The Philippine Economy

From Building to Sustaining Resilience

1st Monthly General Membership Meeting Bank Marketing Association of the Philippines13 February 2018, Tower Club, Makati

Director Zeno Ronald R. AbenojaDepartment of Economic Research

Bangko Sentral ng Pilipinas

2

Megatrends transforming the operating environment

Rapid urbanizationRebalancing of theworld economy

Changes in demographics

Climate change Disruptive technologies Threats of retreat from multilateralism

3

PH remains in a position of strength

* Data starting 2012 are computed as prescribed under BSP Circular No. 772. Gross NPL represents the actual level of NPL without any adjustment for loans treated as “loss” and fullyprovisioned. U/KBs stand for universal and commercial banks.**Computation based on the combined reports of parent bank (head office and branches) and its subsidiaries engaged in financial undertakings but excluding insurance; also excludes trustdepartment; 2007-2013 figures are calculated under the Basel II regime while 2014-2016 figures are under Basel III framework.n.a. - not available

Key Indicators 2005 – 2009 2010 – 2015 2016 2017 2018

Strong growth momentum

Real GDP growth (%) 4.4 6.2 6.9 6.7 n.a.

Benign inflation Headline inflation (%) 5.5 3.4 1.8 3.2 4.0 (Jan)

Sustained fiscal discipline

Fiscal balance (% of GDP) -1.7 -1.8 -2.4 -1.9 (Jan-Sep) n.a.

Ample liquidity and credit

Domestic Liquidity (% of GDP)(% y-o-y change)

47.215.1

55.613.2

65.612.8

67.411.9

n.a.

Outstanding loans -U/KBs(% y-o-y change)

8.9 15.7 17.3 19.0 n.a.

Sound and stable banking system

Non-performing loans (% of total loans) - U/KBs*

5.0 2.2 1.4 1.4 (end-Nov) n.a.

Capital Adequacy Ratio (consolidated basis) - U/KBs**

16.7 17.2 15.1 15.7 (end-Sep) n.a.

Robust external payments position

Current Account Balance (US$ Bn) (% of GDP)

5.13.6

8.23.2

-1.0-0.3

0.03 (Jan-Sep)0.01 (Jan-Sep)

n.a.

Gross International Reserves (in months of imports of goods and services and primary income)

6.4 10.8 8.8 8.3 8.2 (end-Jan)

External debt (% of GDP) 46.1 30.9 24.5 23.4 (end-Sep) n.a.

External debt service ratio(% of exports of goods, receipts of services & income)

12.3 7.9 7.0 6.1 (Jan-Oct) n.a.

4

Growing contributions of investments and manufacturing reflect ongoing transformation of the economy

Source: Philippine Statistics Authority (PSA)

Positive economic growth for 76 consecutive quarters

3.3 4.0 4.4 4.8 4.00.7

3.04.0

5.7

2.50.7

0.8

0.9

0.8

-1.3 -3.1 -4.5-0.6

-10

-5

0

5

10

15

2000-2009 2010-2016 2015 2016 2017

Private ConsumptionInvestmentGovernment ConsumptionNet Exports

Contribution to GDP Growth: Demand Sidein percentage points

0.4 0.1 0.0 -0.1 0.31.2 2.4 2.2 2.8 2.5

2.8

3.8 3.94.2 3.9

-1

0

1

2

3

4

5

6

7

8

2000-2009 2010-2016 2015 2016 2017

Agriculture, Fishery, and Forestry Industry Services

Contributions to GDP Growth: Supply Sidein percentage points

0.20.8 1.0 1.4

0.60.5

1.72.4

4.3

1.9

0.0

0.1

0.2

0.3

0.4

0

1

2

3

4

5

6

7

2000-2009 2010-2016 2015 2016 2017

Construction

Durable Equipment

Others

Components of Gross Capital FormationContribution to GDP growth in percentage points

0.1 0.1 0.0 0.0 0.0

0.8

1.71.3

1.62.00.2

0.50.7

0.8 0.30.2

0.2

0.30.1

-1

0

1

2

3

2000-2009 2010-2016 2015 2016 2017

Mining & QuarryingManufacturingConstructionUtilities

Industry Sub-SectorsContribution to GDP growth in percentage points

5

Rising investments boost growth and create jobs

Source: PSA, NEDA, BSP, * Investment approved by the Philippines’ Investment Promotion Agencies – Board of Investments (BOI), Clark Development Corporation (CDC), Philippine

Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BOI-Autonomous Region of Muslim Mindanao (BOI-ARMM),

and Cagayan Economic Zone Authority (CEZA)

542.7

747.1697.7

754.0 755.9

686.9 686.0

411.2

626.2

2010 2011 2012 2013 2014 2015 2016 2016Q1-3

2017Q1-3

Manufacturing36.76%

Finance and Insurance13.68%

Arts, Enternainment and Recreation

10.66%

Water Supply, Sewerage, and

Waste Management

13.59%

Real Estate8.46%

Wholesale and Retail Trade

6.21%

Mining and Quarrying

4.24%

Construction2.40%

Others4.00%

Total Approved Investments* (PHP bn)

+52.3%

Net FDI Average Percent Share to Net Equity by Industry, 2012-2016

Rising investment pledges favorablefor growth prospects

Considerable foreign interest in the manufacturing sector

6

Q4 2017 business outlook more upbeat due to expected seasonal demand; consumers remain optimistic

6

7

Positive alignment between growth and inflation lingers

Low and stable inflation outturn Well-anchored inflation expectations

Sources: PSA, BSP

2.9

8.3

4.23.8

4.6

3.2

3.0

4.1

1.4 1.8

3.2

2.9

5.8

4.2

3.6

4.3

3.7

2.9 3.02.1 1.9

2.9

4.0

3.9

0

1

2

3

4

5

6

7

8

9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jan 18

Headline and Core inflation (%), 2006=100

Headline Inflation Target

Headline Inflation

Core Inflation

Factors Driving Headline Inflation Contribution of Core and Non-Core Items to Inflation

Note:Non-core items refer to:rice, corn, meat (fresh,chilled or frozen), freshfruits, vegetablescultivated for their fruit,fresh or dried vegetablescultivated for their roots,fresh or dried, naturalgas, liquefied or in thegaseous state, and gasoils for motor vehicles

8

Some supply-side pressures pose risks to inflation path

• Prevailing weak La Niña conditions favorable to palay production

• But potential risks could emerge (e.g., Mt. Mayon eruption)

• Proposed reform in the rice industry involving the replacement ofquantitative restrictions with tariffs could reduce rice prices

Weather developments and rice tarrification

• Crude oil prices rise in January 2018 while futures prices still showdownward path over the medium-term

Global oil supply and demand

• Price pressures could come from higher consumption taxes and increaseddemand (higher infrastructure spending and disposable income)

• Impact is transitory: 2018 inflation could be above the target but inflationis expected to average within target by 2019

Tax Reform for Acceleration and Inclusion (TRAIN)

KEY FACTORS SHAPING INFLATION

9

Source: International Research Institute for Climate and Society and Climate Prediction Center

Season La Niña Neutral El Niño Season La Niña Neutral El Niño

NDJ 2017 98% 2% 0%

DJF 2018 97% 3% 0% DJF 2018 92% 8% 0%

JFM 2018 85% 15% 0% JFM 2018 82% 17% 1%

FMA 2018 63% 36% 1% FMA 2018 66% 32% 2%

MAM 2018 46% 50% 4% MAM 2018 48% 48% 4%

AMJ 2018 34% 58% 8% AMJ 2018 35% 56% 9%

MJJ 2018 26% 58% 16% MJJ 2018 28% 55% 17%

JJA 2018 25% 53% 22% JJA 2018 24% 54% 22%

JAS 2018 22% 52% 26% JAS 2018 23% 51% 26%

ASO 2018 23% 49% 28%

Forecast probabilities of ENSO events

As of 11 January 2018

Forecast probabilities of ENSO events

As of 14 December 2017

Prevailing weak La Niña conditions favorable to palayproduction…

10

Rainfall Forecast as of 24 January 2018 (Feb. – July 2018)

Rainfall Forecast as of 13 December 2017 (Feb. – June 2018)

PAGASA: 4 to 8 tropical cyclones (TCs) expected from February to July 2018

10

11

Crop production projected to increase in Q1 2018

Prospects are favorable for palay output given expectations of sufficient water supply and good weather conditions during the cropping period in Q1 2018.

Source: PSA Rice and Corn Situation Outlook Report (January 2018)

Palay Crop EstimatesOctober – December 2015 - 2017

Palay Crop EstimatesJanuary – March 2016 - 2018

12

Tariffication will benefit both consumers and producers

• Consumers, especially the poor, will benefit from lowerprices:*

Weight of rice in CPI is 8.9%

Approximately 72% of all Philippine households and 34% ofrice producing households are net consumers**

• BSP estimates of impact on headline inflation

Estimated price gap of about ₱4.00/kg using weightedaverage of import parity price (Vietnam, Thailand, India andPakistan) and domestic wholesale price of RMR***

Downward impact on inflation could potentially offset mostof the transitory impact of TRAIN

Source: *Briones, et. al (2017) projected that retail prices will decrease by about ₱6.97/kg after tariffication.**OECD Review: Agricultural Policies in the Philippines, 2017*** Based on methodology used in the 2016 DA-PhilRice-IRRI study, “Competitiveness of Philippine Rice in Asia”

13

Oil prices could drop in the medium term based on Brent crude futures prices

Expectations of higher US shale oil production (based on US EIA and IEA reports)

Higher, 51

Lower, 3

Near current levels, 46

Do you expect the number of U.S. rigs drilling for oil six months from now to be higher, lower or near current levels?

%

no. of rigs

%%

no. of rigs

14

Potentialsecond-round effects

Mitigating Social Programs and Other Measures

• Minimum wage adjustment

• Transport fare hike

• Inflation expectations

• Unconditional cash transfers for the poorest households

• Subsidy for jeepney drivers (Pantawid-Pasada) and PUV modernization

• Subsidy for small power utilities group (Pantawid-Kuryente)

• Reform in the rice industry

• Close monitoring of prices

Potential sources of second-round impact and mitigating social programs and other measures

15

Credit growth consistent with expanding economic activity

Source: BSP

-10

0

10

20

30

40

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

M3 and Outstanding Loans of U/KBs (year-on-year growth, in %)

Outstanding loans of U/KBs (Net of RRPs)Domestic Liquidity (M3)

Sectors

Share to Total KB

Loans (Net of RRP)

Contribution to KB Loan

Growth (Net of RRP)

Wholesale and Retail Trade, Repair of Motor Vehicles and Motorcycles; Transportation and Storage; and Information and Communication

21.0 4.4

Real Estate Activities 17.5 3.4

Manufacturing 13.1 1.6

Electricity, Gas, Steam and Air conditioning Supply; and Water Supply, Sewerage and Waste Management

12.5 2.9

Financial and Insurance Activities

8.4 1.4

Households 7.8 1.4

Agriculture, Forestry and Fishing

2.3 -0.4

Other sectors 17.4 4.3

Growth of KB Loans (end-2017)

100.0 19.0

end-2017:Outstanding loans of U/KBs: 19.0%Domestic Liquidity (M3): 11.9%

Solid demand for loans across key economic sectors

Supportive liquidity conditions and upbeat bank lending

16

PH banks remain as effective intermediator of funds

0

2

4

6

8

10

12

14

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Non-Performing Loans (Gross) and Non-Performing Assets Ratios of UKBs (in percent)

GNPL Ratio NPA Ratio

end-2017:GNPL ratio: 1.2 %

NPA ratio: 1.3 %

5

10

15

20

25

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Sep-1

7

Capital Adequacy Ratio of UKBs (in percent)

CAR (consolidated basis)

CAR (solo basis)

Sep 2017:CAR (solo): 15.0 %

CAR (consolidated): 15.7 %

Source: BSP

Quality of assets and loan portfolios sustainsimprovement.

Philippine banks remain adequately capitalized providing buffers to mitigate shocks.

17

72.4

23.40

10

20

30

40

50

60

70

80

90

External Debt External Debt Ratio

PH has adequate buffer from global headwinds

22.9

16.9*

26.9

20.8

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan-Sep17

BPO revenues Remittances

Sources: BSP, IBPAP for BPO revenues (actual and projected)

Overseas Filipinos' cash remittances and BPO revenues (USD bn)

External debt (USD bn) and external debt/GDP, (%)

* Jan-Sep 2017 BPO revenues based on BOP concept

2017 Projections:BPO: USD24.5bnRemittances: USD28.0bn

Structural flows from remittances and BPOs

Improved debt profile

81.6 81.2

8.3 8.2

0

2

4

6

8

10

12

14

0

20

40

60

80

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jan-18

FX reserves Import cover

Non-Residents' direct investments,by instrument (US$ bn, net)

FX reserves (USD bn) and months of import cover

3.3

4.6

-1

0

1

2

3

4

5

6

7

8

9

Equity and investment fund shares Debt

Resilient foreign direct investments

Ample cushion from external headwinds

18

Structural transformation of PH supported by decades of reforms

Selected Structural/Policy Reforms in the Philippine Economy (1993-present)

1993 Creation of the Bangko Sentral ng Pilipinas

1994 - 2001

Harmonization of the BSP’s Business Expectations Survey (BES) with International Practices; Liberalization of foreign bank entry and the telecommunications industry; Privatization of water services (MWSS); Deregulation of the oil industry; Passage of the Philippine E-Commerce Act; Liberalization of the power sector; Introduction of Tariff Reform Program (TRP) III; Accession to the World Trade Organization (WTO)

2002 Adoption by BSP of Inflation Targeting Framework

2003-2009

Launch of the BSP’s Consumer Expectations Survey (CES); Passage of the Securitization Act; Adoption of Basel II; Passage of expanded value-added tax; Establishment of the Wholesale Electricity Spot Market (WESM); Full implementation of risk-based bank supervision; Privatization of the National Transmission Corporation and National Power Corporation

2011-2015Adoption of phased-in migration to Basel III; Liberalization of entry of foreign banks in the Philippines; Implementation of macroprudential measures on real estate exposure; Passage of the Philippine Competition Act

2016-2017

Adoption by BSP of Interest Rate Corridor (IRC) Framework; Credit Card Industry Regulation Law; Amendment to Foreign Investment Restrictions; Economic and Financial Literacy Act; Freedom of Information; Further Liberalization of FX regulations; Implementation of Interest Rate Corridor; Financial Inclusion Steering Committee; Implementing Rules and Regulations of the Philippine Competition Act; Designated Casinos as Covered Persons under the Anti-Money Laundering Act

Other Structural Reforms in the Pipeline for

2018-onwards

Amendments to the Bangko Sentral ng Pilipinas Charter;Amendments to Bank Secrecy Laws;Comprehensive Tax Reform Package; andRationalization of Fiscal Incentives Law, among others

Long track record of purposeful structural reforms contributed to PH strength andflexibility in dealing with challenges brought by globalization

19

Policy Thrusts Initiatives

Conduct appropriate

monetary policy stance

(Monetary Sector)

Adoption of the inflation targeting framework

Implementation of the interest rate corridor (IRC)system

Conduct of expectations surveys (e.g., BusinessExpectations Survey, Consumer Expectations Survey,Private Sector Economists’ Survey)

Strengthen resilience to

external shocks

(External Sector)

Liberalization of foreign exchange (FX) regulatoryframework

Adherence to market-determined exchange rate regime

Accumulation of ample foreign exchange reserves

Continue to initiate key

financial reforms

(Financial Sector)

Enhancement of the macroprudential toolkit, such as the introduction of the Real Estate Stress Test (REST), placement of a cap on real estate loans, and use of an Early Warning System (EWS)

Liberalization of the Philippine banking system Implementation of risk-based bank supervision

BSP committed to pursue policies supportive of growth

20

Source: Latest BSP staff estimates

Source: PSA

Employment Share by Class of Workers Employment Share by Educational Attainment

Improved potential capacity to sustain growth trajectory

Incremental Capital-Output Ratio Total Factor Productivity

9.5

6.44.2 3.7

0.0

2.0

4.0

6.0

8.0

10.0

1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2017

0.0 0.5

2.0 2.1

0.0

0.5

1.0

1.5

2.0

2.5

1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2017

33.4 26.6

38.141.4

4.7

26.5 25.8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

College Post Secondary High School

Elementary (w/ SPED) No Grade Completed

51.162.5

12.36.0

32.3 27.8

4.4 3.7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Employer in Own Family Self-Employed

Unpaid Worker Wage and Salary Workers

21

Downside risks to growth

DOMESTIC

EXTERNAL

China’s economic rebalancing

Political andpolicy uncertainty

US Fed policy normalization

Shortfalls in TRAIN implementation

Infrastructure gaps

2222

Prospects for the Philippine economy remain bright

The Philippine economy is expected to sustain its growth momentumover the medium term, consistent with third-party assessments

6.7 %6.9 % 7.0 –8.0 %

7.0 –8.0 %

7.0 –8.0 %

2016 2017 2018 2019 2020

6.6 %(IMF)

6.7 %(WB)

6.7 %(ADB)

6.7 %(IMF)

6.7 %(WB)

6.8 %(ADB)

Sources:Macroeconomic Assumptions approved by the DBCC on 22 December 2017.International Monetary Fund (IMF) World Economic Outlook, October 2017.World Bank (WB) Global Economic Prospects, January 2018.Asian Development Bank (ADB) Asian Development Outlook Supplement,December 2017.

6.5-7.5%

23

Robust monetary, financial, and external sectors are expected to continueto lend support to economic growth over the near and medium term

Philippine economy poised to sustain its growth momentum

a/ Approved by the DBCC on 22 December 2017.b/ Cash remittances coursed through banks.c/ Approved by the Monetary Board on 28 November 2017.*Inflation forecasts as part of macroassumptions for the national budget.r – revised; n.a. – not available

IndicatorsActual Projections

2016 2017 2018 2017 2018

GDP Growth (%, 2000=100) 6.9 6.7 n.a. 6.5 – 7.5 a/ 7.0 – 8.0 a/

Fiscal Balance (% of GDP) -2.4 -1.9 (Jan-Sep) n.a. -3.0 a/ -3.0 a/

Headline Inflation (%, 2006=100)

1.8 3.2 4.0 (Jan) 2.0 – 4.0 a/ 2.0 – 4.0 a/

Merchandise Exports, per BPM6 concept (% growth rate)

-1.1 16.2 (Jan-Sep) n.a. 11.0 a/ c/ 9.0 a/ c/

Merchandise Imports, per BPM6 concept (% growth rate)

17.7 13.3 (Jan-Sep) n.a. 10.0 a/ c/ 10.0 a/ c/

OF Remittances b/

Amount (USD bn)Growth Rate (%)

26.95.0

25.3 (Jan-Nov)4.0 (Jan-Nov)

n.a. 28.0 c/

4.0 c/

29.1 c/

4.0 c/

Balance of Payments (USD bn) -0.4 -0.9 n.a. -1.4 c/ -1.0 c/

Gross International Reserves (USD bn) 80.7 81.6 81.2 (end-Jan) 80.7 c/ 80.0 c/

24

• The Philippine economy is in a position of strength to weathervolatilities and uncertainties in the global environment. Domesticsources of resilience allow us to sustain the alignment betweenpositive economic growth and low inflation.

• Amid external challenges, the current landscape provides plentifulopportunities for domestic and foreign investors alike. The Philippineeconomy offers sustainability and stability, hence continues to be aviable destination for business and investment.

• The BSP remains committed to staying the course: (a) maintainingprice stability; (b) promoting financial sector soundness;(c) strengthening resilience against external shocks; and (d) advocatingfor inclusive growth.

Key take-aways

The Philippine Economy

From Building to Sustaining Resilience

1st Monthly General Membership Meeting Bank Marketing Association of the Philippines13 February 2018, Tower Club, Makati

Director Zeno Ronald R. AbenojaDepartment of Economic Research

Bangko Sentral ng Pilipinas

27

Ample policy space, both on the monetary and fiscal side

Sufficient fiscal space allows the opportunityfor increased spending while keeping debtsustainable.

Inflation forecasts show higher outturnsfor 2018 and is expected to moderate towithin target in 2019

Source: BSP

4,718 4,951 5,437 5,681 5,735 5,955 6,090 6,444

52.4 51.051.5 49.2 45.4 44.7

42.1 41.7

0

10

20

30

40

50

60

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015 2016 Q3 2017

Levels in billion pesos (LHS) as % of GDP (RHS)

National Government Outstanding Debt

Total Public Sector Debt

6,569 7,593 7,496 7,654 7,434 7,307

73.078.2

71.066.3

58.8 55.7

0

10

20

30

40

50

60

70

80

90

6,000

6,200

6,400

6,600

6,800

7,000

7,200

7,400

7,600

7,800

2010 2011 2012 2013 2014 Sep 2015

Levels in billion pesos (LHS) as % of GDP (RHS)

28

28

Confidence

Projection Ranges (%)

2018 2019

25% 4.0 - 4.6 3.0 - 4.0

50% 3.8 - 5.0 2.5 - 4.6

75% 3.4 - 5.5 1.9 - 5.4

90% 3.0 - 6.0 1.2 - 6.3

As of 5 December 2017 (14 December 2017 MB Meeting)

As of 6 February 2018 (8 February 2018 MB Meeting)

Risks to future inflation remain skewed to the upside

29

Inflation (2006=100, in percent), RVAT Reform Implementation and BSP Policy Rate

• Price pressures from previous tax reform episodes were viewed astemporary in nature and did not require a policy response from the BSP

Source: BSP staff calculations

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1

2

3

4

5

6

7

8

9

Jan Feb

Mar

Apr

May

Jun Jul Aug

Sep Oct

Nov

Dec

Jan Feb

Mar

Apr

May

Jun Jul Aug

Sep Oct

Nov

Dec

Jan Feb

Mar

Apr

May

Jun Jul Aug

Sep Oct

Nov

Dec

Jan Feb

Mar

Apr

May

Jun Jul Aug

Sep Oct

Nov

Dec

2004 2005 2006 2007

M-o-M Inflation (LHS) Y-o-Y Inflation (RHS)

RRP Rate (RHS)

November 2005:

Expansion of VAT

base

February 2006: VAT

hike from 10% to 12%

Tax Reform Episodes: Experience from the RVAT Law

30

Inflation of Alcoholic Beverages and Tobacco, Sin Tax Reform Implementation and BSP Policy Rate

Source: BSP staff calculations

0

2

4

6

8

10

12

14

0

5

10

15

20

25

30

35

Jan 12

Feb 1

2Ma

r 12

Apr 1

2Ma

y 12

Jun 12

Jul 12

Aug 1

2Se

p 12

Oct 1

2No

v 12

Dec 1

2Jan

13Fe

b 13

Mar 1

3Ap

r 13

May 1

3Jun

13Jul

13Au

g 13

Sep 1

3Oc

t 13

Nov 1

3De

c 13

Jan 14

Feb 1

4Ma

r 14

Apr 1

4Ma

y 14

Jun 14

Jul 14

Aug 1

4Se

p 14

Oct 1

4No

v 14

Dec 1

4Jan

15Fe

b 15

Mar 1

5Ap

r 15

May 1

5Jun

15Jul

15Au

g 15

Sep 1

5Oc

t 15

Nov 1

5De

c 15

Jan 16

Feb 1

6Ma

r 16

Apr 1

6Ma

y 16

Jun 16

Jul 16

Aug 1

6Se

p 16

Oct 1

6No

v 16

Dec 1

6Jan

17Fe

b 17

Mar 1

7Ap

r 17

May 1

7Jun

17Jul

17Au

g 17

Sep 1

7Oc

t 17

Nov 1

7De

c 17

M-o-M Alcohol and Tobacco Inflation Y-o-Y Alcohol and Tobacco Inflation (RHS)

Y-o-Y Headline Inflation RRP Rate

January 2013:

Implementation of

Sin Tax Reform Law

Tax Reform Episodes: Experience from the Sin Tax Reform Law

• Price pressures from previous tax reform episodes were viewed astemporary in nature and did not require a policy response from the BSP

31

Number of items with inflation rates above the threshold increased

31.6%

31 items

0

5

10

15

20

25

30

35

40

45

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5M

ay-1

5Ju

n-1

5Ju

l-15

Au

g-1

5Se

p-1

5O

ct-1

5N

ov-

15D

ec-1

5Ja

n-1

6Fe

b-1

6M

ar-1

6A

pr-

16

May

-16

Jun

-16

Jul-

16A

ug-

16

Sep

-16

Oct

-16

No

v-16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7M

ay-1

7Ju

n-1

7Ju

l-17

Au

g-1

7Se

p-1

7O

ct-1

7N

ov-

17D

ec-1

7Ja

n-1

8

CPI Items Above Inflation Threshold

Weights No. of items

32

… but potential risks could emerge (e.g., Mayon eruption)

1. With the higher domestic oil prices due to TRAINimplementation, there have been reports of retailerspassing on additional cost to consumers

2. Weather disturbances could affect harvest in February-March 2018

3. Damage from Mayon eruption could reduce overalldomestic supply of rice; Bicol Region is the 5th top palayproducer in 2017

33

Nonetheless, there are possible mitigating factors that could temper price pressures

1. Strengthening price monitoring through joint effortsfrom the Department of Trade and Industry and theDepartment of Agriculture

2. Stabilization of rice prices through rice importationfrom the private sector (expected to arrive in Q12018) under MAV and by tapping the 250 TMTstandby authority for NFA importation

3. Proposed rehabilitation plan from different bannerprograms for rice, corn, high value cropsdevelopment, agriculture, livestock, and poultry

34

Rice Tariffication: Domestic versus Imported Rice Prices

* Based on DER staff estimates sourced from different data and reports from PSA, FAO, BSP

29.2531.51

32.92 32.14

34.73

16.93 16.8419.66

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Philippines(RMR)

Vietnam(25% brokens)

Thailand(25% brokens)

India(25% brokens)

Pakistan(25% brokens)

Wholesale Price of Rice, by Country

Wholesale price of rice in the Philippines* Domestic rice price**

(in ₱/kg)

**Source: FAO-GIEWS. No data available for Pakistan.Note: All rice prices (except the Philippines) were in US$. Prices were converted using the ₱50.4/US$ conversion rate (Source: BSP website, 2017 FX average).

35

Crude oil prices rose in January 2018 while futures prices still show downward path over the medium-term

– OPEC compliance exceeds 100 pct in December 2017

– Supply disruptions from OPEC and non-OPEC producers

– Declining US commercial crude oil inventory due to higher refinery demand

105

91100

95 97

77 7586 87

101

115

129

4737

51

70 7482

68

126 125

111

96

-10

10

30

50

70

90

110

130

Jan

-17

Fe

b-1

7

Ma

r-1

7

Ap

r-1

7

Ma

y-1

7

Jun

-17

Jul-

17

Au

g-1

7

Se

p-1

7

Oct-

17

No

v-1

7

De

c-1

7

OPEC and Non-OPEC Compliance Ratein percent OPEC Non-OPEC

Source: International Energy Agency, Oil Market Report

36

EIA expects supply to outstrip demand in 2018-2019

- Supply to come from OECD countries: US, Canada, Norway

- Demand to come from Asia, specifically China and India

Global Supply-Demand Balance (in million barrels)

36

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

86

88

90

92

94

96

98

100

102

104

106

'13 '14 '15 '16 '17 '18 '19

World Supply Surplus/Deficit World Demand

Source: US Energy Information Administration, Short-Term Energy Outlook, January 2018Note: Supply includes production of crude oil (including lease condensates), natural gas plant liquids,

biofuels, other liquids, and refinery processing gains.

37

- Domestic demand continues to drive output growth

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2012 2013 2014 2015 2016 2017

Year-on-Year Growth Rate (%)

Trend

average growth (from Q1 1999)

average growth (from Q1 2007)

Gross Domestic ProductAt Constant 2000 PricesGrowth Rate (%)

average growth since Q1 1999 = 5.2

average growth since Q1 2007 = 5.7

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2012 2013 2014 2015 2016 2017

Pe

rce

nta

ge

po

int

co

ntr

ibu

tio

n t

o G

DP

gro

wth

(%

)

Contribution to GDP: Domestic Demand and Net Exports

Net Exports

Domestic Demand

RGDP Growth

Philippine output growth slowed down in Q4 2017 but within potential; output gap remains below 1 percent

38

– Consolidated potential output growth above 6.0 pct consistent with a slightly positive output gap in recent quarters

Domestic growth remains within potential

-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.08.09.0

10.0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Perc

ent

Quarterly Potential Output Growth & Output Gap Estimates*

Output Gap Actual Output, seasonally adjusted

Potential Output, average

*Based on average of potential output estimates from six approaches: (1) Filters using data for 2000-2017; (2) HP filter usingdata for 2009-2017; (3) multivariate filter (MMPH); (4) productio function; (5) MUCM; and (6) structural vectorautoregressive (SVAR) system.