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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 BSPs 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 BSPs commitment to the inflation
target, thereby helping both in anchoring inflation expectations and encouraging informed
debate on monetary policy issues.
The governments target for annual headline inflation under the inflation targeting
framework has been maintained at 4.0 percent 1.0 percentage point (ppt) for 2014.
For 2015-2016, the medium-term inflation target has been set at 3.0 percent 1.0 ppt by the
Development Budget Coordination Committee (DBCC) to be 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. A section is devoted
to a discussion of monetary policy developments in the most recent, as well as a comprehensive
analysis of the BSPs view of the inflation outlook for the policy horizon.
The Monetary
25 September 2014.

Board

approved

this

Inflation

Report

at

its

meeting

on

AMANDO M. TETANGCO, JR.


Governor

3 October 2014

List of Acronyms, Abbreviations, and Symbols


AE
AFF
AHFF
AMCs
AP
AL
BES
BGC
BIR
BIS
BOC
BPO
BTr
CAMPI
CAR
CBD
CCRs
CES
CDS
CI
CPI
DAA
DDA
DBCC
DOF
EIA
EM
EMBI
ERC
EU
FAO
FPI
GDP
GNI
GRAM
GS
ICERA
IEA
IMF
IPP
LFS
LPG
LTFRB
MB
MEM

Advanced economy
Agriculture, Fishery, and Forestry
Agriculture, Hunting, Forestry and Fishing
Asset Management Companies
Asia Pacific
Auto Loans
Business Expectations Survey
Bonifacio Global City
Bureau of Internal Revenue
Bank for International Settlements
Bureau of Customs
Business Process Outsourcing
Bureau of the Treasury
Chamber of Automotive Manufacturers of the Philippines, Inc.
Capital Adequacy Ratio
Central Business District
Credit Card Receivables
Consumer Expectations Survey
Credit Default Swaps
Confidence Index
Consumer Price Index
Deferred Accounting Adjustment
Demand Deposit Account
Development Budget Coordination Committee
Department of Finance
US Energy Information Administration
Emerging Market
JP Morgan Emerging Market Bond Index
Energy Regulatory Commission
European Union
Food and Agriculture Organization
Food Price Index
Gross Domestic Product
Gross National Income
Generation Rate Adjustment Mechanism
Government Securities
Incremental Currency Exchange Rate Adjustment
International Energy Agency
International Monetary Fund
Independent Power Producer
Labor Force Survey
Liquefied Petroleum Gas
Land Transportation Franchising and Regulatory Board
Monetary Board
Multi-Equation Model
ii

MENA
Meralco
MISSI
MTP
NBQBs
NCCP
NDA
NEDA
NEER
NFA
NG
NGCP
NPC
NPI
NPLs
O&O
OECD
OPEC
OF
PSA
PBR
PMI
PSALM
PSEi
PSIC
R&I
RB
RDA
REER
ROP
RP
RR
RREL
RRP
RWA
SEM
SMS
SDA
TCS
TLP
U/KBs
VAPI
VOP
WEO
WESM

Middle East and North Africa


Manila Electric Company
Monthly Integrated Survey of Selected Industries
Major Trading Partner
Non-Bank Financial Institutions with Quasi-Banking Functions
National Council for Commuters Protection
Net Domestic Assets
National Economic and Development Authority
Nominal Effective Exchange Rate
Net Foreign Assets; National Food Authority
National Government
National Grid Corporation of the Philippines
National Power Corporation
Net Primary Income
Non-performing loans
Offshoring and Outsourcing
Organization for Economic Cooperation and Development
Organization of the Petroleum Exporting Countries
Overseas Filipinos
Philippine Statistics Authority
Performance-Based Rate
Purchasing Managers Index
Power Sector Assets and Liabilities Management Corporation
Philippine Stock Exchange Composite Index
Philippine Standard Industrial Classification
Rating and Investment Information Inc.
Rural Banks
Reserve Deposit Account
Real Effective Exchange Rate
Republic of the Philippines
Repurchase
Reserve Requirement
Residential and Real Estate Loans
Reverse Repurchase
Risk Weighted Assets
Single-Equation Model
Short Message Service
Special Deposit Account
Transportation, Communications, and Storage
Total Loan Portfolio
Universal/commercial banks
Value of production index
Volume of production index
World Economic Outlook
Wholesale Electricity Spot Market

iii

THE MONETARY POLICY OF THE


BANGKO SENTRAL NG PILIPINAS
The BSP Mandate
The BSPs 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 BSPs 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 BSPs holdings of government
securities.
Policy Target
The BSPs 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 2014 was set at 4.0 percent
1.0 ppt. For 2015-2016, the medium-term inflation target was reduced to 3.0 percent
1.0 ppt.2
BSPs 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 2015-2016 was announced on 13 December 2012.

iv

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 Zuiga, 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. Cyd N. Tuao-Amador
Assistant Governor
Monetary Policy Sub-Sector
Ma. Ramona GDT Santiago
Assistant Governor
Treasury Department

2014 SCHEDULE OF MONETARY POLICY MEETINGS, INFLATION REPORT


PRESS CONFERENCE AND PUBLICATION OF MB HIGHLIGHTS

Period

Advisory
Committee (AC)
Meeting

Monetary Board
(MB)
Meeting

Jan

Feb

3 (Monday)
AC Meeting No. 1

6 (Thursday)
MB Meeting No. 1

Mar

21 (Friday)
AC Meeting No. 2

27 (Thursday)
MB Meeting No. 2

Inflation Report
(IR) Press
Conference

9 (Thursday)
12 Dec 2013 MB meeting

24 (Friday)
Fourth Quarter 2013 IR

6 (Thursday)
6 Feb 2014 MB meeting
24 (Thursday)

Apr

27 Mar 2014 MB meeting

May

2 (Friday)
AC Meeting No. 3

8 (Thursday)
MB Meeting No. 3

Jun

13 (Friday)
AC Meeting No. 4

19 (Thursday)
MB Meeting No. 4

5 (Thursday)
8 May 2014 MB meeting

Jul

28 (Monday)
AC Meeting No. 5

31 (Thursday)
MB Meeting No. 5

17 (Thursday)
19 Jun 2014 MB meeting

0
1

MB Highlights
Publication

11 (Friday)
Second Quarter 2014 IR

28 (Thursday)
31 Jul 2014 MB meeting

Aug
Sep

5 (Friday)
AC Meeting No. 6

11 (Thursday)
MB Meeting No. 6

Oct

17 (Friday)
AC Meeting No. 7

23 (Thursday)
MB Meeting No. 7

9 (Thursday)
11 Sep 2014 MB meeting

3 (Friday)
Third Quarter 2014 IR

20 (Thursday)
23 Oct 2014 MB meeting

Nov
Dec

28 (Monday)
First Quarter 2014 IR

5 (Friday)
AC Meeting No. 8

11 (Thursday)
MB Meeting No. 8

8 Jan 2015 (Thursday)


11 Dec 2014 MB meeting

vi

CONTENTS
Overview

I.

II.

Inflation and Real Sector Developments


Prices

Box Article: Inflation for the Poorest 30% of Philippine Households

Private Sector Economists Inflation Forecasts

Aggregate Demand and Supply

12

Aggregate Demand

12

Other Demand Indicators

14

Aggregate Supply

22

Labor Market Conditions

23

Monetary and Financial Market Conditions

24

Domestic Liquidity and Credit Conditions

24

Interest Rates

29

Financial Market Conditions

31

Banking System

34

Exchange Rate

37

III.

Fiscal Developments

40

IV.

External Developments

41

V.

Monetary Policy Developments

46

VI.

Inflation Outlook

47

VII.

BSP Inflation Forecasts

47

Risks to the Inflation Outlook

51

Implications for the Monetary Policy Stance

54

Summary of Monetary Policy Decisions

57

vii

OVERVIEW3
Inflation rises further on higher food prices. Yearonyear (yoy) headline inflation increased to 4.6 percent4
in Q3 2014 (July-August) from the quarter- and year-ago rates of 4.4 percent and 2.4 percent, respectively.
Nonetheless, the resulting year-to-date (ytd) inflation rate of 4.4 percent remained within the Governments
inflation target range of 4.0 percent 1.0 percentage point (ppt) for 2014. The continued uptrend in headline
inflation was driven mainly by the higher prices of food owing to tight domestic supply conditions, triggered
by weather-related production disruptions and supply-side bottlenecks. At the same time, the official core
inflation rose to 3.2 percent in Q3 2014 from 3.0 percent in Q2 2014 and 2.1 percent in Q3 2013. Two out of
three alternative measures of core inflation estimated by the BSP were also higher during the review period.
Meanwhile, the number of items with inflation rates greater than the threshold of 5.0 percent (the upper end
of the 2014 inflation target) was unchanged at 30 items, accounting for 28.5 percent of the CPI basket.
Inflation expectations are stable but are settling at the upper end of the 2015-2016 target band. Results of
the BSPs survey of private sector economists for August 2014 yielded generally higher mean inflation
forecasts for 2014, but steady inflation forecasts for 2015-2016 relative to the results in June 2014. Analysts
expectations of higher inflation in 2014 were due to possible upticks in food prices, pending petitions for
adjustments in utility rates, and looming power shortages. Results of the August 2014 Consensus Economics
inflation forecast survey for the country also showed a higher mean inflation forecast for 2014 of
4.3 percent.
Domestic demand continues to be robust. The Philippine economy returned to a higher growth trajectory in
Q2 2014 with the higher-than-expected real GDP growth of 6.4 percent in Q2 2014 from 5.6 percent in the
previous quarter and 7.9 percent in Q2 2013. The output expansion was underpinned by net exports and
household consumption on the expenditure side, reflective of the improvement in external trade in line with
the gradual recovery of the global economy and continued favorable domestic demand conditions. At the
same time, this growth reflects the broadening output base in the production side, led by sustained
improvements in services and more recently in industry. Meanwhile, trends in higher-frequency demand
indicators have also remained generally positive in Q3 2014. Vehicle sales continued to post double-digit
growth on brisk demand for both passenger cars and commercial vehicles, while the composite Purchasing
Managers Index (PMI) remained firmly above the 50-point expansion threshold. Over the coming months,
domestic demand is likely to be supported by the generally favorable business and consumer sentiment amid
robust credit growth and steady improvements in employment conditions.
Global economic activity strengthens in Q2 2014, but growth prospects across countries continue to
diverge. Global growth gained traction during the quarter, notably in the US, where the expansion was
buoyed by personal consumption expenditure, private fixed investment, and inventory build-up. A rebound
was likewise seen in major emerging markets (EMs). Stronger external demand and government stimulus
measures provided support to the Chinese economy. In India, output growth was driven by the rebound in
manufacturing sector activity. Meanwhile, economic activity contracted in Japan as private consumption and
investment fell following the implementation of higher consumption tax in April 2014. The recovery in the
euro area meanwhile remained modest with favourable domestic demand and net exports offset by the
impact of inventory drawdowns. Going forward, the global economy is likely to proceed on a moderate
expansion path, but risks to the global growth outlook remain tilted to the downside. Geopolitical risks in the
Middle East and Ukraine-Russia and potential sharp adjustments in long-term yields and risk aversion as
monetary policy in the US normalizes represent soft spots for the global economy. Meanwhile, the global
inflation environment remains broadly benign. Inflation pressures in AEs continue to be subdued as output
gaps are seen to stay substantial even as the recovery gains pace. However, inflation has risen in some
emerg7ing economies owing to domestic supply side factors.
3

The analysis contained in this report is based on information as of 10 September 2014.


In this report, the quarterly inflation rates (headline, core, food- and non-food inflation) for Q3 2014 were computed as the y-o-y change in
the average CPI for July-August 2014 relative to the average CPI for July-September 2013.
4

Financial market conditions improve generally. Investor sentiment was buoyed by reports of favorable
domestic Q2 2014 corporate earnings and the stronger-than-expected Q2 2014 GDP growth amid signs of
improving geopolitical situation in the Middle East and Ukraine. The rating upgrade received from the Japanbased credit rating agency Rating and Investment Information Inc.(R&I) likewise contributed to the positive
mood in the market. Confidence was further lifted by US Fed statements that interest rates will likely remain
low for some time after the end of the US Feds bond buying program and the unprecedented monetary
stimulus measures by the European Central Bank (ECB). Consequently, the local bourse surged past the
7,100-mark peaking to a 15-month high in August. The countrys 5-year sovereign credit default swap (CDS)
spreads also narrowed during the quarter, trading lower than Indonesias and Thailands CDS and close to
Malaysias CDS. The peso likewise strengthened in line with the overall appreciation observed among the
currencies in the region as global financial market conditions stabilized on the US Fed pronouncement to
maintain interest rates at current levels in the foreseeable future. The larger oversubscription in T-bill
auctions similarly pointed to strong investor appetite for Philippine government securities (GS), supported by
ample market liquidity. Meanwhile, broadly unchanged bank lending standards for both loans to enterprises
and household show that banks are prudently managing their risks.
The BSP key policy rates and SDA rate are raised. The BSP decided to increase its key policy interest rates by
25 bps each during its 31 July and 11 September 2014 monetary policy meetings. The interest rate on the SDA
was also raised by 25 bps during the 11 September policy meeting. Meanwhile, the reserve requirement
ratios were left unchanged during the quarter. The said policy decisions were based on the assessment that
the inflation target, particularly for 2015, could be at risk as latest baseline forecasts along with inflation
expectations have shifted near the higher end of the 2015 inflation target range. At the same time, the
balance of risks to the inflation outlook continued to lean toward the upside. The BSP also deemed it
necessary to respond with stronger policy action to rein in inflation expectations as well as preempt potential
second-round effects even as previous monetary responses continue to work their way through the
economy.
The inflation outlook calls for preemptive policy action. The latest baseline inflation path has shifted upward
compared to the previous quarter owing mainly to the higher inflation outturn in July. The inflation forecasts
show that the average inflation could settle above the midpoint of the target ranges of 4.0 percent 1.0 ppt
in 2014 and 3.0 percent 1.0 ppt in 2015 before easing to around the midpoint of the target range in 2016.
The current assessment of the price environment also indicates that the balance of risks to the inflation
outlook remains tilted to the upside, with price pressures emanating from the possible further increases in
food prices, pending petitions for adjustments in utility rates, and potential power shortages. Thus far, the
persistent increases in food prices have yet not translated into considerable second-round effects. Recent
wage petitions have not diverged significantly from their historical trends, while there have been no new calls
for transport fare adjustments. However, core inflation, which captures underlying price trends, has picked
up in Q3 2014, while inflation expectations have hovered close to the upper-end of the 2015-2016 target
ranges since the early part of 2014. Thus, monetary authorities remain ready to act preemptively to ensure
that inflation expectations and the general price-setting behavior do not become disanchored from the
inflation targets. The protracted supply shocks amid strong aggregate demand conditions can also potentially
increase the impetus for second-round effects, thus calling for a firmer policy response to help safeguard the
inflation target.
The broad buoyancy of domestic demand suggests that there is some room for a measured policy response to
potential second-round effects. Favorable growth dynamics reflected in solid domestic demand growth in Q2
2014 imply that monetary authorities have some flexibility to undertake a measured monetary policy
tightening. Responding preemptively to the rising inflation risks will also provide BSP latitude to assess at
future meetings the evolving balance of risks to both inflation and output and helps to avoid the need for
sharp adjustments later on. Going forward, the BSP will remain vigilant against a potential build-up in inflation
expectations and stands ready to undertake preemptive policy actions as necessary to safeguard its price and
financial stability objectives.

I. INFLATION AND REAL SECTOR DEVELOPMENTS


Headline and Core Inflation
Inflation rises further on higher food prices.
Quarterly Headline Inflation (2006=100)

Food
Non-Alcoholic Beverage
Headline

7
6

Non-Food
Alcoholic Beverage and Tobacco

Q3 2014
4.6 pct

5
in percent

Headline inflation increased to 4.6 percent in


Q3 2014 (July-August) from the quarter- and yearago rates of 4.4 percent and 2.4 percent,
respectively. The resulting ytd inflation rate of
4.4 percent remains within the Governments
inflation target range of 4.0 percent 1.0 ppt for
2014.

4
3

The continued uptrend in headline inflation was


driven mainly by the higher prices of food owing
to tight domestic supply conditions. Meanwhile,
non-food inflation decelerated on slower price
increases of domestic petroleum products.

2
1

2009

2010

2011

2012

2013

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

0
2014

Core inflation increases.


Alternative Core Inflation Measures
Quarterly averages of year-on-year change
Official
Headline
Inflation
3.2
3.1
2.9
3.6
3.0
3.0
3.2
2.7
2.4
3.4
4.4
4.1
4.4
4.6

Quarter
2012
Q1
Q2
Q3
Q4
2013
Q1
Q2
Q3
Q4
2014
Q1
Q2
Q3

Official
Core
Inflation
3.7
3.5
3.7
4.1
3.4
2.9
3.8
2.9
2.1
2.9
3.0
3.0
3.0
3.2

Trimmed
Mean 1/

Weighted
Median 2/

3.2
3.0
3.1
3.4
3.2
2.5
3.0
2.3
2.1
2.6
3.6
3.3
3.6
3.8

3.0
2.6
3.2
3.2
3.0
2.3
2.8
2.3
2.0
2.2
3.0
2.6
3.2
3.1

Net of
Volatile
Items 3/ *
3.4
3.0
3.3
3.9
3.4
3.1
3.9
3.2
2.4
2.9
2.7
2.8
2.6
2.8

1/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest
to-highest ranking of year-on-year inflation rates for all CPI components.
2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50
percent) in a lowest-to-highest ranking of year-on-year inflation rates.
3/ The net of volatile items method excludes the following items: educational services, fruits and vegetables,
personal services, rentals, recreational services, rice, and corn.
r/ Revised.
* The series has been recomputed using a new methodology that is aligned with PSAs 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

CPI Items with Inflation Rates Above Threshold


70

120

Cumulative Weight (in %)

No. of Items Above 5% Threshold (RHS)

60

100

50
80
40

28.5 pct

60

30

30 items

20

40

20

10

2009

2010

2011

2012

2013

2014

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

0
Q1

Core inflation, which excludes some food and


energy items to measure underlying price
pressures, accelerated to 3.2 percent in Q3 2014
(July-August) from 3.0 percent in Q2 2014 and
2.1 percent in Q3 2013. Two out of three
alternative measures of core inflation estimated
by the BSP were also higher during the review
period relative to the rates registered in the
previous quarter. In particular, the trimmed mean
and net of volatile items measures edged higher to
3.8 percent and 2.8 percent, respectively, from the
quarter-ago rates of 3.6 percent and 2.6 percent.
Conversely, the weighted median measure
decreased slightly to 3.1 percent from 3.2 percent
in Q2 2014.
The number of items with inflation rates greater
than the threshold of 5.0 percent (the upper end
of the 2014 inflation target) was unchanged at
30 items in Q3 2014 (July-August). These items
accounted for 28.5 percent of the CPI basket,
slightly lower than the previous quarters share of
28.9 percent.
Grouping the CPI basket into food and non-food
components, the number of food items above the
5.0-percent threshold inched up to 17 items in
Q3 2014 (July-August) from 14 items in Q2 2014.
By contrast, the number of non-food items with
inflation rates higher than the threshold
decreased to 13 items from 16 items.

Food Inflation
Tight domestic supply of key food items drives
up food inflation.
Inflation Rates for Selected Food Items
Quarterly averages in percent (2006=100)
Commodity

Q2

2013
Q3

Q2

2014
Q3

Food and Non-alcoholic


Beverages
Food
Bread and Cereals
Rice
Corn
Meat
Fish
Milk, Cheese and Eggs
Oils and Fats
Fruit
Vegetables
Sugar, Jam, Honey
Food Products N.E.C.
Non-alcoholic Beverages

2.4

2.2

6.8

7.8

2.3
2.2
1.6
4.9
2.2
2.4
2.1
-7.4
5.0
4.6
0.9
2.3
2.7

2.2
4.0
4.5
3.7
2.0
1.9
1.7
-7.2
4.3
-0.7
-3.7
3.1
2.2

7.1
10.2
12.9
5.9
4.0
5.4
2.8
4.9
5.5
9.7
4.8
8.7
1.5

8.2
9.9
12.2
8.4
5.5
6.2
3.9
7.4
6.8
14.7
7.4
9.8
1.7

Alcoholic Beverages and


Tobacco

31.2

31.1

4.0

3.4

Food inflation continued to rise to 8.2 percent in


Q3 2014 (July-August) from the quarter-ago rate of
7.1 percent as the prices of all food items, except
rice, increased at a faster pace due to tight
domestic supply conditions, triggered by recent
weather-related production disruptions. Similarly,
delays in supply-side response (e.g., failed bidding
in rice imports) and bottlenecks in supply chain
(e.g., port congestion and changing transportation
policies) also contributed to the continued upsurge
in food prices.
By contrast, alcoholic beverages and tobacco (ABT)
inflation declined further to 3.4 percent from
4.0 percent in the previous quarter, partly
reflecting the base effects from higher prices of
ABT in 2013. It should be noted that prices of ABT
rose following the implementation of Republic Act
No. 10351, which raised the excise tax on alcohol
and tobacco products in January 2013.

Source of Basic Data: PSA, BSP

Non-food inflation
Price reductions in
products contributes
inflation.

domestic petroleum
to lower non-food

Inflation Rates for Selected Non-Food Items


Quarterly averages in percent (2006=100)
Q2

2013
Q3

Q2

2014
Q3

Non-Food

1.9

1.5

2.6

2.4

Clothing and Footwear


Housing, Water, Electricity,
Gas and Other Fuels
Electricity, Gas, and
Other Fuels
Furnishings, Household
Equipment
Health
Transport
Operation of Personal
Transport Equipment
Communication
Recreation and Culture
Education
Restaurant and Miscellaneous
Goods and Services

3.6
1.4

3.0
0.5

3.4
3.0

3.3
2.5

-0.6

-2.0

5.6

3.9

3.6

2.5

2.5

2.6

3.0
-0.2
-1.1

2.6
1.0
3.3

3.0
1.3
5.6

3.2
1.3
2.7

0.1
2.1
4.5
2.4

0.1
2.5
4.7
2.2

0.1
2.0
4.8
1.9

0.0
1.3
5.1
1.7

Commodity

Non-food inflation decreased to 2.4 percent in


Q3 2014 (July-August) from 2.6 percent in
Q2 2014 as a result of slower price increases of
electricity, gas, and other fuels (3.9 percent from
5.6 percent) and operation of personal transport
equipment (2.7 percent from 5.6 percent), owing
to reductions in the prices of domestic petroleum
products (e.g., gasoline, diesel, kerosene, and
LPG). Favorable US inventory helped ease
international oil prices, which were translated to
lower domestic oil prices.

Source of Basic Data: PSA, BSP

Box Article: Inflation for the Poorest 30% of Philippine Households


There are about 5.4 million Filipino households who belong to the poorest or bottom 30% income
group. Of these, 3.6 million households have monthly incomes lower than what is set by the
Philippine government as necessary to buy basic food needs (food threshold) and minimum basic
food and non-food needs (poverty threshold).5
Monthly Income for Each Decile Class

2012 Food and Poverty Threshold (In Pesos)

Source of basic data: Official Poverty Statistics and Poverty Reduction Programs of the Philippines 2013

A more detailed description of the bottom 30% can be obtained from the 2008 Philippines Poverty
Survey which noted the profile of this income group as follows:
1. 67% of heads of the households have at most an elementary education
2. 36% do not have electricity at home
3. 25% have no sanitary toilet
4. 30% do not have access to safe water
5. 50% live in 10 to 29 square meter housing units, many of which are made of light materials.

The Philippine Governments (via the NSCB) official approach in constructing poverty lines or defining what is poor and non-poor
starts with the construction of representative food menus for urban and rural areas of each region of the country. The menus,
prepared by the Food and Nutrition Research Institute (FNRI), consider local consumption patterns and satisfy a minimum nutritional
requirement of 2,000 calories per person per day and 80 to 100 percent of recommended daily allowance for vitamins and minerals.
Two thresholds have been established: the food threshold and the poverty threshold. Food threshold is the minimum monthly
income required for a household (assumed composed of 5 individuals) to meet the basic food needs, which satisfies the nutritional
requirements for economically necessary and socially desirable physical activities. Poverty threshold is the minimum monthly
income required for a household (assumed composed of 5 individuals) to meet the basic food and non-food requirements. Note that
the basic food requirements are currently based on 100% adequacy for the Recommended Energy and Nutrient Intake (RENI) for
protein and energy equivalent to an average of 2000 kilocalories per capita, and 80% adequacy for other nutrients. On the other
hand, basic non-food requirements, indirectly estimated by obtaining the ratio of food to total basic expenditures from a reference
group of families, cover expenditure on: 1) clothing and footwear 2) housing 3) fuel, light, and water 4)maintenance and minor
repairs 5) rental of occupied dwelling units 6) medical care 7) education 8) transportation and communication 9) non-durable
furnishings 10) household operations and 11)personal care and effects.

Such living conditions resonate with the fact that the bottom 30% has a share of only about
11 percent of the countrys GDP while 60% of Philippines GDP accrue to the top 30% income group.
This gap in income and living conditions is now aggravated by the difference in inflation rates. While
the national or all-income inflation rate has remained within the BSPs target range of 4.0 percent
1.0 ppt, the inflation rate for the bottom 30% has breached the 5% upper bound of the range since
December 2013.

Source of basic data: Philippine Statistics Authority

An analysis of the inflation rates show that the said divergence resulted from the following (1) food
comprise 70% of the CPI basket for the bottom 30% versus 47% for the national/all-income inflation
(2) prices of food, particularly rice, have increased significantly in the past months. The impact of the
said CPI basket weights is especially evident in Q1 2014 where 4.5% of the 5.7% inflation for the
bottom 30% is attributable to food inflation while 2.4% of the 5.7% inflation is caused by rice price
increases.
That inflation rate is higher for the bottom 30% is true in almost regions, with Region 8 experiencing
the highest inflation rate possibly due to the impact of typhoon Haiyan which devastated farms and
destroyed infrastructure causing a spike in transportation and logistics costs.
CPI Weights Bottom 30% versus All Income

Commodities with High PPT Contribution to


Headline Inflation

Source of basic data: Philippine Statistics Authority

The steady increase in the inflation rates for the bottom 30% bears watching given that this income
group is most economically sensitive and vulnerable to price increases. Moreover, high inflation can
increase the incidence and severity of poverty in the short-run and can exact a toll on the countrys
long-run economic development as lower income households, in order to meet food requirements,
reduce spending on health and education.
Going forward, the BSP will continue to take special interest in and monitor efforts by the Philippine
government to improve the countrys supply side management which could include improving the
scheduling and monitoring of rice imports, tighter monitoring of retail prices, lowering logistics and
shipping costs, and increasing agricultural productivity.

Private Sector Economists Inflation Forecasts


Mean inflation forecasts for 2014-2016 are
generally steady.
BSP Private Sector Economists' Survey
Mean forecast for full year, in percent
5.5
5.0

2014: 4.4

4.5
4.0
3.5

2015: 4.0
2016: 3.9

3.0

2014
2016

2.5

2015
target range

2.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug
2013

2014

Private Sector Forecasts for Inflation, August 2014


Annual Percent Change
2014
Q3
Q4
1) Al-Amanah Islamic Bank
2) Asia ING
3) Banco De Oro
4) Bangkok Bank
5) Bank of Commerce
6) Bank of the Philippine Islands
7) Barclays
8) Chinabank
9) CTBC Bank
10) Deutsche Bank
11) Eastwest Bank
12) Global Source
13) IDEA
14) Korea Exchange Bank
15) Land Bank of the Phils
16) Maybank
17) Maybank-ATR KimEng
18) Metrobank
19) Multinat'l Inv. Banc
20) Mizuho
21) Nomura
22) Philippine Equity Partners
23) RCBC
24) Robinsons Bank
25) Security Bank
26) Standard Chartered
27) UBS
28) Union Bank

2015
FY

2016
FY

4.00
3.90
3.90
4.00
4.00
3.80
4.00
4.50
3.40
4.15
4.00
4.20
2.80
4.0-4.3
3.50
3.50
4.00
3.80
4.30
4.20
4.38
3.9-4.3
4.0-4.5
4.00
3.90
4.50
4.40

4.00
3.60
3.90
4.00
3.50
3.80
4.00
4.15
4.40
2.80
4.0-4.3
4.00
4.00
4.00
4.0-4.5
3.5-40.
3.80
3.50
4.30

4.5
4.4
4.8
2.9
28

4.0
4.0
4.5
2.8
27

4.0
3.9
4.4
2.8
19

4.01.0

3.01.0

3.01.0

FY

4.70
4.60
4.60
4.80
4.60
4.50
4.07
4.03
4.25
5.00
4.50
4.50
4.80
4.80
4.50
4.90
4.30
4.40
4.20
3.80
4.10
4.80
4.40
4.40
5.00
4.80
4.50
4.20
5.00
4.80
4.60
5.00
4.70
4.50
5.20
4.90
4.60
2.80
2.90
2.90
4.5-4.8
4.6-4.9
4.6-4.9
4.30
4.00
4.30
4.50
3.80
4.20
4.50
4.60
4.20
4.30
4.80
4.60
4.50
4.90
4.80
4.70
4.84
4.69
4.49
4.8-4.9
4.5-4.9
4.4-4.6
4.75-5.0 4.5-5.75 4.25-4.75
3.50
3.50
4.30
4.70
4.60
4.40
4.70
4.30
4.30
4.60
4.90
4.60

Median Forecast
Mean Forecast
High
Low
Number of observations

4.8
4.6
5.2
2.8
26

4.6
4.4
5.1
2.9
26

Government Target

Results of the BSPs survey of private sector


economists for August 2014 yielded generally
steady mean inflation forecasts for 2014-2016
relative to the results in June 2014.6 In particular,
the mean inflation forecast for 2014 was slightly
higher at 4.4 percent (from 4.3 percent in June),
while the mean inflation forecasts for 2015 and
2016 were steady at 4.0 percent and 3.9 percent,
respectively.
Analysts expectations of higher inflation in 2014
were due to possible upticks in food prices as a
result of tight domestic supply conditions, delays
in shipments due to port congestion, pending
petitions for adjustments in utility rates, and
looming power shortages.
Based on the probability distributions of the
forecasts provided by the respondents, a
12.7-percent chance is ascribed to average
inflation for 2014 settling within the
3.1-4.0 percent range. Meanwhile, there is a
69.3 percent probability that average inflation for
2014 could be within 4.1-5.0 percent.
Results of the August 2014 Consensus Economics
inflation forecast survey for the country showed a
higher inflation forecast for 2014 at 4.3 percent
(from 4.2 percent in June) and a steady inflation
forecast for 2015 at 3.9 percent.7

Probability Distribution For Analysts' Inflation Forecasts*


2014-2016

80.0
70.0

2014

60.0

2015

2016

50.0
40.0
30.0
20.0

10.0
0.0

<1

1.0-2.0

2.1-3.0

3.1-4.0

4.1-5.0

5.1-6.0

6.1-7.0

7.1-8.0

8.1-9.0

*Probability distributions were averages of those provided by 5 out of 7 respondents.

(Source: BSP Survey)

6
7

There were 28 respondents in the BSPs survey of private sector economists in August 2014.
There were 18 respondents in the Consensus Economics survey in August 2014.

Results of the Q3 2014 BES indicate that


respondents who expect inflation to go up in
the current and next quarters increase.

Relative to the previous survey, a greater majority


of respondents in the Q3 2014 BSP Business
Expectations Survey (BES) expect inflation to
move up in the current quarter (from a diffusion
index of 31.4 percent to 40.2 percent). Similarly,
the number of respondents that expect inflation
to increase in the next quarter increased (from
28.4 percent to 38.9 percent).

Results of the Q3 2014 CES show that


consumers expect steady inflation over the next
12 months.

In the Q3 2014 BSP Consumer Expectations Survey


(CES), consumers anticipate inflation to remain
steady at 6.1 percent. This indicated that inflation
expectations of consumers are likely to remain
stable in the next 12 months as the number of
respondents with views of higher inflation was
almost unchanged compared to a quarter ago.
Energy Prices

International oil prices decline on ample global


oil supply and expectations of weakening
demand.
Spot and Estimated Future Prices of Dubai Crude Oil*
140

Price in US dollars per barrel

120

30 June 2014
100

9 September 2014
80

60

40

20
2008

2009

2010

2011

2012

2013

2014

2015

2016

The average price of Dubai crude oil declined by


3.5 percent q-o-q in Q3 20148 as oil production in
the US accelerated to 8.5 million barrels a day in
July 2014, the highest since April 1987, according
to a US Energy Information Administration (EIA)
report. The Organization of Petroleum Exporting
Countries (OPEC) likewise boosted oil production
by 891,000 barrels a day to 31 million barrels in
August, the biggest level in 2014. Expectations of
slower demand growth for 2014 following a
weaker assessment of the world economy by the
International Monetary Fund and the release of
weak manufacturing data9 in Europe and China
also exerted downward pressure on oil prices.

*Futures prices derived using Brent crude futures data.

At the same time, the estimated futures prices of


Dubai crude oil, which are based on movements
in Brent crude oil futures, in Q3 2014 showed a
lower path for the rest of 2014 to 2016 compared
to the estimates in Q2 2014.
Forecasts for 2014 global oil demand decrease.

In September 2014, the US EIA,10 the OPEC,11 and


the International Energy Administration (IEA)12
projected global demand for 2014 to increase by

As of 9 September 2014.
Markit Economics reported that its euro-area gauge declined by more than initially projected in August, with the index for Italy
unexpectedly dropping below 50, reflecting the first contraction in 14 months. In the UK, manufacturing grew the least in more than
a year, with spillovers from the weak euro region among the factors cited. Similarly, Chinas manufacturing expanded at a slower
pace in August at 51.1, below the median estimate of 51.2 in a Bloomberg survey.
10
EIA, September 2014 Short-Term Energy Outlook, www.eia.doe.gov
11
OPEC, September 2014 Monthly Oil Market Report, www.opec.org
12
IEA, September 2014 Oil Market Report, www.iea.org
9

1.0 million barrels a day (mmbd), 1.05 mmbd, and


0.9 mmbd, lower relative to the previous
quarters estimates of 1.3 mmbd and 1.14 mmbd,
and 1.3 mmbd, respectively. OECDs downward
revision of its world oil demand growth was
mainly due to the weaker-than-expected
performance of the OECD countries while IEA
attributed its lower forecast to a weaker outlook
for Europe and China. Meanwhile, EIA expects the
bulk of the projected increase in world oil
consumption over the next two years to still come
from non-OECD regions, particularly China.
Tracking the movement of international oil
prices, domestic prices of petroleum products
go down.
Domestic Retail Pump Prices (peso/liter)*

In Q3 2014, the domestic prices of gasoline,


kerosene, diesel, and LPG fell by P2.60 per liter,
P2.55 per liter, P1.90 per liter, and P1.70 per liter,
respectively, relative to their end-Q2 2014 levels.

End-quarter prices
Quarter

Gasoline

Kerosene

Diesel

LPG

2013
Q1
Q2
Q3
Q4

51.45
51.95
53.20
55.50

48.45
50.07
51.12
53.07

39.85
42.30
42.90
45.45

40.21
36.83
41.25
49.80

2014
Q1
Q2
Q3***

53.75
54.95
52.35

50.87
51.54
48.99

44.25
43.70
41.80

41.73
40.44
38.74

Q-o-Q

(2.60)

(2.55)

(1.90)

(1.70)

Y-o-Y

(0.85)

(2.13)

(1.10)

(2.51)

Similarly, compared to year-ago levels, the


domestic prices of gasoline, kerosene, diesel, and
LPG prices went down by P0.85 per liter,
P2.13 per liter, P1.10 per liter, and P2.51 per liter,
respectively.

Average retail pump price for the Big Three oil companiesCaltex,
Petron, and Shell, Metro Manila prices only.
** Average price for unleaded gasoline
*** Data as of 9 September 2014
Source: Department of Energy (DOE)

Power
Tight supply conditions put upward pressure on
electricity prices.

Power generation charges went up by P0.10 per


kilowatt hour (kWh) in July and by P0.23 per kWh
in August due to tight supply conditions. Meralco
reported that higher generation charge in July was
due to the lower dispatch of several power plants
following their scheduled and unscheduled
outages resulting to tight power supply. The cost
of power purchased by Meralco from their
suppliers under the Power Supply Agreements
(PSAs) and the Independent Power Producers
(IPPS) were higher by P0.26 per kWh and
P0.10 per kWh, respectively. Meanwhile, the
reduction in the Wholesale Electricity Spot Market
(WESM) average price of P4.24 per kWh partly
offset the higher power rates. WESM prices were

10

lower due to the implementation of the Energy


Regulatory Commissions (ERC) secondary price
cap13 in the WESM. Meanwhile, transmission,
subsidies and system loss charges also increased
in July.
In August, total generation charge also went up
mainly due to higher prices at the WESM and the
increase in the average cost of contracted power
supply sourced from the PSAs. Scheduled and
forced outages of various plants, aggravated by
the impact of Typhoon Glenda led to a shortfall
in power supply.14 The damages caused by the
typhoon to some transmission and generating
facilities limited the output of a number of power
plants located in Southern Luzon. This led to the
lower dispatch of the affected plants. Meanwhile,
universal charge also increased by P0.04 per kWh,
as collection for the previously deferred Universal
Charge - Missionary Electrification resumed
starting August 2014.
Potential sources of upside pressures on
electricity charges remain. Meralcos existing
petitions for rate increases with ERC include the
petition to implement the Maximum Average
Price for 2012, 2013 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 6 months), and petition 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 to December 2011. In addition,
there are several pending petitions filed by the
Power Sector Assets and Liabilities Managements
(PSALM) with the ERC for 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
13

On 5 May 2014, the ERC issued Resolution No. 8, s. 2014, imposing a secondary cap of P6,245/MWH on the 73rd hour upon breach
of the P8,186/MWH 72-hour rolling average Generator Weighted Average Price (GWAP) threshold. The resolution aims to mitigate
sustained high prices in the WESM during the supply months of May and June 2014.
14
For the July supply month, a number of power plant units pushed through with their scheduled outages, including Pagbilao 1, and
Ilijan 1 & 2. Further depleting supply of power were 20 new forced outages of several power plant units of various durations during
the month (due to Typhoon Glenda or otherwise) such as Sta. Rita Units 10, 20 & 30, Calaca 1 & 2, GN Power 1 & 2, Sual 1 & 2, Ilijan
1 & 2, Pagbilao 1 & 2, Masinloc 1 & 2, San Lorenzo Units 50 & 60, Therma Mobile 2 & 4, and Quezon Power, in addition to the
continuing forced outage of Sta. Rita 40.

11

(NPC), and NPCs Stranded Debt portion of the


universal charge. The National Grid Corporation of
the Philippines (NGCP) has 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 that
struck the country in 2011-2012.
Aggregate Demand and Supply
The Philippine economy continues to expand at
above-trend rate.
GDP and GNI (At Constant Prices)
12

year-on-year growth in percent

GDP

GNI

10

Q2 2014
7.3 pct

Q2 2014
6.4 pct

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009

2010

2011

2012

2013

2014

The countrys real gross domestic product (GDP)


expanded at a faster pace of 6.4 percent in
Q2 2014 from 5.6 percent in the previous quarter.
However, this is slower than the 7.9 percent
growth in the same quarter a year ago. The
faster-than-expected growth in Q2 2014 was
driven by services (3.5 ppts contribution to GDP
growth) and industry sectors (2.5 ppts) on the
production side, and by net exports (4.2 ppts) and
household consumption (3.6 ppts) on the
expenditure side. These developments reflect the
improvement in external trade in line with the
gradual recovery of the global economy
and continued favorable domestic demand
conditions.
On a seasonally-adjusted basis, q-o-q GDP growth
rose to 1.9 percent in Q2 2014 from 1.4 percent
in Q1 2014.
First semester GDP growth at 6.0 percent is
below the Governments growth target of
6.57.5 percent for 2014.
Gross national income (GNI) increased further by
7.3 percent in Q2 2014. Net primary income (NPI)
grew by 12.7 percent, owing to the continued
strong inflows of overseas Filipinos remittances
during the quarter.
Aggregate Demand

Robust consumer spending and net exports


drive output growth.

Household consumption, expanding at a slightly


slower pace of 5.3 percent in Q2 2014 from the
quarter-ago rate of 5.9 percent, continued to
account for the stable half of the countrys output
at 66.1 percent. The slight slowdown in
household consumption could be attributed

12

mainly to higher consumer prices, particularly


food prices, as a result of tight domestic supply
conditions.

GDP-Expenditure (At Constant Prices)


60

year-on-year growth in percent

50

HH Consumption
5.3 pct

Govt Spending
0.0 pct

Capital Formation
-2.4 pct

40
30
20

10
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

-10

2009

2010

2011

2012

2013

2014

-20
-30
-40

Economic Performance
At constant 2000 prices
Growth rate (in percent)
Sector
By expenditure item
Household consumption
Government consumption
Capital formation
Fixed capital formation
Exports
Imports
Source: PSA

2013
Q2

2014
Q1
Q2

5.1
12.1
33.6
13.6
-7.7
-4.6

5.9
1.9
9.5
11.0
13.5
10.1

5.3
0.0
-2.4
4.0
10.3
1.4

Government spending posted nil growth in


Q2 2014 as actual spending continues to be
below the programmed budget of the
government. In Q2 2014, personal services (PS)
only grew by 1.1 percent (from 9.5 percent in
Q2 2013) while maintenance and other operating
expenditures (MOOE) grew by 7.4 percent (from
27.3 percent).
After posting double-digit growth rates in 2013,
capital formation contracted in Q2 2014 due
largely to inventory drawdown along with the fall
in investments in construction and breeding
stocks. A withdrawal of inventory from the
previous quarters inventory accumulation pulled
down GDP growth by 1.9 ppts. Investments in
breeding stocks also continued to fall for the fifth
consecutive quarter. Similarly, public construction
contracted due to lower spending in
infrastructures and other capital outlays by the
Department of Agriculture (DA) and the
Department of Public Works and Highways
(DPWH).
However,
private
construction
recovered, supported by strong demand for office
spaces due to the expansion of the business
processing outsourcing (BPO) industry and other
multinational firms. Meanwhile, investments in
durable equipment declined, reflecting broadbased slowdown across sectors most notably
transport equipment.
External trade recovered in Q2 2014, reflecting
improved global demand. Total exports continued
to grow in Q2 2014 due to the expansion in both
exports of goods and services. Exports of goods
grew by 10.0 percent on account of increased
exports of electronic components, while growth
in exports of services came mainly from BPO and
tourism receipts as reflected in the double-digit
growth in miscellaneous services, travel, and
insurance. Meanwhile, growth in total imports
decelerated due to decline in imports of goods,
which offset the higher imports of services.

13

Other Demand Indicators


Recent indicators of activity remain generally
positive.

Trends in higher-frequency demand indicators


have also remained generally positive in Q3 2014.
Vehicle sales continued to post double-digit
growth on brisk demand for both passenger cars
and commercial vehicles, while the composite
PMI remained firmly above the 50-point
expansion threshold. Over the coming months,
domestic demand is likely to be supported by the
generally favorable business and consumer
sentiment amid robust credit growth and steady
improvements in employment conditions.
Property Prices
Land Values, Metro Manila

Implied land values continue to trend higher.

Data from Colliers International indicated that


implied land values15 in the Makati CBD and
Ortigas Center appreciated in Q2 2014 from
quarter- and year-ago levels. Implied land values
in the Makati CBD reached P366,425/sq.m. in
Q2 2014, higher by 3.6 percent and 20.4 percent
relative to the levels recorded in Q1 2014 and
Q2 2013, respectively. Similarly, implied land
values in the Ortigas Center rose by 2.0 percent
q-o-q and 7.9 percent y-o-y to P149,365/sq.m.
Land values in the Makati CBD are presently at
about 86.2 percent of their 1997 levels in nominal
terms, but only about 38.4 percent of their
1997 levels in real terms. Likewise, land values in
the Ortigas Center were lower than their
comparable levels in 1997 in both nominal and
real terms by about 76.6 percent and
34.2 percent, respectively.
Vacancy Rates, Metro Manila

Office vacancy rate declines due to continued


strong demand for office space.

The office vacancy rate in the Makati CBD


decreased significantly to 2.1 percent in Q2 2014
from the previous quarter level of 4.2 percent.
The office vacancy rate in Q2 2014 was also lower
than the 3.5 percent recorded a year ago due to
continued strong office demand amid limited
office supply in the Makati CBD. The office
vacancy rate is estimated by Colliers to decline
further to 2.0 percent in Q2 2015.

15

In the absence of reported closed transactions, implied land values based on trends are used by Colliers International to monitor
prices.

14

Residential vacancy rate is lower on increased


occupancy of high-rise residential units.

The residential vacancy rate in the Makati CBD at


10.4 percent in Q2 2014 was slightly lower than
the quarter-ago level of 10.9 percent, but higher
than the year-ago level of 9.6 percent. Residential
vacancy rates decreased due to higher occupancy
rates in the Grade A and B high-rise residential
segments. Nonetheless, according to Colliers, the
residential vacancy rate in the Makati CBD is
expected to rise to 11.7 percent in Q2 2015 as
more residential units will be delivered by 2014
and 2015.
Rental Values, Metro Manila16

Office rental values trend higher.

Monthly Grade A office17 rents in the Makati CBD


reached P818/sq.m. in Q2 2014, representing an
increase of 3.5 percent from the previous quarter.
Similarly, monthly Grade A office rents in the
Makati CBD were higher by 10.5 percent relative
to Q2 2013. Office rental values for Grade A
offices were slightly above their 1997 levels in
nominal terms. In real terms, office rental values
were about 46.9 percent of the comparable levels
in 1997.

Residential rental values increase slightly.

Monthly rents for luxury three-bedroom


condominium units in the Makati CBD rose to
P820/sq.m. in Q2 2014 or a 1.2 percent growth
from the previous quarter. Likewise, monthly
rents for the 3-bedroom segment were higher by
3.8 percent compared to the year-ago levels.
Residential rental values for luxury threebedroom high-rise units were above their
1997 levels in nominal terms but were only about
77.0 percent of their 1997 levels in real terms.
Capital Values, Metro Manila

Capital values for office and residential


buildings are higher.

Capital values18 for office buildings in the Makati


CBD in Q2 2014 were higher in nominal terms
than their quarter- and year-ago levels. Grade A
office capital values in the Makati CBD rose to
P93,908/sq.m., higher by 3.4 percent and by
9.5 percent compared to the quarter- and yearago levels, respectively. Grade A office capital

16

Housing rentals account for 13.8 percent of the 2006-based CPI basket. The NSO only surveys rentals ranging from around
P300-P10,000/month to compute rent inflation. However, the rental values discussed in this section pertain to high-end rented
properties, which may be considered as indicators of wealth and demand.
17
Grade A refers to office space with capital values between P65,000 and P75,000/sq.m..
18
Probable price that the property would have fetched if sold on the date of the valuation. The valuation includes imputed land and
building value.

15

values were also higher than the 1997 levels in


nominal terms. Nevertheless, in real terms, office
capital values were about 52.7 percent of the
comparable levels in 1997.
Capital values for luxury residential buildings19 in
Makati CBD in Q2 2014 increased from their
quarter- and year-ago levels. Average prices for
three-bedroom luxury residential condominium
units increased by 1.1 percent q-o-q and
7.3 percent y-o-y. Capital values for luxury
residential buildings were above their 1997 levels
in nominal terms. In real terms, residential capital
values were about 63.1 percent of the
comparable levels in 1997.
Vehicle Sales
Vehicle sales increase on brisk demand.

Overall vehicle sales from the Chamber of


Automotive Manufacturers of the Philippines
(CAMPI)20 posted double-digit growth in the first
two months of Q3 2014. Vehicle sales increased
by 35.6 percent y-o-y from the 21.8 percent
growth recorded in the previous quarter (AprilMay 2014). CAMPI noted that aggressive
marketing promotions and car launches as well as
sustained demand for passenger cars bolstered
the strong vehicle sales.
Passenger car sales from CAMPI grew by
60.1 percent y-o-y in Q3 2014 (July-August),
accruing to a total of 16,314 from 10,188 units
sold in the same period in 2013.
Meanwhile, commercial vehicle sales which
account for 59.0 percent of total vehicle sales,
expanded by 22.6 percent in the first two months
of Q3 2014. Commercial vehicles sold during the
quarter reached 23,532 units from 19,201 units in
the same period in 2013.

19

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.
20
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.

16

Energy Sales
Total energy sales of Meralco declined by
0.3 percent y-o-y in July 2014, a reversal of the
4.6 percent growth a year-ago. According to
Meralco, the decline in total energy sales could be
attributed to the effect of Typhoon Glenda on
16 July 2014 where the majority of Meralco
customers within their franchise area experienced
disruptions in electric power due to damaged
electric poles and power lines.

Energy sales declines.

The growth of residential and commercial energy


sales slowed down in July to 1.7 percent and
1.0 percent, respectively, from their year- and
quarter-ago figures. Meanwhile, industrial energy
sales declined by 3.8 percent. As reported by
Meralco, households electricity consumption
tend to be lower during the cooler months as they
lessen their use of air conditioning units.
Capacity Utilization
Capacity utilization in manufacturing remains
above 80 percent.
Monthly Average Capacity Utilization for Manufacturing
In percent

90
July 2014 = 83.4
85

80
75
70

The average capacity utilization rate in the


manufacturing sector was steady in July 2014 at
83.4 percent based on the NSOs Monthly
Integrated Survey of Selected Industries (MISSI).
The proportion of establishments that operated
at 80 percent or more was 59.5 percent in July
2014. Based on data since 2000, manufacturing
companies have been operating above the longterm average of 80.0 percent since 2010. The
peak so far was at 83.5 percent in May 2014.

65
J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J
2009

2010

2011

2012

2013

2014

Source: PSA

Volume and Value of Production


Manufacturing output continues to expand,
albeit at a slower pace.

Preliminary results of MISSI showed that the value


of production index (VaPI) expanded by
7.7 percent in July 2014 from the month-ago
growth of 10.1 percent. The growth in VAPI was
driven by strong production values of printing,
leather products, fabricated metal products,
wood and wood products, basic metals,
machinery (except electrical), and electrical
machinery.

17

Volume and Value Indices of Manufacturing Production


Volume of Production
9.6 pct

45

Value of Production
7.7 pct

35

July 2014
9.6 pct

25

in percent

15
5

-5
-15

Likewise, the volume of production index (VoPI)


grew at a slower pace of 9.6 percent in July 2014
from 13.3 percent in the previous month. The rise
in VoPI was attributed to the improved
production of printing, fabricated metal products,
leather products, beverages, machinery except
electrical and electrical machinery.

July 2014
7.7 pct

-25
-35

J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J
2009

2010

2011

2012

2013

2014

Source: PSA

Business Expectations
Business sentiment in Q3 2014 remains
positive, but turns more upbeat in Q4 2014.
Business Expectations Survey
2013

Index

2014

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Current Quarter

41.5

54.9

42.8

52.3

37.8

50.7

34.4

Next Quarter

56.4

46.2

60.0

40.7

50.8

48.9

52.9

Business Outlook
Index

Source: BSP

Results of the BES21 for Q3 2014 continued to be


favorable in Q3 2014 as the overall confidence
index (CI) stayed in positive territory at
34.4 percent. The current quarter reading was
lower however compared to the 50.7 percent CI
recorded in the Q2 2014 survey. For the next
quarter (Q4 2014), business outlook turned more
upbeat as the next quarter index rose to
52.9 percent from 48.9 percent in the Q2 2014
survey. Business outlook in both NCR and AONCR
tracked the same sentiment of businesses at the
national levelless sanguine in Q3 2014, but
more upbeat in Q4 2014.
Respondents attributed the less buoyant outlook
in Q3 2014 to expectations of: (a) seasonal slack
in demand due to interruption of business
activities during the rainy season and lower
consumer spending in view of increased
expenditures on education and tax payments in
the previous quarter; (b) increase in prices of
basic commodities and higher overhead costs
such as raw materials and utilities; (c) slowdown
in business activities as a result of the truck ban
and port congestion issues; and (d) political noise
brought about the Priority Development
Assistance Fund (PDAF) and Disbursement
Acceleration Program (DAP) concerns. The
sentiment of businesses in the Philippines
mirrored the less bullish outlook in the UK,
Canada, Germany, New Zealand, Singapore, Hong
Kong and India, but was in contrast to the more
buoyant views of those in the US and China.

21

The Q3 2014 BES was conducted from 1 July 15 August 2014 among 1,527 firms nationwide, drawn from the Securities and
Exchange Commissions Top 7000 Corporations in 2010 and Business Worlds Top 1000 Corporations in 2012.

18

Meanwhile, respondents cited the following


reasons for their more positive outlook in
Q4 2014: expectations of a) brisker business in
view of the expected increase in consumer
spending during the holiday season; b) expansion
in retail trade, infrastructure, power and
telecommunication, education, and health care
businesses; c) higher exports of garments and
metals in line with the recovery of global markets;
and
d) increase in orders for manufacturing
products leading to higher volume of production.
The
prevailing
favorable
macroeconomic
conditions brought about by the steady growth of
overseas Filipinos (OFs) remittances, increase in
investment inflows as well as the expected rollout of major public-private partnership (PPP)
projects (e.g., North-South commuter rail and
subway system mass transit loop) also boosted
business confidence for the next quarter.
Consumer Expectations
Consumer confidence edges lower in Q3 2014,
but remains positive for the year ahead.

Results of the Q3 2014 CES showed weakened


consumer sentiment for the current quarter, with
positive sentiment for the year ahead.

Consumer Expectations Survey


Index

2013

2014

Q1

Q2

Q3

Q4

Q1

Q2

Q3

-11.2

-5.7

-7.9

-21.3

-18.8

-17.3

-26.3

Next 3 months

7.8

4.1

5.7

2.8

5.4

0.0

-1.0

Next 12 months

18.5

16.1

15.8

14.1

19.3

15.9

9.7

Current Quarter

Source: BSP

Overall consumer CI in Q3 2014 decreased to


-26.3 percent from -17.3 percent in Q2 2014. This
CI indicated that the number of pessimists
increased and continued to exceed the number of
optimists in Q3 2014. Respondents cited the
following reasons for their bearish outlook during
the current quarter: (a) rising prices of basic
commodities; (b) political concerns over issues
like PDAF and DAP; (c) higher household
expenses; and (d) concerns over income,
employment opportunities, and the business
environment. The outlook of consumers in the
Philippines mirrored the less upbeat sentiment of
consumers in euro area, and United Kingdom, but
was in contrast to the optimistic views of those in
Australia, Indonesia, Japan, Taiwan, South Korea,
and the United States for Q3 2014.
For the next quarter (Q4 2014), consumer
sentiment declined slightly from a neutral outlook
of 0 percent to -1 percent in the current quarters
survey as respondents anticipated higher prices

19

of commodities and expressed concerns over the


utilization of government funds. Consumer
outlook for the next 12 months was likewise less
favorable but remained positive.
Purchasing Managers Index22
PMI remains above the 50-point expansion
threshold.

Source: Philippine Institute of Supply Management (PISM)

The results of the monthly PMI survey suggest


that domestic output expansion slowed down in
July 2014. The Composite PMI remained firmly
above the 50-point threshold23 at 56.8, but was
lower than the 59.5 Composite PMI recorded in
June 2014 and 57.4 in July 2013. The lower
Composite PMI reflected the slowdown in the
manufacturing and retail/wholesale (R/W)
sectors.
Manufacturing PMI was 55.2 in July, lower than
the 56.1 and 56.6 levels registered in June 2014
and July 2013, respectively. Industry players in the
manufacturing
industry
reported
lower
production due to delays in the delivery of raw
materials as a result of bad weather conditions,
local truck ban policy, and port congestion
problems in July. New orders and production have
slowed down, while employment, supplier
deliveries, and inventories increased relative to
end-Q2 levels.
Services PMI in July 2014 was higher at 63.7
compared to 61.2 in the previous month and 58.5
in July 2013. Services PMI increased given new
projects and retained contracts carried over from
previous months. Key services indicators namely,
business activity, new orders, outstanding
business, price charge, and average operating
costs improved relative to June 2014 levels while
employment contracted.
The R/W PMI decreased to 52.6 in July 2014 from
58.0 in June 2014 and 54.9 in July 2013.
Respondents attributed this to the local truck ban
policy and port congestion problems that trapped
goods in transit. Key indicators namely,
purchases, sales revenues, and employment

22

The PMI for the Philippines is compiled by the Foundation of the Society of Fellows in Supply Management, Inc. (SOFSM), the
advocacy arm of PISM.
23
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.

20

declined, while supplier deliveries and inventories


expanded compared to the indices recorded in
the previous month.

External Demand
Exports
Export growth slows down on lower shipments
of electronic components.
Exports of Goods
Growth rate (in percent)
Commodity Group

2014
Q1

Q2

11.5

3.8

-12.7

-1.1

Fishery Products

43.6

-37.8

Apparel and Clothing


Accessories

13.3

23.4

Electronic Components

Agricultural Products

Basketworks
Copper

-1.4

-8.1

-100.0

31.5

Ignition Wiring Sets

13.4

22.1

Metal Components

-11.3

-31.7

Petroleum Products

-31.2

-67.8

Others

22.4

21.1

Total Exports

14.2

10.0

Based on the National Accounts data of the


Philippine Statistics Agency (PSA), exports of
goods grew at a slower rate of 10.0 percent in
Q2 2014 from 14.2 percent in the previous
quarter. The slowdown in the export performance
was due to lower shipments of electronic
components (3.8 percent) and decline of the
several commodity exports, including fishery
products
(-37.8
percent),
basketworks
(-8.1 percent), metal components (-31.7 percent)
and petroleum products (-67.8 percent).

Source: PSA

Imports
Import growth declines as electronic imports
falls.
Imports of Goods
Growth rate (in percent)
Commodity Group

2014
Q1

Q2

-38.9

-49.2

8.3

-4.9

Machinery and Mechanical


Appliances

20.5

-4.7

Base Metals

39.4

21.5

Transport Equipment

13.8

9.9

Textile Yarns

14.0

17.9

Electrical Machinery

11.6

22.1

Artificial Resins

43.9

32.8

Chemical Products

36.4

-16.8

Electronics
Mineral Fuels

110.1

38.5

Dairy Products

42.5

-1.9

Medical and Pharmaceutical


Products

18.5

9.8

Paper Products

23.8

-12.5

Feedstuff

96.6

50.1

-68.9

-66.7

41.0

19.8

7.5

-3.9

Cereals

Metalliferous Ores and Metal


Scrap
Others
Total Imports

Imports of goods declined by 3.9 percent in


Q2 2014, a reversal of the 7.5 percent growth
recorded in the previous quarter. The decrease in
imports can be attributed to lower inward
shipments of electronics, mineral fuels, machinery
and mechanical appliances, chemicals, dairy,
paper products, and metalliferous ores and metal
scraps.

Source: PSA

21

Aggregate Supply
The services sector remains the main driver of
output growth on the production side.
GDP-Production (At Constant Prices)

year-on-year growth in percent

20

Agriculture

Industry

Services

3.6 pct

7.8 pct

6.0 pct

15

10

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009

2010

2011

2012

2013

2014

-5

-10

Economic Performance
At constant 2000 prices
Growth rate (in percent)
Sector
By industrial origin
Agri, Hunting, Forestry & Fishing
Agriculture and Forestry
Fishing
Industry
Mining and quarrying
Manufacturing
Construction
Electricity, gas and water supply
Services
Transport., Storage, & Comm.
Trade
Finance
Real estate, Rent, & Bus. Act.
Public administration & defense
Other services
Source: PSA

2013
Q2

Q1

2014
Q2

-0.2
-0.9
3.3
10.5
0.3
10.3
16.6
7.0
7.8
6.6
6.3
10.3
9.5
5.9
8.3

0.9
1.7
-3.1
5.3
9.0
6.9
0.2
1.0
6.8
7.7
6.0
5.7
9.5
6.3
5.5

3.6
4.6
-0.7
7.8
1.9
10.8
1.4
2.8
6.0
6.3
6.6
5.9
8.9
1.2
4.1

The services sector, which comprised 57.6 percent


of GDP, expanded by 6.0 percent in Q2 2014 from
6.8 percent in the previous quarter and
7.8 percent in Q2 2013. The continued output
increase in transport, real estate services, and
trade was partly offset by the growth slowdown in
financial intermediation, public administration
and defense, compulsory social security, and
other services. The strong expansion in transport
services was due to the robust growth in air
transport following the introduction of new
routes, fleet expansion, and upgrades. The growth
in trade and repair of motor vehicles, wholesale
and retail sub-sector also accelerated given
sustained growth in vehicle sales and favorable
consumer sentiment. Notwithstanding the
slowdown in the growth of ownership of
dwellings, real estate, renting and business
activities continued to be one of the main drivers
of growth as renting and other business activities
posted double-digit growth rates for five
consecutive quarters.
The industry sector grew at a faster pace of
7.8 percent in Q2 2014 from 5.3 percent in the
previous quarter. The growth of the
manufacturing industry, which accelerated to
10.8 percent in Q2 2014 from 6.9 percent in
Q1 2014, was the main driver of the expansion in
the industry sector. The growth in manufacturing
mainly came from food manufactures, radio,
television, and communication equipment and
apparatus, furniture and fixtures, fabricated metal
products, and petroleum and other fuel products.
Meanwhile, the contraction in public construction
(-12.9 percent) offset the increase in private
construction (12.7 percent). Growth in the utilities
subsector (electricity, gas, and water supply) was
supported by the brisk real estate and trade
activities (commercial account), food and
beverage, basic non-mineral, as well as steel
manufacturing sectors (industrial account).
The agriculture, hunting, forestry, and fishery
(AHFF) sector rebounded in Q2 2014, growing by
3.6 percent from 0.9 percent in the previous
quarter and -0.2 percent in Q2 2013. The growth

22

in the agriculture sub-sector accelerated due to


the big turnaround in crop harvest, particularly
palay, corn, mango, and other crops. Meanwhile,
the fishing sub-sector declined for the third
consecutive quarter.

Labor Market Conditions


The unemployment rate declines.
Unemployment and Underemployment
25

Unemployment
* Excludes Leyte province

Underemployment

20

July 2014*
18.3 pct

10
July 2014*
6.7 pct

2009

2010

2011

2012

2013

2014

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

0
Q1

in percent

15

Based on the preliminary results of the July 2014


Labor Force Survey (LFS),24 the unemployment
rate continued to fall to 6.7 percent in July 2014
from the quarter- and year-ago rates of
7.0 percent and 7.3 percent, respectively. The
number of unemployed persons was lower at
2.8 million in July 2014 from 2.9 million in the
previous quarter and 3.0 million in the previous
year.
Consequently, the employment rate improved
further in July 2014, climbing to 93.3 percent from
93.0 percent in April 2014 and 92.7 percent in July
2013. Employed persons were estimated at about
38.5 million, increasing by 2.8 percent y-o-y. All
sectors posted employment gains, led by the
services sector with a 2.0-ppt contribution to total
employment growth. In terms of major
occupation groups, the y-o-y increase in the
employment level could be traced largely to the
higher number of employed farmers, service
workers, clerks, and laborers.
Meanwhile, the proportion of underemployed to
total employed persons decreased to 18.3 percent
in July 2014 from 19.2 percent in July 2013, but
was slightly higher than the quarter-ago rate of
18.2 percent.25

24

The July 2014 LFS excludes data on the province of Leyte.


Underemployed persons include all employed persons who express the desire to have additional hours of work in their present job
or an additional job, or to have a new job with longer working hours. Visibly underemployed persons are those who work for less
than 40 hours during the reference period and want additional hours of work.
25

23

II. MONETARY AND FINANCIAL MARKET CONDITIONS


Domestic Liquidity and Credit Conditions
Domestic liquidity growth decelerates.

The growth in money supply or M3 decelerated to


18.3 percent in July 2014 from 23.3 percent in
end-Q2 2014. Money supply continued to expand
due to the sustained demand for credit in the
domestic economy. Domestic claims increased by
13.0 percent in July, slightly slower than the
13.8-percent increase at end-Q2 2014, as bank
lending remained strong. Meanwhile, net public
sector credit decreased by 4.1 percent in July
following an expansion of 8.7 percent at the end
of the previous quarter, as the deposits of the
National Government (NG) increased at a faster
pace, reflecting in part the proceeds from the
auction of government securities as well as
revenue collections of various agencies.
The growth in net foreign assets (NFA) was
likewise slower at 1.9 percent y-o-y in July from
5.7 percent in end-Q2 2014. The NFA of banks
increased as banks foreign assets expanded at a
faster pace relative to the growth in their foreign
liabilities. Banks foreign assets rose due mainly to
the growth in their deposits with other banks and
in their foreign loans and receivables. Meanwhile,
banks foreign liabilities increased on account of
higher deposits of foreign residents as well as
placements and deposits made by foreign banks
with their local branches.

Loans for production activities underpin solid


bank lending growth.

As of July 2014, outstanding loans of commercial


banks, net of banks reverse repurchase (RRP)
placements with the BSP, grew at a faster rate of
21.8 percent y-o-y relative to the 20.1 percent
and 15.8 percent growth posted at end-Q2 2014
and end-Q3 2013, respectively.
The continued expansion of bank lending was
driven largely by lending to the following
productive sectors: real estate, renting, and
business services; wholesale and retail trade;
manufacturing; electricity, gas and water; and
financial intermediation. Meanwhile, loans for
household consumption grew at a broadly steady
pace of 16.0 percent as of July 2014, reflecting the
continued expansion in auto loans and other

24

types of loans (i.e., salary and personal loans),


which offset the slight slowdown in the growth of
credit card loans.
Credit Standards
Results of the Q3 2014 Senior Bank Loan Officers
Survey (SLOS)26 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.27 This is the 22nd consecutive
quarter starting Q2 2009 that majority of banks
reported broadly unchanged credit standards.
The diffusion index (DI) approach,28,29 likewise
showed unchanged overall credit standards for
loans to enterprises as the number of banks
indicating tighter credit standards equaled the
number of banks that indicated easing credit
standards. However, the DI approach pointed to a
net tightening of overall credit standards for loans
to households in Q3 2014 relative to the previous
quarter, with a DI of 9.5 percent. In the previous
quarter, credit standards for corporate lending
were unchanged, while credit standards for loans
to households showed a net tightening.
Lending to Enterprises
Most respondent banks maintain
standards for loans to enterprises.

credit

Most banks (93.5 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. The unchanged overall credit standards
was attributed by banks to their steady outlook
on the domestic economy as well as specific
industries such as manufacturing, real estate,
renting and business activities, wholesale and
retail trade, and utilities. At the same time, banks

26

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 March 2014, U/KB loans accounted for about 86.4 percent of the banking systems total
outstanding loans.
27
In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.
28
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).
29
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.

25

General Credit Standards for Loans to Enterprises (Overall)


2014

2013
Q1

Q2

Q3

Q4

Q1

Q2

Q3

Tightened considerably

0.0

0.0

3.6

3.3

3.7

3.6

0.0

Tightened somewhat

0.0

3.4

3.6

3.3

0.0

3.6

3.2

90.3

86.2

89.3

86.7

88.9

85.7

93.5

Remained basically unchanged

9.7

Eased somewhat

10.3

3.6

6.7

7.4

7.1

3.2

0.0

0.0

0.0

0.0

0.0

0.0

0.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Diffusion Index for Credit Standards

-9.7

-6.9

3.6

0.0

-3.7

0.0

0.0

Weighted Diffusion Index for Credit Standards

-4.8

-3.4

3.6

1.7

0.0

1.8

0.0

Mean

3.1

3.1

2.9

3.0

3.0

3.0

3.0

Eased considerably
Total

29.0
28.0 tightened
30.0 their
27.0credit28.0
31.0
Number
ofdiffusion
banks responding
Note:
A positive
index for credit standards indicates 31.0
that more
banks have
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).

responses indicated unchanged loan covenants


for all firm sizes, except for small and medium
enterprises (SMEs), and steady use of interest rate
floors
for
top
corporations.
Collateral
requirements, credit line sizes, and loan
maturities were also unchanged for micro
enterprises.30
By borrower firm size, overall credit standards for
large middle-market and micro enterprises were
unchanged based on the DI approach. By contrast,
credit standards for SMEs showed a slight net
easing, while those for top corporations showed a
net tightening based on the DI approach.
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 foreseeing a slight easing of
credit standards for loans to businesses was
higher compared to those expecting the opposite.
A more favorable outlook on the domestic
economy, expected improvements in the
profitability and liquidity of banks asset
portfolios, increased tolerance for risk, and
anticipated improvement in borrowers profile
were among the reasons behind the expected net
easing of credit standards of respondent banks.
Lending to Households

Most respondent banks report unchanged


credit standards for loans to households.
General Credit Standards for Loans to Households (Overall)
2013

2014

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Tightened considerably

0.0

0.0

5.3

4.8

5.0

5.0

4.8

Tightened somewhat

4.2

4.8

0.0

4.8

10.0

0.0

9.5

87.5

85.7

84.2

85.7

80.0

95.0

81.0

Eased somewhat

8.3

9.5

10.5

4.8

5.0

0.0

4.8

Eased considerably

0.0

0.0

0.0

0.0

0.0

0.0

0.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

-4.8

-5.3

4.8

10.0

5.0

9.5

-2.1
-2.4
Weighted Diffusion Index for Credit Standards

0.0

4.8

7.5

5.0

7.1

Remained basically unchanged

Total

Diffusion Index for Credit Standards -4.2


Mean

3.0

3.0

3.0

2.9

2.9

2.9

2.9

Number of banks responding

24.0

21.0

19.0

21.0

20.0

20.0

21.0

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).

Using the modal approach, the survey results


likewise showed that most of the respondent
banks (81.0 percent) continued to report
unchanged credit standards for loans extended to
households. The DI approach, however, indicated
a net tightening of overall credit standards for
household loans owing to less aggressive
competition from banks and non-bank lenders
and decreased access of banks to money or bond
marker financing. In particular, banks responses
indicated stricter collateral requirements and
increased use of interest rate floors for all types of
household loans. Banks responses also showed
net tightening of standards on loan covenants

30

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.

26

(except for housing loans), wider loan margins for


credit card and auto loans, and reduced credit line
sizes for credit card loans. By type of household
loans, a continued net tightening of credit
standards for housing loans was noted while
credit standards for credit card and auto loans
showed some tightening from being unchanged in
Q2 2104.
Most of the respondent banks foresee
maintaining their credit standards over the next
quarter. However, some banks expect overall
credit standards to tighten slightly due to an
anticipated deterioration in borrowers profiles
and reduced tolerance for risk, among others.
Loan demand
Responses to the survey question on loan demand
indicated that the majority of the respondent
banks continue to see unchanged overall demand
for loans from both enterprises and households.
Using the DI approach, however, a net increase in
overall demand31 for loans from both enterprises
and households was observed. For loans to
businesses, the net increase in loan demand was
attributed by banks to increased needs for
working capital and fixed-capital investments of
borrower firms as well as lower interest rates and
clients improved economic outlook. Meanwhile,
the net increase in demand for household loans
reflected the low interest rate environment and
more attractive financing terms offered by banks.
Loan demand from both enterprises and
households is unchanged.

Looking ahead, most of the respondent banks


expect unchanged loan demand for loans to firms
and households over the next quarter. However, a
larger proportion of respondents expect demand
for loans to increase further in the next quarter
relative to those who indicated the opposite. For
loans to enterprises, the net increase in loan
demand was attributed by respondent banks to
the low interest rate environment as well as
higher inventory and working capital financing
and fixed-capital investment needs of borrower
firms. For loans to households, meanwhile,

31

Diffusion index (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.

27

expectations of higher household consumption


and lower interest rates were cited by respondent
banks as key factors behind the anticipated
increase in loan demand.
Special Questions on Commercial Real Estate
Loans
Most of the respondent banks (80.0 percent)
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 9th
consecutive quarter in Q3 2014. The net
tightening of overall credit standards for
commercial real estate loans was attributed by
respondent banks to perceived stricter oversight
of banks real estate exposure along with banks
reduced tolerance for risk, among others. In
particular, respondent banks reported wider loan
margins, reduced credit line sizes, and stricter
loan covenants for commercial real estate loans.
Credit standards for commercial real estate
loans are steady.

Demand for commercial real estate loans was also


unchanged in Q3 2014 based on the modal
approach. A number of banks, however, indicated
increased demand for the said type of loan on the
back of improved clients economic outlook, lower
interest rates, and increased working capital
financing needs of clients.
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. In terms of demand for this type of loan,
although most of the respondent banks anticipate
generally steady loan demand, a number of banks
expect that demand for commercial real estate
loans will continue to increase in the following
quarter.

28

Interest Rates
Primary Interest Rates
T-bill rates in the primary market decline.

In July-August 2014, the average 91-day, 182-day,


and 364-day T-bill rates in the primary market was
slightly lower at 1.258 percent, 1.582 percent, and
1.809 percent from 1.274 percent, 1.589 percent,
and 1.863 percent, respectively, in Q2 2014. The
slight decline in T-bill rates reflected strong
demand for short-term GS and ample liquidity in
the financial system amid expectations of further
monetary policy tightening on account of higher
inflation outlook.

Treasury Bill Rates


6
5

in percent

4
3
2
1
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2011

2010

2009
91-day T-bill Rate

2012

182-day T-bill Rate

2013

2014

364-day T-bill Rate

Yield Curve
Secondary market yields rise.
Yields of Government Securities in the Secondary Market
6
5

in percent

4
3
2
1
0
3Mo

6Mo

1Yr

2Yr

11 Sep 2013

3yr

4Yr
5Yr
Maturity
30 Jun 2014

7Yr

10Yr

20Yr

25Yr

11 Sep 2014

The secondary market yield of GS rose generally


across tenors, except for the 2-year and 25-year
GS, as of 11 September 2014 relative to the
end-June 2014 levels, reflecting the hike in the
BSPs policy interest rate on 31 July 2014 and
11 September 2014 and the higher-than-expected
inflation outturn in July and August 2014 as well
as expectations of further increases in domestic
inflation. Debt paper yields were higher by a
range of 2.9 bps (for 20-year GS) to 29.8 bps (for
4-year GS) compared to end-June 2014 levels.
However, the 2-year and the 25-year GS declined
by 2.2 bps and 0.7 bp, respectively.
Relative to year-ago levels, secondary market
yield of GS increased by a range of 2.1 bps (4-year
GS) to 109.0 bps (20-year GS). However, the rates
for the 3-month, 1-year, 25-year, 6-month and
2-year GS declined by 0.4 bp, 0.8 bp, 3.4 bps,
4.6 bps, and 20.7 bps, respectively.
Interest Rate Differentials

Interest rate differentials show mixed trends.

The average differentials between domestic and


US interest rates, gross and net of tax, showed
mixed trends in Q3 2014 relative to the previous
quarter. The average differential between the
91-day RP T-bill rate and the US 90-day LIBOR,

29

Interest Rate Differentials


450
quarterly averages; in basis points

400
350
300
250
200

150
100
50
0
-50
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009
2010
2011
2013
2014
2012
RP 91-day T-bill vs. US 90-day LIBOR (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 (before tax)


RP 91-day T-bill vs. US 90-day T-bill (after tax)

BSP RRP Rate and US Federal Funds Target Rate


6
5

in percent

4
3
2
1
0
-1
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009
2010
2013
2011
2012
2014
BSP RRP Rate
US Federal Funds Target Rate

in basis points

Risk-Adjusted Differentials
350
325
300
275
250
225
200
175
150
125
100
75
50
25
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2012
2014
2013
2009
2011
2010

32
33

gross and net of tax, narrowed in Q3 2014 relative


to the previous quarter. By contrast, the average
differential between the 91-day RP T-bill rate and
the US 90-day T-bill rate widened for the same
period. The average 91-day RP T-bill rate declined
q-o-q by 1.6 bps to 1.258 percent in Q3 2014 from
1.274 percent in Q2 2014. Meanwhile, the
average US 90-day T-bill rate decreased by 2.1 bps
to 0.028 percent in Q3 2014 whereas the average
US 90-day LIBOR increased by 0.6 bp to
0.234 percent. The domestic interest rate fell
during the quarter on strong demand for shortterm GS and ample liquidity in the financial
market. Meanwhile, foreign interest rates showed
mixed trends on speculations that the US Fed
would raise its policy rate in 2015 following the
release of stronger-than-expected US economic
data on manufacturing activity, labor market
conditions, import price index, retail sales
(excluding auto sales), and home re-sales during
the quarter. The easing geopolitical tensions
between Russia and Ukraine also supported the
favorable movement in foreign interest rates.
The positive differential between the BSP's policy
interest rate (overnight borrowing or RRP rate)
and the US federal funds target rate widened to
375 bps in Q3 2014 from 325 bps in Q2 2014,
reflecting the impact of the 50-bp increase in the
BSPs policy interest rate to 3.75 percent on
31 July 201432 and 4.0 percent in 11 September
2014. Likewise, the interest rate differential
between the BSPs overnight RRP rate and the US
federal funds target rate adjusted for country risk
premium33 widened to 286 bps in 12 September
2014 from 226 bps in end-June 2014. This
development could be traced to the hike in the
BSPs policy interest rate and to the lower risk
premium given the decline in the 10-year ROP
yield. The 10-year ROP yield declined following
the Philippines credit rating upgrade by the Japan
Credit Rating Agency and the tightening of
spreads in the Asian credit market.

This is the first BSP policy interest rate increase since 2013.
The difference between the 10-year ROP note and the 10-year US Treasury note is used as proxy for the risk premium.

30

Real lending rate declines further.


Philippines' Real Lending Rate
6
5

in percent

4
3
2
1
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Aug
2009
2014
2010
2011
2012
2013

The real lending rate34 declined to 0.8 percent in


August 2014 from 1.2 percent in June 2014. This
was due to the 50-bp rise in inflation to
4.9 percent in August 2014 from 4.4 percent in
June 2014 as well as the 10-bps increase in the
average bank lending rate to 5.7 percent from
5.6 percent. The Philippines along with Taiwan
posted the second lowest real lending rates in a
sample of 10 Asian countries, with India recording
the highest real lending rate at 9.6 percent and
Japan the lowest at -2.2 percent.

Financial Market Conditions


Financial markets end the quarter on a Investor sentiment was buoyed by reports of
favorable note.
favorable domestic Q2 2014 corporate earnings
and the stronger-than-expected Q2 2014 GDP
growth amid signs of improving geopolitical
situation in the Middle East and Ukraine. The
rating upgrade received from the Japan-based
credit rating agency R&I likewise contributed to
the positive mood in the market. Confidence was
further lifted by US Fed statements that interest
rates will likely remain low for some time after
the end of the US Feds bond buying program and
the unprecedented monetary stimulus measures
by the ECB. Consequently, the local bourse
surged past the 7,100-mark peaking to a
15-month high in August. The countrys 5-year
sovereign CDS spreads also narrowed during the
quarter, trading lower than Indonesias and
Thailands CDS and close to Malaysias CDS. The
peso likewise strengthened in line with the
overall appreciation observed among the
currencies in the region as global financial market
conditions stabilized on the US Fed
pronouncement to maintain interest rates at
current levels in the foreseeable future.
Stock Market
The stock index breaches the 7,100 barrier.

34

The PSEi rallied by 3.2 percent q-o-q to average


6,954.9 index points in Q3 2014 (July-29 August),
as investors were upbeat on the local bourse
given reports of favorable domestic Q2 corporate

Real lending rate is measured as the difference between the average bank lending rate and inflation.

31

earnings and the stronger-than-expected Q2 2014


GDP growth amid signs of improving geopolitical
situation in the Middle East and Ukraine.

Quarterly Average PSEi


8,000
7,000

6,000

index points

5,000

Q3 2014
6,954.9

4,000

3,000
2,000
1,000

2009

2010

2011

2012

2013

2014

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

In July, the PSEi breached the 6,900 barrier for the


first time in 13 months after markets cheered the
lower-than-expected June inflation. Investors also
followed the lead of Wall Street, which surged to
record highs after the US jobs data showed a
6-year low unemployment rate. However,
towards the end of the month, the local bourse
retreated on concerns of overvaluation of stocks
and lack of fresh leads. Investors adopted a waitand-see stance ahead of the monetary policy
meetings of the BSP and the US Fed as well as
President Aquinos state of the nation address.
The continued tensions in Gaza and fears of
adverse effects of the US and EUs new sanctions
against Russia also hindered further rally as the
month drew to a close. The index closed at
6,864.8 index points as of 31 July, higher by
0.3 percent m-o-m and 16.6 percent ytd.
In August, the local bourse surged past the
7,100 mark and peaked at a 15-month high of
7,160.4 index points on 27 August on account of
the strong Q2 2014 corporate earnings and the
Philippine Q2 2014 GDP growth of 6.4 percent.
Stock trading picked up notwithstanding the
25 bps hike in the BSPs policy rates and the
higher inflation rate for July. Investors were
likewise encouraged by the rally in Wall Street,
which was propelled by the pick-up in the jobs
market and higher home sales. Global sentiment
was also lifted by the dovish comments of US Fed
Chair Yellen and ECB President Draghi during the
annual conference of central bankers in Jackson
Hole, Wyoming. The market closed the month at
7,050.9 index points, 2.7 percent higher m-o-m
and 19.7 percent ytd.

Foreign investors remain net buyers.

Total stock market capitalization increased by


1.8 percent q-o-q to P13.5 trillion as of 29 August
as foreign investors continued to post net buying
activities during the review period. Foreign
investor net purchases amounted to P13.1 billion
during the period in review. Data from Bloomberg
also indicated that the price-earnings ratio of
listed issues decreased from 21.7x in end-June to

32

20.7x as of end-August. At this level, Philippine


shares remains the most expensive in the region,
followed by Indonesia with 20.6x.
Government Securities
Demand for local GS remains strong.
Total Oversubscription of T-bill Auctions
180
160
140

Q3 2014
P106.7B

in billion pesos

120
100
80
60

40
20
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009

2010

2011

2012

2013

2014

Results of the T-bill auctions conducted in


Q3 2014 (July-August) continued to show robust
demand for T-bills as indicated by the increased
oversubscription in the auctions during the
quarter. On an aggregate basis, the total
oversubscription for the quarter (July-August
2014) amounted to P106.7 billion against the total
offered amount of P60.0 billion. The total
oversubscription for the quarter was higher than
the P73.9-billion oversubscription in the Q2 2014.
The Auction Committee awarded in full the total
offered amount in two of the three auctions
conducted during the quarter. During the auction
on 4 August, the Auction Committee rejected all
bids for the 182-day T-bill as bids were deemed
very high by the Auction Committee. The increase
in T-bill rates during the auctions conducted on
7 July and 4 August reflected the increase in the
BSPs SDA rate on 19 June and the hike in the BSP
policy rates on 31 July 2014 as well as
expectations of higher inflation in the near term.
Sovereign Bond and CDS Spreads

Debt spreads reflect increased risk aversion.


Quarterly JPMorgan EMBI+ Sovereign Bond Spreads
700

600

in basis points

500

EMBI+Global
291 bps

400
300
200
100

EMBI+Philippines
141 bps

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

2009

2010

2011

2012

2013

2014

Bond spreads increased in Q3 2014 (July-August),


indicating perception of higher risk aversion
towards Philippine sovereign debt papers. The
EMBI+Philippine spreads, or the extra yield
investors demand to own Philippine debt over
U.S. Treasuries, averaged 141 bps, up from the
previous quarters 127 bps. Meanwhile, the
countrys 5-year sovereign CDS spreads decreased
to an average of 88 bps from 94 bps. Against
those of neighboring economies, the Philippine
CDS traded lower than Indonesias CDS average of
148 bps and Thailands 100 bps, and close to
Malaysias 84 bps.
In July, debt spreads tightened as various
indicators pointed to the sustained recovery of
the US economy. Many segments of the US
economy have rebounded, including corporate
profits and consumer spending as well as

33

Quarterly Philippine Sovereign 5-Year CDS Spreads


700
600

Philippines
88 bps

in basis points

500

Indonesia
148 bps

Thailand
100 bps

Malaysia
84 bps

400
300
200

unemployment. At the local front, the lower-thanexpected June inflation translated to lower
premiums in holding Philippine debt papers.
Meanwhile, the credit rating upgrade received by
the Philippines from the Japan-based credit rating
agency R&I likewise contributed to the narrowing
of credit spreads during the month.

100
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009

2010

2011

2012

2013

2014

However, the tightening trend was not sustained


as debt spreads widened anew in August. The
escalating geopolitical risk in the Middle East,
particularly the ongoing conflict in the Gaza area,
and the continued violence in the borders of
Russia and Ukraine, sent debt spreads to climb to
levels last seen in May 2014. Moreover, the
lower-than-expected US jobs data added to the
negative external environment. In the Philippines,
the July headline inflation rate accelerated as
most food items posted higher prices due to tight
domestic supply conditions, adding pressure for
debt spreads to widen. Debt spreads recovered
and started to narrow in the latter part of the
month, buoyed by reports of Philippine economy
growing faster than expected for the first half of
the year.
As of 29 August, the EMBI+Philippine spread
stood at 137 bps, slightly higher than end-Julys
134 bps. Meanwhile, CDS decreased to 85 bps
from the previous months 94 bps.

Banking System
Philippine banking system continues to register
strong performance amid tighter capital
requirements.

The Philippine banking system maintained its


strong performance, supported by the countrys
continued robust growth. Banks balance sheets
were marked by a sustained growth in assets and
deposits. Asset quality indicators continued to
improve, while capital adequacy ratios remained
above international standards, even with the
implementation of a much tighter Basel 3
framework.
Savings Mobilization
Savings and time deposits remained the primary
sources of funds for banks. Banks total deposits35
as of end-June 2014 amounted to P6.3 trillion,

35

This refers to the total peso-denominated deposits of the banking system.

34

25.6 percent higher than the year-ago level of


P5.0 trillion. The rapid growth may be attributed
to the shift of depositors investments from the
BSPs SDA facility to bank deposits as a result of
the
fine-tuning
of
access
of
trust
36
departments/entities to the BSP SDA facility as
well as to improving corporate profits and robust
economic expansion. Savings deposits registered
a 21.8 percent growth, continuing to account for
nearly half of the funding base of banks.
Meanwhile, demand deposits expanded y-o-y by
21.6 percent and time deposits increased by
37.2 percent from the level posted a year ago.
Institutional Developments
U/KBs account for the largest share in the
resource base.

The total resources of the banking system rose by


1.5 percent to P10.6 trillion as of end-June 2014
from quarter-ago and 18.8 percent from year-ago
levels. The increase could be traced to the growth
in loans, equity investments and other assets.
Universal and commercial banks (U/KBs)
accounted for more than 90 percent of the total
resources of the banking system.
The number of banking institutions (head offices)
fell to 667 as of end-March 2014 from the
quarter- and year-ago levels of 673 and 687,
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 U/KBs, 70 thrift
banks (TBs), and 561 rural banks (RBs).
Meanwhile, the operating network (head offices
and branches/agencies) of the banking system
increased to 10,020 in Q1 2014 from 9,935 in
Q4 2013 and 9,477 during the same period last
year, due mainly to the increase in the
branches/agencies of all bank categories.

36

Under BSP Memorandum to All Banks/Non-Bank Financial Institutions dated 17 May 2013, SDA placements of trust
departments/entities under the investment management accounts (IMA) must be reduced by at least 30 percent by end-July 2013
(relative to the outstanding balance as of 31 March 2013) and the remaining balance must be phased out by end-November 2013.
Thus, beginning 1 January 2014, placements of trust departments/entities in the SDA facility must consist only of funds from trust
accounts allowed under existing regulations.

35

Asset quality of Philippine banks improves


slightly.

The
Philippine
banking
systems
gross
non-performing loan (GNPL) ratio marginally
declined to 2.7 percent as of end-June 2014,37
relative to the previous quarters 2.8 percent.38
Banks initiatives to improve their asset quality
along with prudent lending regulations helped
bring the NPL ratio to below its pre-Asian crisis
level of around 3.5 percent. The lower Q2 2014
GNPL ratio reflected the slower GNPL growth of
1.1 percent from P138.5 billion to P140.0 billion,
relative to the banking systems TLP expansion of
4.0 percent, from P5.0 trillion to P5.2 trillion.
Meanwhile, the net non-performing loan (NNPL)
ratio increased slightly to 0.7 percent from the
0.6 percent posted in end-March 2014. In
computing for the NNPLs, specific allowances for
credit losses39 on TLP are deducted from the
GNPLs. The said allowances decreased to
P105.9 billion in Q2 2014 from the P106.0 billion
posted a quarter ago.
The Philippine banking systems GNPL ratio of
2.7 percent was higher compared to Indonesia
(2.2 percent), South Korea (1.7 percent), and
Thailand (2.3 percent), but broadly similar as that
of Malaysia.40
The loan exposures of banks remained adequately
covered as the banking systems NPL coverage
ratio improved slightly to 116.4 percent as of
end-June 2014 from 116.2 percent in end-March
2014. The ratio was indicative of banks continued
compliance with the loan-loss provisioning
requirements of the BSP to ensure adequate
buffers against potential credit losses.

37

On 16 October 2012, the BSP amended banks reporting standard for NPLs. Beginning with the January 2013 reports, banks have
been required to report their gross NPLs and their net NPLs. Gross NPLs represent the actual level of NPL without any
adjustment for loans treated as loss and fully provisioned. Net NPLs is just the gross NPLs less specific allowance for credit losses
on TLP (Circular No. 772, series of 2012). The new reporting standard was driven by the BSPs intent to be more transparent as it
gives a fuller picture of the gross amount of NPLs and the full extent of allowances for probable losses. Under the previous
framework, NPLs were reported net of loans considered as loss but fully provisioned for.
38
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.
39
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.
40
Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, May 2014); Malaysia
(banking system, Q2 2014); Thailand (commercial banks, Q2 2014); and South Korea (banking system, Q2 2014).

36

Banks remain adequately capitalized amid


tighter capital requirements.

Compliance with the BSP capital framework for


U/KBs under the Basel 3 framework41 took effect
on 1 January 2014. The new Basel 3 regime
incorporates adjustments to the treatment of
bank capital in ways that enhance the use of the
capital adequacy ratio (CAR) as a prudential
measure.
Under the Basel 3 framework, the U/KBs industry
average CAR stood at 15.5 percent and
16.4 percent on solo and consolidated bases, both
lower than the previous quarters 16.5 percent
and 17.7 percent, respectively, as of end-March
2014. This developed as banks risk weighted
assets (RWA) grew, while their qualifying capital
slightly fell. Tier 1 capital ratios stood at
13.7 percent and 14.6 percent on solo and
consolidated basis, respectively.
The Philippine banking systems CAR on a
consolidated basis at 16.4 percent was higher
than that of Malaysia (14.8 percent), Thailand
(15.7 percent), and South Korea (14.1 percent),
but lower than Indonesia (19.5 percent).42

Exchange Rate
The peso along with other EM currencies
strengthens during the review period.
Quarterly Peso-Dollar Rate
50
48

Q3 2014
P43.62/US$1

44
42
40
38

2009

2010

2011

2012

2013

2014

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

36
Q1

Php/US$

46

For the period 1 July-29 August 2014, the peso


averaged
P43.62/US$1,
appreciating
by
1.2 percent from the previous quarters average
of P44.13/US$1, and by 0.14 percent relative to
the P43.68/US$1 Q3 2013 average.43 The peso
stabilized against the US dollar during the review
period on account of robust GDP growth of the
Philippines in Q2 2014, projected improvement in
the countrys external payments position, and
credit rating upgrade. However, lingering
concerns about the future monetary policy path
of the US Fed and its impact on global liquidiy
continued to affect the movement of the peso,
along with geopolitical conflicts in the Middle East
and Ukraine-Russia.

41

Basel 3 no longer counts towards bank capital those Basel 2-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 3
now deducts from capital the investments of banks in non-allied undertakings, defined benefit pension fund assets, goodwill and
other intangible assets.
42
Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, May 2014); Thailand
(commercial banks, Q2 2014); Malaysia (banking system, Q2 2014); and Korea (banking system, Q2 2014).
43
Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change.

37

In July, the peso strengthened to average


P43.47/US$1 relative to the previous months
P43.82/US$1 due mainly to market expectations
that the projected improvement in the countrys
external payments position could spur capital
inflows. Further, the peso strengthened on
account of the credit rating upgrade to
investment grade by the Japan Credit Rating
Agency, R&I, recognizing the countrys sound
macroeconomic
fundamentals
and
rising
per-capita income resulting from the expansion
of infrastructure investments and continuing
governance reforms. Meanwhile, in August, the
peso weakened slightly to average P43.77/US$1,
reflecting mainly the World Banks growth
forecast downgrade on the Philippines due to
weaker government spending, tighter monetary
policy, and higher inflation.
Overall, the strength of the peso-dollar rate
during the review period was buoyed by the
sustained inflows of foreign exchange from higher
OF remittances,44 foreign portfolio,45 and direct
investments,46 coupled with the robust
6.4 percent Philippine GDP growth in Q2 2014.
Likewise, the ample level of the countrys gross
international reserves continued to support the
peso.47
On a ytd basis, the peso appreciated against the
US dollar by 1.85 percent on 29 August 2014 as it
closed at P43.59/US$1, moving in tandem with
other Asian currencies, except the Chinese yuan
and New Taiwan dollar which depreciated vis-vis the US dollar.48
Meanwhile, volatility, as measured by the
coefficient of variation (COV)49 of the pesos daily
closing rates was lower at 0.48 percent during the
review period (1 July-29 August) compared with
44

Personal remittances from OFs rose by 7.0 percent y-o-ythe highest recorded growth in six monthsto US$2.3 billion in
June 2014.
45
Transactions in July 2014 for registered foreign portfolio investments yielded overall net inflows of US$321 million, reflecting a
significant improvement from the previous months US$44 million.
46
Foreign direct investments (FDI) posted net inflows amounting to US$473 million in May 2014, a turnaround from the
US$62 million net outflows registered in the same period last year.
47
GIR reached US$80.79 billion as of end-August 2014 (preliminary).
48
Based on the last done deal in the afternoon.
49
The coefficient of variation is computed as the standard deviation of the daily exchange rate divided by the average exchange
rates for the period.

38

Changes in Selected Dollar Rates


Year-to-date
Appr./(Depr.), in percent
31 Dec 13*

29 Aug 14**

Philippine peso

(7.53)

1.85

Thai baht (onshore)


Chinese yuan
Malaysian ringgit
South Korean won
Singaporean dollar
New Taiwan dollar
Indonesian rupiah
Japanese yen

(6.74)
2.67
(6.98)
1.02
(3.56)
(2.99)
(20.22)
(17.13)

2.40
(1.47)
3.99
3.58
1.22
(0.14)
4.06
1.44

Source: Bloomberg, Reuters and PDEX


As of 4:00 p.m., 27 December 2013
** As of 4:00 p.m., 29 August 2014

0.95 percent in Q2 2014. The degree of calm in


the local currency market reflected investor
confidence towards the peso, buoyed by the
confidence on Philippine growth prospects, amid
uncertainty in the path of US monetary policy and
geopolitical concerns in several countries.
On a real trade-weighted basis, during the period
July-August 2014, the peso lost slightly external
price competitiveness against the basket of
currencies of all major trading partners (MTPs)
and trading partners in advanced (TPI-A) and
developing (TPI-D) countries as the real effective
exchange rate (REER) index of the peso increased
by 0.45 percent, 1.09 percent, and 0.02 percent,
respectively, relative to Q2 2014.50,51 This
developed as the narrowing inflation differential
failed to offset the impact of the pesos nominal
appreciation against these currency baskets.
Likewise, relative to Q3 2013, the peso lost
external price competitiveness against the basket
of currencies of MTPs and TPI-A as the peso
appreciated in real terms by 2.9 percent and
3.9 percent, respectively, due to the combined
effects of the pesos nominal appreciation and
positive inflation differential. Similarly, the peso
lost external price competitiveness against the
basket of currencies in the TPI-D as the nominal
depreciation of the peso failed to neutralize the
impact of positive inflation differential resulting in
the real appreciation of the peso by 2.3 percent.

50

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.
51
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--vis a basket of foreign currencies.

39

III. FISCAL DEVELOPMENTS


NG posts lower deficit as of end-July 2014.

National Government Fiscal Performance


In billion pesos
January-July
2013

2014

Growth
(%)

Surplus/(Deficit)
Revenues

-104.5
984.1

-55.7
1,100.5

-47.0
12.0

Expenditures

1,088.6

1,156.2

6.0

*Totals may not add up due to rounding


Source: BTR

The fiscal deficit for the period January-July 2014


was P55.7 billion, lower than the P104.5-billion
deficit incurred during the same period in 2013.
Meanwhile, netting out the interest payments in
the expenditures, the primary surplus amounted
to P152.2 billion, P46.1 billion higher than the
level recorded in the period January-July 2013.
Revenue collections rose by 12.0 percent to
P1,100.5 billion as of end-July 2014 compared to
P984.1 billion in the same period in 2013, mainly
due to higher collections by the Bureau of Internal
Revenue (BIR). The BIR and the Bureau of
Customs contributed P763.2 billion and
P203.9 billion, respectively, to total revenues,
which represented an increase of 10.0 percent
and 18.0 percent, respectively, compared to their
levels a year ago. Likewise, collections by the
Bureau of the Treasury went up to P70.4 billion
from P57.5 billion in the same period in 2013.
Revenues from other offices also increased by
5.0 percent to P63.0 billion.
Expenditures in January-July 2014 amounted to
P1,156.2 billion, 6.0 percent higher than the
expenditures in the same period in 2013.
Excluding interest payments, expenditures
increased by 8.0 percent to P948.2 billion.
Meanwhile, interest payments declined by
1.0 percent to reach P208.0 billion.

40

IV. EXTERNAL DEVELOPMENTS


Overall global economic activity remains
brisk.

Global growth prospects continue to be uneven.


The outlook for AEs is generally upbeat, mainly as
growth in the US strengthens further, while the
recovery in the euro area remains moderate.
However, economic activity in Japan has been
fragile, as the imposition of higher sales taxes in
April continues to dampen domestic demand.
Meanwhile, growth prospects in major EMs,
particularly in China and India, have been
subdued, notwithstanding indications of modest
improvements.
The JP Morgan Global All-Industry Output Index
eased slightly to 55.1 in August from 55.5 in July,
signaling a continued expansion in output,
underpinned by robust inflows of new orders in
both the manufacturing and services sectors.
Strong output growth was observed in the US and
UK, while activity was relatively subdued across
Europe and Asia.52
Meanwhile, the global inflation environment
remains broadly benign. Inflationary pressures are
expected to remain subdued as output gaps are
seen to stay substantial even with the pickup in
activity. However, inflation has risen in some
emerging economies owing to domestic supply
factors.

The US economy continues to strengthen.

Real GDP increased by 4.2 percent q-o-q in


Q2 2014, reversing the 2.1-percent contraction
recorded in the previous quarter. On a y-o-y basis,
real GDP grew by 2.5 percent. The acceleration
during the quarter reflected positive contributions
from personal consumption expenditures, private
inventory investment, exports, nonresidential
fixed investment, state and local government
spending, and residential fixed investment.53
The manufacturing PMI likewise rose to 59.0 in
August from 57.1 in July as new orders continued
to increase. Survey respondents remained
generally upbeat about business conditions,

52

JP Morgan Global Manufacturing & Services PMI,


http://www.markiteconomics.com/Survey/PressRelease.mvc/aa0f580159104585b0d16e2fd5a30f21
53
Second estimates. Bureau of Economic Analysis. http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp2q14_2nd.pdf

41

although some expressed concerns


geopolitical tensions overseas.54

over

Inflation eased slightly to 2.0 percent in July from


2.1 percent in the previous month as the
increases in the indices for shelter and food were
offset by declines in the indices for airline fares
and energy. The energy index decreased for the
first time since March 2014. Meanwhile, the
unemployment rate declined slightly to
6.1 percent in August from 6.2 percent in July.
Total nonfarm payroll employment increased by
142,000 in August, with gains noted in
professional and business services and in health
care.
Consumer confidence improved on robust
employment growth, supporting prospects for
stronger consumer spending in the months ahead.
The Conference Board Consumer Confidence
Index rose to 92.4 in August from 90.3 in July,55
while the Thomson-Reuters/University of
Michigan Index of Consumer Sentiment increased
to 82.5 in August from 81.8 in July.56
The recovery in the euro area slows down.

On a q-o-q basis, real GDP growth in the euro area


was nil in Q2 2014, following the 0.2-percent
increase in the previous quarter. Similarly, on a
y-o-y basis, real GDP growth in Q2 2014 was
slightly slower at 0.7 percent compared to the
1.0-percent expansion in Q1 2014.57
The composite PMI for the euro area declined to
52.5 in August from 53.8 in July, as output growth
in the manufacturing and services sectors slowed.
Strong output expansions in Ireland and Spain
were offset by the contraction in Italy and
France.58
The European Commissions Economic Sentiment
Indicator for the euro area fell to 100.6 in August
from 102.1 in July. Market sentiment moderated
in retail trade, industry, and services. Similarly,

54

Institute for Supply Management, August 2014 Manufacturing ISM Report On Business, 2 September 2014,
http://www.ism.ws/ISMReport/MfgROB.cfm
55
The Conference Board Consumer Confidence Index Improves Again. 26 August 2014. http://www.conferenceboard.org/data/consumerconfidence.cfm
56
Stability in Consumer Sentiment Aids Economy. 29 August 2014. http://press.sca.isr.umich.edu/press/press_release
57
Eurostat news release 133/2014 dated 5 September 2014.
58
Markit Eurozone Composite PMI,
http://www.markiteconomics.com/Survey/PressRelease.mvc/0bdd0b3b190a4eee9180e1180d572ce5

42

consumer confidence weakened owing to more


negative assessments of future unemployment
prospects.59
The seasonally adjusted unemployment rate was
steady at 11.5 percent in July, the same rate as in
June 2014.60 Meanwhile, inflation decelerated
further to 0.3 percent in August from 0.4 percent
in July.61
Output in Japan contracts.

Real GDP contracted by 1.8 percent q-o-q in


Q2 2014, following the 1.5-percent expansion in
Q1 2014. On a y-o-y basis, real GDP likewise
decreased by 0.1 percent in Q2 2014 after
increasing by 3.0 percent in the previous
quarter.62 Real GDP declined as business and
housing investment fell following the increases in
consumption taxes in April 2014. Meanwhile, the
seasonally adjusted manufacturing PMI rose to
52.2 in August from 50.5 in July amid faster
growth in new domestic and export orders.63
Inflation eased to 3.4 percent y-o-y in July from
3.6 percent y-o-y in June. Meanwhile, the
seasonally adjusted unemployment rate increased
slightly to 3.8 percent in July from 3.7 percent in
June.

China grows at a faster pace.

Real GDP growth rose slightly to 7.5 percent y-o-y


in Q2 2014 from 7.4 percent in Q1 2014.
However, the seasonally adjusted manufacturing
PMI decreased to 50.2 in August from 51.7 in July
as new domestic and export orders softened.64
Inflation was broadly steady at 2.3 percent in July
from the same rate in June. The higher prices of
food, particularly fresh fruits and eggs, drove
inflation during the month.

Growth conditions in India improve.

Real GDP increased by 5.7 percent y-o-y in


Q2 2014, faster than the 4.6-percent expansion in
the previous quarter. Meanwhile, the composite

59

European Commission. http://ec.europa.eu/economy_finance/db_indicators/surveys/documents/2014/esi_2014_07_en.pdf


Eurostat news release 129/2014 dated 29 August 2014.
61
Eurostat news release 130/2014 dated 29 August 2014.
62
Second estimates by the Department of National Accounts, Economic and Social Research Institute, Cabinet Office.
http://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2014/qe142_2/pdf/jikei_1.pdf
63
Markit/JMMA Japan Manufacturing PMI,
http://www.markiteconomics.com/Survey/PressRelease.mvc/6ee8cf09ff8a48a7a23f407f821b8d28
64
HSBC China Manufacturing PMI,
http://www.markiteconomics.com/Survey/PressRelease.mvc/8522abed75f6421e9351b4633808ce90
60

43

PMI declined to 51.6 in August from 53.0 in July as


output in both the manufacturing and services
sector decreased.65
Inflation, based on the consumer price index (CPI),
rose to 8.0 percent in July from 7.5 percent in
June.
Major central banks adjust their monetary
policy settings in response to evolving
economic conditions.

On 10 July 2014, Bank Negara Malaysia (BNM)


decided to raise its overnight policy rate by 25 bps
to 3.25 percent. The policy rate hike was aimed at
mitigating the risks of broader economic and
financial imbalances that could undermine
Malaysias growth prospects as domestic
economic activity continues to be firm and as
inflation is expected to remain elevated.
On 24 July 2014, Reserve Bank of New Zealand
raised its official cash rate by 25 bps to
3.5 percent to help keep future average inflation
near the 2-percent target midpoint and ensure
that the economic expansion can be sustained.
On 30 July, the US Federal Reserve decided to
reduce further the pace of its asset purchases.
Beginning in August, it will add to its holdings of
agency mortgage-backed securities at a pace of
US$10 billion per month (from US$15 billion per
month), and will add to its holdings of longer-term
Treasury securities at a pace of US$15 billion per
month (from US$20 billion per month).
On 14 August, Bank of Korea decided to lower its
key policy rate, the Base rate, by 25 bps to
2.25 percent to boost domestic demand. The
Board noted that improvements in domestic
demand, which had contracted due mainly to the
impact of the Sewol ferry accident, have been
insufficient, and that the consumption and
investment sentiment of economic agents also
remained weak.
On 4 September 2014, the European Central Bank
(ECB) decided to lower the interest rate on the
main refinancing operations of the Eurosystem by
10 bps to 0.05 percent. At the same time, the ECB
lowered the interest rate on its deposit facility by

65

HSBC India Services PMI (with Composite PMI Data),


http://www.markiteconomics.com/Survey/PressRelease.mvc/e845470e2e9441fd8ad366f9964a56b9

44

10 bps to -0.20 percent, and the interest rate on


its marginal lending facility by 10 bps to
0.30 percent, effective on 10 September 2014.
The Boards decisions took into account the
overall subdued outlook for inflation, the
weakening in the euro areas growth momentum
over the recent past, and the continued muted
monetary and credit dynamics.

45

V. MONETARY POLICY DEVELOPMENTS


The BSP raises the RRP and SDA rates during
the quarter...
BSP Policy Rates
7

4
3
2
1

Overnight RRP Rate


0

Overnight RP rate

SDA rate

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

in percent

During its monetary policy meetings on 31 July


and 11 September, the BSP decided to raise its
key policy interest rates by 25 bps each to
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 and RPs
were also raised accordingly. Meanwhile, the
reserve requirement ratios were left unchanged.

2011

2012

2013

2014

At the same time, the Monetary Board (MB)


decided to raise the interest rate on the SDA by
25 bps from 2.25 percent to 2.50 percent across
all tenors on 11 September.
The MBs decision is based on the assessment
that the inflation target, particularly for 2015,
remained at risk. Latest baseline forecasts have
shifted closer toward the higher end of the target
range of 3.0 percent 1.0 ppt for 2015, indicating
elevated inflation pressures. Moreover, inflation
expectations are seen to be settling near the
upper end of the inflation target range,
particularly for 2015. At the same time, the
balance of risks to the inflation outlook continued
to lean toward the upside, with price pressures
emanating from the possible further increases in
food prices as a result of tight domestic supply
conditions, as well as from pending petitions for
adjustments in utility rates and potential power
shortages.
Given these considerations, the MB deemed it
necessary to respond with stronger policy action
to rein in inflation expectations further and
preempt potential second-round effects even as
previous monetary responses continue to work
their way through the economy. The MB believed
that the continued favorable prospects for
domestic demandas evidenced by the stronger
GDP growth in the second quarterallowed some
scope for a further adjustment in policy rates.
Going forward, the BSP remains prepared to take
appropriate policy actions as necessary to ensure
the achievement of its price and financial stability
objectives.

46

VI. INFLATION OUTLOOK


BSP Inflation Forecasts
The BSP forecasts indicate within target
inflation, even as upside inflation pressures
have emerged.

Inflation is expected to settle within the


government target ranges notwithstanding upside
risks.
The latest emerging baseline forecasts are higher
in this quarter compared to the previous quarter
owing mainly to the higher-than-projected
inflation outturn in July. The central projections
indicate that inflation will be above the midpoint
of the 4.0 percent 1.0 ppt range in 2014. For
2015, forecast runs suggest that inflation could
approach the upper-end of the 3.0 percent
1.0 ppt target range before easing to around the
midpoint of the target range in 2016.
Demand Conditions
Overall demand conditions remain strong.
Following the lower-than-expected real GDP
growth in Q1 2014, output expansion accelerated
to 6.4 percent Q2 2014. Growth was driven mainly
by steady private consumption and marked
improvement in net external trade. This brought
the first semester real output growth to
6.0 percent.
Similarly, other demand indicators point to robust
real sector activity. In particular, there appeared
to be some improvement in labor market
conditions, while manufacturing indices suggested
expansion in production. Results of the recent LFS
showed a decline in the jobless rate to 6.7 percent
in July 2014 from 7.3 percent a year ago.
Meanwhile, more than half of all major
manufacturing sectors registered capacity
utilization greater than 80 percent. The composite
PMI has also remained firmly above the 50-point
mark at 56.8 in July 2014.66 This, however, was
lower than the 59.5 composite PMI in June 2014.
The outlook for real economic activity remains
optimistic as reflected in the business
expectations survey of the BSP. Results of the
Q3 2014 BES pointed to continued favorable

66

A PMI reading above 50 suggests expansion while below 50 denotes contraction.

47

business sentiment during the quarter. For the


following quarter, the BES suggests more upbeat
outlook due to brisker business during the holiday
season.
The CES results likewise point to still favorable
outlook over the next 12 months.
Supply Conditions
Supply-side issues have contributed to the
observed increase in food prices. While global
food supply conditions appear favorable as
evidenced by the general decline in the Food and
Agriculture Organization (FAO) food price index
since the early part of 2014, domestic food supply
conditions could be impeded further by
distribution bottlenecks and adverse weather
conditions, which could keep food prices
elevated. Meanwhile, an escalation of geopolitical
tensions could lead to sharp uptick in oil prices.
However, such spikes in oil prices are likely to be
transitory as the global oil market remains wellsupplied.
The FAO forecasts cereal production to reach
2,512 million tonnes in 2014, lower by 0.5 percent
from a year ago. However, the latest forecast is
higher compared to the previous FAO estimate as
a result of higher-than-earlier anticipated
production prospects for wheat in China, the
Russian Federation, Ukraine, and the United
States. In particular, the FAO expects 2014 wheat
production at 716.5 million tonnes, lower than
the 2013 level by 0.1 percent. Similarly, coarse
grains production is expected to decline to
1,295.2 million tonnes. Meanwhile, rice
production is projected to rise to 500.4 million
tonnes or up by 0.4 percent from the previous
year.67
Given relatively ample supply forecasts,
international food prices have remained
manageable. The FAO food price index (FPI)
registered its lowest level since January 2014 at
203.9 points in July, 2.1 percent (4.4 points) lower
than the previous months level on account of the
decreases in all of its sub-indices with the
67

FAO, Cereal Supply and Demand Brief, 11 September 2014, available online at http://www.fao.org

48

exception of meat and sugar price indices. In


particular, the cereal price index declined by
5.5 percent m-o-m as wheat and maize quotations
eased due to expectations of favorable supply
until next year. These have offset the increase in
international rice prices owing to increased
import demand and suspension of sales from
Thailands state reserves. Meanwhile, the
vegetable oil price index registered a monthly
decline of 4.1 percent because of the drop in the
price of soy and palm oil, resulting from abundant
supply in South America. Similarly, the dairy price
index went down by 4.4 percent as imports
demand from Islamic countries, Russia, and China
decreases amid the rise in exports supply from the
euro area. By contrast, the meat price index
inched up by 1.8 percent, while the sugar index
rose by 0.4 percent. 68
In the domestic front, the AHFF sector expanded
by 3.6 percent in Q2 2014 owing to increased
production of mango, corn, cassava, palay, and
other crops.69
In Q3 2014, the PSA anticipates palay production
to contract by 11.0 percent from 3.4 million MT in
the same period last year. The PSA attributed the
forecasted decline in palay production to the
delay in the onset of rainy season and release of
irrigation water as well as damage from
flashfloods. By contrast, palay harvest in Q4 2014
is projected to be higher by 3.4 percent y-o-y as
planting is moved from the third quarter to the
fourth quarter of the year. Meanwhile, the PSA
projects corn output to fall by 7.8 percent
Q3 2014, but expects a rebound in the last
quarter by 18.9 percent.70
Adverse weather conditions pose risk to food
prices. The Climate Prediction Center (CPC) of the
US National Oceanic and Atmospheric
Administration
(NOAA)
and
International
Research Institute (IRI) expect El Nio to develop
in October and to peak at a weak strength
between November 2014 January 2015. This
68
69
70

FAO, Food Price Index , 7 August 2014, available online at http://www.fao.org


PSA, National Accounts of the Philippines, Q2 2014
PSA, Rice and Corn Situation and Outlook, July 2014

49

weather condition is expected to last up to the


first few months of 2015.71
Unfavorable weather conditionswhether in the
form of below normal or above normal rainfall
conditionscould hurt domestic farm production.
Adverse weather conditions do not only lead to
lower harvest but could also cause supply and
distribution bottlenecks, particularly in the case of
strong typhoons which damage critical farm-tomarket roads.
Meanwhile, international oil prices have
decreased compared to the previous quarters
level as the market remains well-supplied.
Consequently, domestic pump prices declined
compared to the previous quarter. Looking ahead,
the EIA expects oil prices to remain relatively
stable as growth in world oil supply is forecasted
to outpace the increase in world consumption.
This should help temper the possible impact of
geopolitical tensions (particularly, in the Middle
East and Ukraine-Russia region) on oil prices.
Output gap estimate widens.

The balance of demand and supply conditions as


captured by the output gap (or the difference
between actual and potential output), provides an
indication of potential inflationary pressures in
the near term. Inflation tends to rise (fall) when
demand for goods and services exert pressure on
the economys ability to produce goods and
services, i.e., when the output gap is positive
(negative).
Given the latest GDP data, preliminary estimates
by the BSP show a higher positive output gap in
Q2 2014 relative to the previous quarter. The
output gap widened as the qoq expansion in
actual output outpaced the growth in potential
output during the review period.

71

CPC and IRI, CPC/IRI ENSO Update, 04 September 2014, available online at http://iri.columbia.edu

50

Key assumptions used to generate the BSPs


inflation forecasts
The BSP's baseline inflation forecasts generated
from the BSPs single equation model (SEM) and
the multiequation model (MEM) are based on
the following assumptions:
1) BSPs overnight RRP rate at 3.75 percent
from September 2014 to December 2016;
2) NG fiscal deficits for 2014 to 2016, which
are consistent with the DBCC-approved
estimates;
3) Dubai crude oil price assumptions, the
trend of which is consistent with the
trend of the futures prices of oil in the
international market;
4) Increase in nominal wage of 6.4 percent in
October 2014, 6.0 percent in October
2015, and 5.7 percent in October 2016;
5) Real GDP growth, which is endogenouslydetermined in the BSPs MEM; and
6) Foreign exchange rate, which is
endogenouslydetermined in the BSPs
MEM through the purchasing power
parity
and
interest
rate
parity
relationships.
Risks to the Inflation Outlook
The current fan chart suggests that inflation
remains within target, but have slightly
shifted upwards.

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 inflation report, the
latest fan chart presents a slight upward shift in
the inflation path for 2014 and 2015. The higher
inflation projections in the latest report could be
attributed to the higher-than-forecasted actual
inflation in July. The latest central inflation

51

projections indicate that inflation would likely


settle in the upper-half of the BSPs target range
in 2014 and 2015. Thereafter, inflation is expected
to decelerate to around the midpoint of the target
range.
The risks to the inflation outlook remain skewed
to the upside.

The latest fan chart also shows that there are


uncertainties further out as shown by the
widening bands of the chart over time.
The BSPs review of current price trends and risks
to future inflation suggests that the risks to the
inflation outlook are tilted to the upside. This
assessment is captured in the latest fan chart by
the relatively larger bands above the central
projection compared to the bands below.

Upside pressures could emanate from possible


rise in food prices and power rates along with
potential power shortages.

Upside price pressures could emanate from


possible uptick in food prices as a result of tight
supply conditions and delays in shipments due to
port congestion. At the same time, pending
petitions for adjustments in utility rates and
looming power shortage in the summer of 2015
could lead to higher inflation.
The congestion at Manila port raises the cost of
production via higher port and transport charges.
The increase in production costs as well as
artificial shortage due to delay in shipment
deliveries could eventually be reflected as higher
consumer prices.
The possibility of power outages next year could
also raise prices. Reports suggest that the country
does not have sufficient capacity to meet peak
electricity demand during the summer months of
2015. Insufficient supply implies higher electricity
prices. These could lead to higher production
costs as well as manufacturing delays and could
therefore cause inflationary pressures. Moreover,
pending petition of Meralco on the December
2013 rate adjustment, which was still under the
temporary restraining order of the Supreme
Court, continue to pose upside risk to inflation
forecasts.

52

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 BSPs 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.

53

VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE


The inflation outlook calls for preemptive
policy action as price shocks have persisted
and risks to the inflation outlook have
increased.

In Q3 2014 (July and August), the headline


inflation of 4.9 percent reached the highest level
seen in almost three years, once again principally
driven by soaring food prices. Food inflation also
has remained elevated, reaching 8.2 percent in
Q3 2014. Given delays in supply-side responses
and continued bottlenecks in the supply chain, it
could take some time before the momentum is
reversed.
So far, the persistence of the supply shocks from
rising food prices has not translated into
considerable second-round effects. For example,
recent wage petitions have not diverged
significantly from their historical trends, while
there have been no new calls for transport fare
adjustments. However, core inflation, which
captures underlying price trends, has picked up in
Q3 2014. Therefore, trends in pricing behavior and
underlying inflation will likely remain of particular
concern in the coming quarters.

A preemptive policy action could help prevent


price-setting behavior from being disanchored
from the inflation targets.

There is an upward shift in the forecasted inflation


path over the policy horizon with risk of a breach
in 2015. The latest baseline forecasts show that
the average inflation could settle above the
midpoint of the target ranges of 4.0 percent
1.0 ppt in 2014 and 3.0 percent 1.0 ppt in 2015
before easing to around the midpoint of the target
range in 2016. The baseline inflation forecasts are
slightly higher in the current quarter compared to
the previous quarter owing mainly to the higherthan-projected inflation outturn in July.
The balance of risks to future inflation remains
tilted to the upside. Possible upticks in food prices
as a result of tight domestic supply conditions,
delays in shipments due to port congestion,
pending petitions for adjustments in utility rates,
and looming power shortages pose upside risks to
inflation.
Monetary authorities will need to act preemptively
to rein in inflation expectations. Based on both
BSP and Consensus Economics surveys, the
inflation forecasts for 2015-2016 remain close to
the upper end of the 2.0-4.0 percent inflation
target band.

54

The continued presence of food price shocks is


seen to have an effect on inflation expectations.
Staff simulations show that, historically, increases
in food prices have a persistent impact on headline
inflation, with the impact of food inflation being
larger and slower to dissipate compared with that
of fuel price shocks. Moreover, the longer that
headline inflation remains at elevated levels, the
higher the probability of self-fulfilling inflation
expectations and the risk of a wage-price spiral.
The broad buoyancy of domestic demand
suggests that there is some room for a
measured policy response to second-round
effects.

The broad buoyancy of domestic demand suggests


that there is some room for a measured policy
response to second-round effects. Favorable
growth dynamics reflected in the still solid
domestic demand growth in Q2 2014 imply that
monetary authorities have some flexibility to
undertake a measured monetary policy tightening.
GDP grew y-o-y by 6.4 percent in Q2, higher than
the revised growth rate of 5.6 percent in Q1 2014.
As prospects for aggregate demand are expected
to remain solid, the economy should be able to
absorb a measured rise in the RRP/RP and SDA
rates.
The presence of strong demand conditions and
protracted supply shocks can also potentially
increase the impetus for second-round effects.
This is particularly true if stronger demand allows
suppliers to more readily pass on higher costs to
consumers and households are able to raise their
spending in anticipation of rising prices. Such a
situation would call for a firmer policy response
than one where demand pressures are weaker.
A proactive policy response to inflationary shocks
will help preserve market confidence and stabilize
macroeconomic conditions. Preemptive interest
rate action will avoid the need for sharper rate
adjustments later on, particularly as the eventual
monetary policy normalization in the US begins to
exert an impact on EM capital flows. Responding
preemptively to the emerging inflation risks will
provide latitude to the BSP to assess at future
meetings the evolving balance of risks to both
inflation and output.

55

Going forward, the BSP will remain vigilant against


a potential build-up in inflation expectations and
stands ready to undertake preemptive policy
actions as necessary to safeguard its price and
financial stability objectives.

56

SUMMARY OF MONETARY POLICY DECISIONS


EFFECTIVITY DATE
2008

LEVELS (IN %)
RRP OVERNIGHT

RP OVERNIGHT

JAN 31

5.00

7.00

MAR 13

5.00

7.00

APR 24

5.00

7.00

JUN 5

5.25

7.25

JUL 17

5.75

7.75

AUG 28

6.00

8.00

OCT 6

6.00

8.00

NOV 6

6.00

8.00

MONETARY POLICY DECISION


The Monetary Board (MB) decided to reduce by 25 basis
points (bps) the BSPs 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.
The MB decided to keep the BSPs 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.
The MB kept the BSPs 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.
The MB decided to increase by 25 bps the BSPs 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.
The MB increased by 50 bps the BSPs 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.
The MB increased by 25 bps the BSPs 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.
The MB kept the BSPs 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.
The MB decided to keep the BSPs 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.

57

EFFECTIVITY DATE

2009

LEVELS (IN %)
RRP OVERNIGHT
RP OVERNIGHT

MONETARY POLICY DECISION

DEC 18

5.50

7.50

The MB decided to reduce the BSPs 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.

JAN 29

5.00

7.00

MAR 5

4.75

6.75

APR 16

4.50

6.50

The MB decided to reduce the BSPs 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.
The MB decided to reduce the BSPs 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.
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 BSPs 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.

58

EFFECTIVITY DATE
MAY 28

4.25

6.25

JUL 9

4.00

6.00

4.00

6.00

AUG 20
OCT 1
NOV 5
DEC 17
2010

2011

LEVELS (IN %)
RRP OVERNIGHT
RP OVERNIGHT

JAN 28
MAR 11
APR 22
JUN 3
JUL 15
AUG 26
OCT 7
NOV 18
DEC 29

MONETARY POLICY DECISION


The MB decided to reduce the BSPs 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.
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.
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.

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.

FEB 10

4.00

6.00

MAR 24

4.25

6.25

The MB decided to keep the BSPs 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 decided to increase by 25 bps the BSPs 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 MBs 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.

59

EFFECTIVITY DATE

2012

LEVELS (IN %)
RRP OVERNIGHT
RP OVERNIGHT

MAY 5

4.50

6.50

JUN 16

4.50

6.50

JUL 28

4.50

6.50

SEP 8
OCT 20
DEC 1

4.50

6.50

JAN 19

4.25

6.25

MAR 1

4.00

6.00

APR 19

4.00

6.00

MONETARY POLICY DECISION


The MB decided to increase the BSPs 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.
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 nonbanks 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.
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.
The MB decided to keep the overnight policy rates steady.
At the same time, the reserve requirement ratios were
kept unchanged.
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.
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.
The MB decided to keep the BSPs 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.

60

EFFECTIVITY DATE

LEVELS (IN %)
RRP OVERNIGHT
RP OVERNIGHT

JUN 14

4.00

6.00

JUL 26

3.75

5.75

SEP 13

3.75

5.75

OCT 25

3.50

5.50

DEC 13

3.50

5.50

MONETARY POLICY DECISION


The MB decided to keep the BSPs 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 MBs 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.
The MB decided to reduce the BSPs 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 MBs 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.
The MB decided to keep the BSPs 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 MBs decision was based on
its assessment that the inflation environment remains
benign, with the risks to the inflation outlook appearing to
be broadly balanced.
The MB decided to reduce the BSPs 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 MBs 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.
The MB decided to keep the BSPs 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 MBs 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.

61

EFFECTIVITY DATE
2013

LEVELS (IN %)
RRP OVERNIGHT
RP OVERNIGHT

MONETARY POLICY DECISION

JAN 24

3.50

5.50

The MB decided to keep the BSPs 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 BSPs continuing efforts to fine-tune
the operation of its monetary policy tools.
The MB decided to keep the BSPs 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.
The MB decided to keep the BSPs 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.
The MB decided to keep the BSPs 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 14

3.50

5.50

APR 25

3.50

5.50

JUN 13

3.50

5.50

JUL 25

3.50

5.50

The MB decided to keep the BSPs 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 BSPs 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 BSPs 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.

DEC 12

3.50

5.50

The MB decided to keep the BSPs 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.

62

EFFECTIVITY DATE
2014

LEVELS (IN %)

MONETARY POLICY DECISION

RRP OVERNIGHT

RP OVERNIGHT

FEB 6

3.50

5.50

MAR 27

3.50

5.50

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

JUL 31

3.75

5.75

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.
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 keep the BSPs 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.
The MB decided to keep the BSPs 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.

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.

63

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 BSPs 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 bspmail@bsp.gov.ph.
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:

bspmail@bsp.gov.ph