced
accordingly. In its assessment of
macroeconomic conditions, the MB noted that
the latest baseline inflation forecasts indicated
a lower inflation path over the policy horizon,
with average inflation expected to settle within
the target ranges in 2009 and 2010. In addition,
the MB considered that the risks to inflation
are 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.
2009 MAY 28 4.25 6.25 The MB decided to reduce the BSP’s key policy
interest rates by another 25 bps to
4.25 percent for the overnight borrowing or
RRP facility and 6.25 percent for the overnight
lending or RP facility. The interest rates on
term RRPs, RPs, and SDAs were also reduced
accordingly. 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. In addition,
the Monetary Board considered that, on
balance, the risks to inflation are 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.
JUL 9 4.00 6.00 The MB decided to reduce the BSP's key policy
interest rates by 25 bps to 4 percent for the
overnight borrowing or RRP facility and
6 percent for the overnight lending or RP
facility, effective immediately. The interest
rates on term RRPs, RPs, and SDAs were
reduced accordingly. This is the sixth time since
December 2008 that the BSP has cut its policy
interest rates.
AUG 20
OCT 1
NOV 5
DEC 17
4.00
6.00
The MB kept key policy rates unchanged at
4 percent for the RRP facility and 6 percent for
the overnight lending RP facility. The decision
to maintain the monetary policy stance comes
after a series of policy rate cuts since
December 2008 totaling 200 bps and other
liquidity enhancing measures.
65
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2010
JAN 28
MAR 11
APR 22
JUN 3
JUL 15
AUG 26
OCT 7
NOV 18
DEC 29
4.00 6.00 The MB decided to keep the BSP's key policy
interest rates steady at 4 percent for the RRP
facility and 6 percent for the RP facility. The
interest rates on term RRPs, RPs, and SDAs
were also left unchanged.
2011 FEB 10 4.00 6.00 The MB decided to keep the BSP’s key policy
interest rates steady at 4 percent for the
overnight borrowing or RRP facility and
6 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also left unchanged.
MAR 24 4.25 6.25 The MB decided to increase by 25 bps the BSP’s
key policy interest rates to 4.25 percent for the
overnight borrowing or RRP facility and 6.25
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDAs
were also raised accordingly. The MB’s decision
was based on signs of stronger and broadening
inflation pressures as well as a further upward
shift in the balance of inflation risks.
International food and oil prices have
continued to escalate due to the combination
of sustained strong global demand and supply
disruptions and constraints.
MAY 5 4.50 6.50 The MB decided to increase the BSP’s key
policy interest rates by another 25 bps to
4.5 percent for the overnight borrowing or RRP
facility and 6.5 percent for the overnight
lending or RP facility. The interest rates on
term RRPs, RPs, and SDAs were also raised
accordingly. Baseline inflation forecasts
continue to suggest that the 3-5 percent
inflation target for 2011 remains at risk, mainly
as a result of expected pressures from oil
prices.
JUN 16 4.50 6.50 The MB decided to keep policy rates steady at
4.5 percent for the overnight borrowing or RRP
facility and 6.5 percent for the overnight
lending or RP facility. At the same time, the
Board decided to raise the reserve requirement
on deposits and deposit substitutes of all banks
and non-banks with quasi-banking functions by
one percentage point effective on Friday,
24 June 2011. The MB's decision to raise the
reserve requirement is a preemptive move to
counter any additional inflationary pressures
from excess liquidity.
66
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2011 JUL 28 4.50 6.50 The MB maintained the BSP's key policy
interest rates at 4.5 percent for the overnight
borrowing or RRP facility and 6.5 percent for
the overnight lending or RP facility. At the same
time, the Board increased anew the reserve
requirement on deposits and deposit
substitutes of all banks and non-banks with
quasi-banking functions by one percentage
point effective on 5 August 2011. The MB's
decision to raise the reserve requirement anew
is a forward-looking move to better manage
liquidity.
SEP 8
OCT 20
DEC 1
4.50
6.50
The MB decided to keep the overnight policy
rates steady. At the same time, the reserve
requirement ratios were kept unchanged.
2012 JAN 19
4.25 6.25 The MB decided to reduce the BSP's key policy
interest rates by 25 bps to 4.25 percent for the
overnight borrowing or RRP facility and
6.25 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also reduced accordingly The
MB's decision is based on its assessment that
the inflation outlook remains comfortably
within the target range, with expectations well-
anchored and as such, allowed some scope for
a reduction in policy rates to help boost
economic activity and support market
confidence.
MAR 1 4.00 6.00 The MB decided to reduce the BSP's key policy
interest rates by another 25 bps to 4.0 percent
for the overnight borrowing or RRP facility and
6.0 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also reduced accordingly. The
MB is of the view that the benign inflation
outlook has allowed further scope for a
measured reduction in policy rates to support
economic activity and reinforce confidence.
APR 19 4.00 6.00 The MB decided to keep the BSP’s key policy
interest rates steady at 4 percent for the
overnight borrowing or RRP facility and 6
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDAs
were also left unchanged.
2012 JUN 14 4.00 6.00 The MB decided to keep the BSP’s key policy
interest rates steady at 4 percent for the
overnight borrowing or RRP facility and
6 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also left unchanged. The MB’s
decision was based on its assessment that the
inflation environment remains manageable.
Baseline forecasts continue to track the lower
half of the 3-5 percent target range for 2012
and 2013, while inflation expectations remain
firmly anchored. At the same time, domestic
macroeconomic readings have improved
significantly in Q1 2012.
67
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2012 JUL 26 3.75 5.75 The MB decided to reduce the BSP’s key policy
interest rates by 25 bps to 3.75 percent for the
overnight borrowing or RRP facility and 5.75
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDAs
were also reduced accordingly. This is the third
time in 2012 that the BSP has cut its policy
rates. The MB’s decision was based on its
assessment that price pressures have been
receding, with risks to the inflation outlook
slightly skewed to the downside. Baseline
forecasts indicate that inflation is likely to
settle within the lower half of the 3-5 percent
target for 2012 and 2013, as pressures on
global commodity prices are seen to continue
to abate amid weaker global growth prospects.
At the same time, the MB is of the view that
prospects for global economic activity are likely
to remain weak.
SEP 13 3.75 5.75 The MB decided to keep the BSP’s key policy
interest rates steady at 3.75 percent for the
overnight borrowing or RRP facility and 5.75
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDAs
were also left unchanged. The MB’s decision
was based on its assessment that the inflation
environment remains benign, with the risks to
the inflation outlook appearing to be broadly
balanced.
OCT 25 3.50 5.50 The MB decided to reduce the BSP’s key policy
interest rates by 25 bps to 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDAs
were also reduced accordingly. This is the
fourth time in 2012 that the BSP has cut its
policy rates. The MB’s decision was based on its
assessment that the inflation environment
continued to be benign with latest baseline
forecasts indicating that the future inflation
path will remain within target for 2012-2014. A
rate cut would also be consistent with a
symmetric response to the risk of below-target
inflation.
2012 DEC 13 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and
5.50 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDAs were also left unchanged. The MB’s
decision was based on its assessment that
current monetary settings remained
appropriate, as the cumulative 100-basis-point
reduction in policy rates in 2012 continued to
work its way through the economy.
68
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2013 JAN 24 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and
5.50 percent for the overnight lending or RP
facility. The interest rates on term RRPs and
RPs were also maintained accordingly. The
reserve requirement ratios were kept steady as
well. At the same time, the MB decided to set
the interest rates on the SDA facility at
3.00 percent regardless of tenor, effective
immediately, consistent with the BSP’s
continuing efforts to fine-tune the operation of
its monetary policy tools.
MAR 14 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rate on the RRP was also set at
3.50 percent regardless of tenor. Following its
previous decision to rationalize the SDA facility
in January 2013, the MB further reduced the
interest rates on the SDA facility by 50 bps to
2.50 percent across all tenors effective
immediately.
APR 25 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rate on the RRP was also set at
3.50 percent regardless of tenor. Meanwhile,
the SDA rate was further reduced by 50 basis
points to 2.0 percent across all tenors.
JUN 13 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and
5.50 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDA were also maintained.
JUL 25 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and
5.50 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDA were also maintained.
SEP 12 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also maintained.
OCT 24 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and
5.50 percent for the overnight lending or RP
facility. The interest rates on term RRPs, RPs,
and SDA were also maintained.
69
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2013 DEC 12 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also maintained.
2014 FEB 6 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also maintained.
MAR 27 3.50 5.50 The MB decided to keep the BSP’s key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also maintained. Meanwhile, the MB
decided to increase the reserve requirement by
one percentage point effective on 11 April
2014.
MAY 8 3.50 5.50 The MB decided to keep the BSP's key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also maintained. Meanwhile, the MB
decided to increase the reserve requirements
for U/KBs and TBs by a further one percentage
point effective on 30 May 2014.
JUN 19 3.50 5.50 The MB decided to keep the BSP's key policy
interest rates steady at 3.50 percent for the
overnight borrowing or RRP facility and 5.50
percent for the overnight lending or RP facility.
The interest rates on term RRPs and RPs were
also maintained. The reserve requirement
ratios were left unchanged as well. Meanwhile,
the MB decided to raise the interest rate on the
SDA facility by 25 basis points from 2.0 percent
to 2.25 percent across all tenors effective
immediately.
JUL 31 3.75 5.75 The MB decided to increase the BSP's key
policy rates by 25 bps to 3.75 percent for the
overnight borrowing or RRP facility and 5.75
percent for the overnight lending or RP facility.
The interest rates on term RRPs and RPs were
also raised accordingly. The rate on special
deposit accounts (SDA) was left unchanged.
Meanwhile, the reserve requirement ratios
were also kept steady.
SEP 11 4.00 6.00 The MB decided to increase the BSP's key
policy rates by 25 bps to 4.0 percent for the
overnight borrowing or RRP facility and 6.0
percent for the overnight lending or RP facility.
The interest rates on term RRPs, RPs, and SDA
were also raised accordingly. Meanwhile, the
reserve requirement ratios were left
unchanged.
70
EFFECTIVITY DATE LEVELS (IN %)
MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT
2014 OCT 23 4.00 6.00 The MB decided to maintain the BSP’s key
policy interest rates at 4.0 percent for the
overnight borrowing or reverse repurchase
(RRP) facility and 6.0 percent for the overnight
lending or repurchase (RP) facility. The interest
rates on term RRPs, RPs, and special deposit
accounts were also kept steady. The reserve
requirement ratios were left unchanged as
well.
DEC 11 4.00 6.00 The MB decided to maintain the BSP’s key
policy interest rates at 4.0 percent for the
overnight borrowing or reverse repurchase
(RRP) facility and 6.0 percent for the overnight
lending or repurchase (RP) facility. The interest
rates on term RRPs, RPs, and special deposit
accounts were also kept steady. The reserve
requirement ratios were left unchanged as
well.
2015 FEB 12
MAR 26
MAY 14
JUN 25
AUG 13
SEP 24
4.00 6.00 The MB decided to maintain the BSP’s key
policy interest rates at 4.0 percent for the
overnight borrowing or reverse repurchase
(RRP) facility and 6.0 percent for the overnight
lending or repurchase (RP) facility. The interest
rates on term RRPs, RPs, and special deposit
accounts were also kept steady. The reserve
requirement ratios were left unchanged as
well.
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]