mpss form no. 03-012 * version 0 * 06 march 2015 file/ref ... · headline inflation continued its...

MPSS Form No. 03-012 * Version 0 * 06 March 2015 File/Ref. No.

MPRG-100715-03

i

FOREWORD

he primary objective of monetary policy is to promote a low and stable rate

of inflation conducive to a balanced and sustainable economic growth. The

adoption in January 2002 of the inflation targeting framework for monetary policy

was aimed at helping to fulfill this objective.

One of the key features of inflation targeting is greater transparency, which

means greater disclosure and communication by the BSP of its policy actions and

decisions. This Inflation Report is published by the BSP as part of its transparency

mechanisms under inflation targeting. The objectives of this Inflation Report are:

(i) to identify the risks to price stability and discuss their implications for monetary

policy; and (ii) to document the economic analysis behind the formulation of

monetary policy and convey to the public the overall thinking behind the BSP’s

decisions on monetary policy. The broad aim is to make monetary policy easier for

the public to understand and enable them to better monitor the BSP’s commitment

to the inflation target, thereby helping both in anchoring inflation expectations and

encouraging informed debate on monetary policy issues.

The government’s target for annual headline inflation under the inflation

targeting framework has been set at 3.0 percent ± 1.0 percentage point (ppt) for

2015-2018 by the Development Budget Coordination Committee (DBCC). This is

consistent with the desired disinflation path over the medium term, favorable

trends in the structure of inflation, and expected higher capacity of the economy for

growth under a low inflation environment.

The report is published on a quarterly basis, presenting a survey of the

various factors affecting inflation. These include recent price and cost

developments, inflation expectations, prospects for aggregate demand and output,

labor market conditions, monetary and financial market conditions, fiscal

developments, and the international environment. An entire section is devoted to a

discussion of monetary policy developments in the most recent quarter, while a

separate section provides a comprehensive analysis of the BSP’s view of the inflation

outlook for the policy horizon.

The Monetary Board approved this Inflation Report at its meeting on

15 October 2015.

AMANDO M. TETANGCO, JR.

Governor

23 October 2015

T

ii

List of Acronyms, Abbreviations, and Symbols

ABT

AL

Alcoholic Beverages and Tobacco

Auto Loans

BES

BGC

BIR

Business Expectations Survey

Bonifacio Global City

Bureau of Internal Revenue

BOC Bureau of Customs

BTr Bureau of the Treasury

CAMPI Chamber of Automotive Manufacturers of the Philippines, Inc.

CAR Capital Adequacy Ratio

CBD Central Business District

CES Consumer Expectations Survey

CDS Credit Default Swaps

CI

COV

Confidence Index

Coefficient of Variation

CPI

DBCC

DOE

DI

DOF

EIA

Consumer Price Index

Development Budget Coordination Committee

Department of Energy

Diffusion Index

Department of Finance

US Energy Information Administration

EM Emerging Market

EMBI

ERC

JP Morgan Emerging Market Bond Index

Energy Regulatory Commission

FAO

FCDA

Food and Agriculture Organization

Foreign Currency Differential Adjustment

GDP Gross Domestic Product

GNI

GOUR

Gross National Income

Generation over/under-recovery

GS Government Securities

IEA International Energy Agency

IMF International Monetary Fund

IPP

IRI

Independent Power Producer

International Research Institute for Climate and Society

LFS Labor Force Survey

LPG

LSOUR

Liquefied Petroleum Gas

Lifeline subsidy over/under recovery

LTFRB

MB

Land Transportation Franchising and Regulatory Board

Monetary Board

MEM

MENA

Multi-Equation Model

Middle East and North Africa

Meralco Manila Electric Company

MISSI Monthly Integrated Survey of Selected Industries

MTP

NBQBs

Major Trading Partner

Non-Bank Financial Institutions with Quasi-Banking

Functions

NDA

NEDA

Net Domestic Assets

National Economic and Development Authority

iii

NEER Nominal Effective Exchange Rate

NFA Net Foreign Assets; National Food Authority

NG

NGCP

NOAA

National Government

National Grid Corporation of the Philippines

National Oceanic and Atmospheric Administration

NPC National Power Corporation

NPI Net Primary Income

NPLs Non-performing loans

O&O Offshoring and Outsourcing

OECD Organization for Economic Cooperation and Development

OPEC

OF

Organization of the Petroleum Exporting Countries

Overseas Filipinos

PBR

PMI

PSA

PSALM

Performance-Based Rate

Purchasing Managers’ Index

Philippine Statistics Authority; Power Supply Agreement

Power Sector Assets and Liabilities Management

Corporation

PSEi Philippine Stock Exchange Composite Index

RB

RDA

Rural Banks

Reserve Deposit Account

REER Real Effective Exchange Rate

ROP Republic of the Philippines

RP

RR

Repurchase

Reserve Requirement

RREL Residential and Real Estate Loans

RRP

RWAs

Reverse Repurchase

Risk Weighted Assets

SDA

SEM

SLOUR

SMEs

SOFSM

Special Deposit Account

Single-Equation Model

System loss over/under-recovery

Small and Medium Enterprises

Society of Fellows in Supply Management, Inc.

TLP

TOUR

Total Loan Portfolio

Transmission over/under-recovery

U/KBs

VAPI

VOPI

Universal/commercial banks

Value of production index

Volume of production index

WEO

WESM

World Economic Outlook

Wholesale Electricity Spot Market

1

THE MONETARY POLICY OF THE

BANGKO SENTRAL NG PILIPINAS

The BSP Mandate

The BSP’s main responsibility is to formulate and implement policy in the areas of money,

banking and credit, with the primary objective of maintaining stable prices conducive to a

balanced and sustainable economic growth in the Philippines. The BSP also aims to

promote and preserve monetary stability and the convertibility of the national currency.

Monetary Policy Instruments

The BSP’s primary monetary policy instrument is its overnight reverse repurchase (RRP)

or borrowing rate. Other instruments to implement the desired monetary policy stance to

achieve the inflation target include (a) increasing/decreasing the reserve requirement;

(b) encouraging/discouraging deposits in the special deposit account (SDA) facility by

banks and trust entities of BSP-supervised financial institutions; (c) adjusting the

rediscount rate on loans extended to banking institutions on a short-term basis against

eligible collateral of banks’ borrowers; and (d) outright sales/purchases of the BSP’s

holdings of government securities.

Policy Target

The BSP’s target for monetary policy uses the Consumer Price Index (CPI) or headline

inflation rate, which is compiled and released to the public by the National Statistics

Office (NSO). The policy target is set by the Development Budget Coordination

Committee (DBCC)1 in consultation with the BSP. The inflation target for 2015-2018

is 3.0 percent ± 1.0 ppt.2

BSP’s Explanation Clauses

These are the predefined set of acceptable circumstances under which an

inflation-targeting central bank may fail to achieve its inflation target. These clauses

reflect the fact that there are limits to the effectiveness of monetary policy and that

deviations from the inflation target may sometimes occur because of factors beyond the

control of the central bank. Under the inflation targeting framework of the BSP, these

exemptions include inflation pressures arising from: (a) volatility in the prices of

agricultural products; (b) natural calamities or events that affect a major part of the

economy; (c) volatility in the prices of oil products; and (d) significant government policy

changes that directly affect prices such as changes in the tax structure, incentives, and

subsidies.

1 The DBCC, created under Executive Order (E.O.) No. 232 dated 14 May 1970, is an inter-agency committee tasked

primarily to formulate the National Government's fiscal program. It is composed of the Office of the President (OP),

Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the

Department of Finance (DOF). The BSP attends the Committee meetings as a resource agency. 2 The inflation target range for 2015-2018 was announced thru DBCC Resolution No.2015-1 dated 27 January 2015.

2

The Monetary Board

The powers and functions of the BSP, such as the conduct of monetary policy and

the supervision over the banking system, are exercised by its Monetary Board,

which has seven members appointed by the President of the Philippines. Starting in

2012, the Monetary Board will hold eight (8) monetary policy meetings in a year to

review and decide on the stance of monetary policy. Prior to 2012, monetary policy

meetings were held every six weeks while prior to July 2006, meetings were held

every four weeks during the 2002 – July 2006 period.

Chairman Amando M. Tetangco, Jr.

Members Cesar V. Purisima

Alfredo C. Antonio

Felipe M. Medalla

Armando L. Suratos

Juan D. De Zuñiga, Jr.

Valentin A. Araneta

The Advisory Committee

The Advisory Committee was established as an integral part of the institutional

setting for inflation targeting. It is tasked to deliberate, discuss, and make

recommendations on monetary policy to the Monetary Board. Like the Monetary

Board, the Committee will meet eight times a year (beginning in January 2012) but

may also meet between regular meetings, whenever deemed necessary.

Chairman Amando M. Tetangco, Jr.

Governor

Members Diwa C. Guinigundo

Deputy Governor

Monetary Stability Sector

Nestor A. Espenilla, Jr.

Deputy Governor

Supervision and Examination Sector

Ma. Ramona GDT Santiago

Assistant Governor

Treasury Department

Francisco G. Dakila, Jr.

Managing Director

Monetary Policy Sub-sector

3

2015 SCHEDULE OF MONETARY POLICY MEETINGS, INFLATION REPORT

PRESS CONFERENCE AND PUBLICATION OF MB HIGHLIGHTS

Period

Advisory

Committee (AC)

Meeting

Monetary Board

(MB)

Meeting

MB Highlights

Publication

Inflation Report

(IR) Press

Conference

2

0

1

5

Jan 8 (Thu)

(11 Dec 2014 MB meeting)

23 (Fri)

(Q4 2014 IR)

Feb 6 (Fri)

(AC Meeting No. 1)

12 (Thu)

(MB Meeting No. 1)

Mar 20 (Fri)

(AC Meeting No. 2)

26 (Thu)

(MB Meeting No. 2)

12 (Thu)

(12 Feb 2015 MB meeting)

Apr 23 (Thu)

(26 Mar 2015 MB meeting)

24 (Fri)

(Q1 2015 IR)

May 8 (Fri)

(AC Meeting No. 3)

14 (Thu)

(MB Meeting No. 3)

Jun 19 (Fri)

(AC Meeting No. 4)

25 (Thu)

(MB Meeting No. 4)

11 (Thu)

(14 May 2015 MB meeting)

Jul 23 (Thu)

(25 Jun 2015 MB meeting)

23 (Thu)

(Q2 2015 IR)

Aug 7 (Fri)

(AC Meeting No. 5)

13 (Thu)

(MB Meeting No. 5)

Sep 18 (Fri)

(AC Meeting No. 6)

24 (Thu)

(MB Meeting No. 6)

10 (Thu)

(13 Aug 2015 MB meeting)

Oct 22 (Thu)

(24 Sep 2015 MB meeting)

23 (Fri)

(Q3 2015 IR)

Nov 6 (Fri)

(AC Meeting No. 7)

12 (Thu)

(MB Meeting No. 7)

Dec 11 (Fri)

(AC Meeting No. 8)

17 (Thu)

(MB Meeting No. 8)

10 (Thu)

(12 Nov 2015 MB meeting)

4

Contents

OVERVIEW .................................................................................................................... 5

I. INFLATION AND REAL SECTOR DEVELOPMENTS ............................................................... 8

Prices .................................................................................................................... 8

Private Sector Economists’ Inflation Forecasts ............................................ 10

Energy Prices ................................................................................................ 11

Power ........................................................................................................... 12

Aggregate Demand and Supply .......................................................................... 14

Aggregate Demand ...................................................................................... 14

Other Demand Indicators ............................................................................ 16

Aggregate Supply ......................................................................................... 25

Labor Market Conditions ................................................................................... 26

II. MONETARY AND FINANCIAL MARKET CONDITIONS ........................................................28

Domestic Liquidity and Credit Conditions .......................................................... 28

Interest Rates ..................................................................................................... 34

Financial Market Conditions ............................................................................... 36

Banking System .................................................................................................. 39

Exchange Rate .................................................................................................... 42

III. FISCAL DEVELOPMENTS ............................................................................................45

IV. EXTERNAL DEVELOPMENTS ........................................................................................46

V. MONETARY POLICY DEVELOPMENTS ...........................................................................50

VI. INFLATION OUTLOOK ...............................................................................................52

BSP Inflation Forecasts ...................................................................................... 52

Risks to the Inflation Outlook ............................................................................. 56

VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE .......................................................59

SUMMARY OF MONETARY POLICY DECISIONS .....................................................................62

5

OVERVIEW

Inflation eases further. Headline inflation continued its downward trend in Q3 2015, decelerating to

0.6 percent from the quarter- and year-ago rates of 1.7 percent and 4.7 percent, respectively

– a record low using the 2006-based CPI series. This brought the year-to-date average inflation rate

to 1.6 percent which is below the Government’s inflation range target of 2.0-4.0 percent for 2015.

Lower prices of rice and corn along with moderate price increases for other food items helped push

down headline inflation. Similarly, non-food inflation eased further on lower prices of electricity and

domestic petroleum products. Core inflation likewise declined to 1.6 percent in Q3 2015 from

2.2 percent in Q2 2015 and 3.3 percent in Q3 2014. All three alternative measures of core inflation

estimated by the BSP were also lower during the review period relative to the rates registered in the

previous quarter. At the same time, the number of CPI items with inflation rates greater than the

upper end of the 2015 inflation target declined to 22 items in Q3 2015 from 30 items in the previous

quarter. These items accounted for 9.2 percent of the CPI basket.

Inflation expectations breach the lower end of the 2015 target band. Results of the BSP’s survey of

private sector economists for September 2015 yielded lower mean inflation forecasts for 2015-2017

relative to the results in June 2015. The lower inflation expectations were attributed mainly to lower

international food and oil prices. These factors are seen to outweigh the potential upside risks

brought about by the stronger El Niño phenomenon, the possible US Federal Reserve rate hike,

increased expenditures associated with the upcoming election, holiday spending, and the

normalization of oil prices. Similarly, the results of the September 2015 Consensus Economics inflation forecast survey showed lower inflation forecasts for 2015 and 2016 at 1.9 percent and

3.2 percent, respectively.

Domestic demand remains intact. Real gross domestic product grew by 5.6 percent in Q2 2015,

higher than the 5-percent growth recorded in the previous quarter but lower than the 6.7-percent

growth in Q2 2014. Accelerated consumer and government spending as well as increased

investments, particularly in construction, boosted Q2 growth. Robust household spending on the

expenditure side and resilient service sector growth on the production side supported the economy

during the review quarter. Moreover, demand indicators reported positive signals, reflecting brisk

economic activity. Vehicle sales continued to post double-digit growth on sustained consumer

spending amid attractive financing packages, while the composite Purchasing Managers’ Index

remained above the 50-point expansion threshold. Business confidence for the next quarter turned

upbeat, supported by bright holiday prospects while consumer sentiment strengthened amid

favorable macroeconomic conditions.

Global economic prospects continue to vary across regions. Growth in the US accelerated,

reflecting upturns in exports, personal and government consumption as well as non-residential fixed

investment. Similarly, economic activity in the euro area remained firm as leading indicators showed

new incoming businesses. In contrast, Asian economies showed more subdued activity, with Japan

registering modest economic recovery while China and India easing slightly. The softer economic

activity in emerging markets served to drag down global output growth to which a number of central

banks responded by easing their monetary policy settings to support domestic economic activity

amid lower oil and commodity prices.

6

Domestic financial market conditions remain sound despite external uncertainties. The favorable

domestic outlook continued to be supported by ample liquidity and credit growth during the review

quarter. However, external headwinds emanating from the slowdown in the Chinese economy and

uncertainty surrounding the US interest rate lift-off have contributed to an increase in investor risk

perception and a consequent search for safe-haven assets. The Philippine equities market, for

example, saw dampened activity during the review period, with the benchmark index falling by

6.1 percent relative to the average registered in the preceding quarter. Bond spreads also widened

as investors priced in the potential spillover effects of a slowing emerging market growth as well as

China’s devaluation moves. However, the country’s sovereign CDS remained lower compared to its

Asian neighbors. Investor appetite for local currency government securities remained healthy as

evidenced by the continued oversubscription in the scheduled GS auctions. In addition, the banking

system remained sound and resilient, marked by sustained growth in assets, lending, and deposits,

and with capital adequacy ratios comfortably above the BSP’s and Bank for International

Settlements’ prescribed levels. Moreover, bank lending standards for both loans to enterprises and

household were also broadly unchanged during the quarter, indicating that banks continue to

prudently manage their risks.

The BSP maintains monetary policy settings during the quarter. During its monetary policy

meetings on 13 August and 24 September, the BSP decided to maintain its key policy interest rates

at 4.0 percent for the overnight borrowing or RRP facility and 6.0 percent for the overnight lending

or RP facility. The interest rates on term RRPs, RPs, and SDAs were also kept steady. Similarly,

reserve requirement ratios were left unchanged. The policy decisions were based on the BSP’s

assessment of the dynamics and risks in the inflation environment over the policy horizon.

Authorities were of the view that the benign inflation outlook and the economy’s underlying growth

momentum provide ample room to keep monetary policy settings unchanged at this time.

Authorities likewise view the prevailing monetary policy settings as being appropriately

calibrated. Latest forecasts suggest that inflation will settle slightly below the government’s target

range of 3.0 percent ± 1.0 percentage point for 2015 before approaching the midpoint of the

target range in 2016-2017. The forecasts are supported by a firm underlying growth momentum.

Risks to the inflation outlook continue to be broadly balanced. Pending petitions for power rate

adjustments and the impact of stronger-than-expected El Niño weather conditions on food and

utility prices present upside risks to inflation. Meanwhile, slower global economic activity is seen as

a key downside risk to inflation.

Inflation expectations remain within the inflation target range over the policy horizon while falling

below the lower bound of the target range for 2015. Nevertheless, domestic economic activity

remains intact and continues to expand at a solid pace. Credit activity is recording sustained growth

overall, as liquidity growth continues to keep pace with the overall requirements of the economy.

Over the period ahead, volatilities in the global financial market resulting from a slowdown in China

and policy normalization in the US could be important considerations for the inflation outlook in the

quarters ahead to the extent that they can influence inflation expectations and market sentiment

on the domestic front. Going forward, the BSP will continue to monitor domestic and external

developments to ensure that the monetary policy stance remains consistent with its price and

financial stability objectives.

7

In addition, the BSP announced on 30 September 2015 its plan to implement an interest rate

corridor (IRC) system by Q2 2016. The IRC system will introduce key changes in the framework for

monetary operations designed to enhance the effectiveness of monetary policy. The shift to IRC will

not represent a change in the BSP’s monetary policy stance and is not expected to have a significant

impact on the general level of interest rates. Nevertheless, the IRC system will help improve the

transmission of policy rate adjustments through the conduct of active liquidity management

operations to effectively implement the monetary policy stance. Moreover, the IRC is expected to

support the development of capital markets by providing an enabling environment for increased

money market transactions.

8

I. INFLATION AND REAL SECTOR DEVELOPMENTS

Prices

Inflation eases on lower food and non-food

prices

0

1

2

3

4

5

6

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

in p

erc

en

t

Food

Non-Food

Non-Alcoholic Beverages

Alcoholic Beverages and Tobacco

Headline Inflation

Q3 2015

0.6 pct

Quarterly Headline Inflation (2006-100)

Core inflation and its alternative measures

ease Alternative Core Inflation Measures

Quarterly averages of year-on-year change

Quarter

Official

Headline

Inflation

Official

Core

Inflation

Trimmed

Mean 1/

Weighted

Median 2/

Net of

Volatile

Items 3/ *

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

Q3

3.0

3.2

2.7

2.4

3.4

4.1

4.1

4.4

4.7

3.6

1.6

2.5

1.7

0.6

2.9

3.8

2.9

2.1

2.9

3.0

3.0

3.0

3.3

2.7

2.1

2.5

2.2

1.6

2.5

3.0

2.3

2.1

2.6

3.5

3.3

3.6

3.8

3.3

2.1

3.0

2.1

1.3

2.3

2.8

2.3

2.0

2.2

2.9

2.6

3.2

3.1

2.7

2.1

3.0

2.2

1.2

3.1

3.9

3.2

2.4

2.9

2.6

2.8

2.6

2.8

2.4

1.9

2.3

1.9

1.51/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest

to-highest ranking of year-on-year inflation rates for all CPI components.

2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50

percent) in a lowest-to-highest ranking of year-on-year inflation rates.

3/ The net of volatile items method excludes the following items: bread and cereals, meat, fish, fruit,

vegetables, gas, solid fuels, fuels and lubricants for personal transport equipment, and passenger

transport by road, which represents 39.0 percent of all items.

r/ Revised.

* The series has been recomputed using a new methodology that is aligned with PSA’s method of

computing the official core inflation, which re-weights remaining items to comprise 100 percent of the core

basket after excluding non-core items. The previous methodology retained the weights of volatile items in the

CPI basket while keeping their indices constant at 100.0 from month to month.

Source: PSA, BSP estimates

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

40

45

Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

CPI Items with Inflation Rates Above Threshold

Cumulative weight in % (LHS)

No. of Items Above Threshold (RHS):

4% (2015); 5% (2009-2014)

22 items

Source: Philippine Statistics Authority, BSP staff estimates

We

igh

t in

pe

rce

nt

Nu

mb

er

of

ite

ms

Headline and Core Inflation

Headline inflation dropped further to 0.6 percent

year-on-year (y-o-y) in Q3 2015, lower than the

quarter- and year-ago rates of 1.7 percent and

4.7 percent, respectively. This brought the

year-to-date average inflation rate to 1.6 percent,

which is below the Government’s inflation range

target of 3.0 percent ± 1.0 percentage point (ppt)

for 2015.

The continued deceleration of headline inflation

can be attributed mainly to slower price increases

of food items. Likewise, non-food items further

decelerated due to downward adjustments in

domestic petroleum products, electricity rates,

and transport.

Similarly, core inflation, which excludes certain

volatile food and energy items to better capture

underlying price pressures, eased further to

1.6 percent in Q3 2015 from 2.2 percent in

Q2 2015 and 3.3 percent in Q3 2014.

All alternative measures of core inflation

estimated by the BSP also fell during the review

period relative to the previous quarter.

In particular, the measures for trimmed mean,

weighted median, and net of volatile items edged

lower to 1.3 percent, 1.2 percent, and 1.5 percent,

respectively, from the quarter-ago rates of

2.1 percent, 2.2 percent, and 1.9 percent.

The number of items with inflation rates greater

than the threshold of 4.0 percent (the upper end

of the 2015 inflation target) dropped to 22 items

in Q3 2015 from 30 items in the previous quarter.

These items accounted for 9.2 percent of the CPI

basket, lower than the quarter-ago share of

14.9 percent.

Grouping the CPI basket into food and non-food

components, the number of food—which

includes alcoholic beverages and tobacco—and

non-food items with inflation rates above the

4.0-percent threshold was lower at 9 items and

13 items, respectively, in Q3 2015 from 13 items

and 17 items in Q2 2015.

9

Adequate domestic supply of key food items

drives down food inflation

Inflation Rates for Selected Food Items

Quarterly averages in percent (2006=100)

Commodity2014 2015

Q3 Q1 Q2 Q3

Food and Non-alcoholic

Beverages8.0 4.8 3.0 1.1

Food 8.3 5.0 3.1 1.1

Bread and Cereals 10.3 5.7 2.6 -0.5

Rice 12.7 7.2 3.3 -0.9

Corn 8.4 2.4 0.2 -0.6

Meat 5.7 4.2 1.3 0.4

Fish 6.3 5.1 5.3 3.2

Milk, Cheese and Eggs 4.1 4.4 3.3 1.9

Oils and Fats 7.3 2.7 0.9 -0.3

Fruit 8.1 11.4 9.6 4.9

Vegetables 13.6 1.1 0.4 0.2

Sugar, Jam, Honey 7.5 3.8 4.2 2.9

Food Products N.E.C. 10.0 4.8 4.6 3.8

Non-alcoholic Beverages 1.9 2.1 2.2 1.8

Alcoholic Beverages and 3.5 4.0 3.8 3.7

Tobacco

Source of Basic Data: PSA, BSP

Lower prices of electricity and domestic

petroleum products continue to drive non-food

inflation downward

Inflation Rates for Selected Non-Food Items

Quarterly averages in percent (2006=100)

Commodity2014 2015

Q3 Q1 Q2 Q3

Non-Food 2.4 0.6 0.5 0.1

Clothing and Footwear 3.4 3.1 2.6 2.3

Housing, Water, Electricity, 2.4 -1.1 -1.1 -1.7

Gas and Other Fuels

Electricity, Gas, and Other

Fuels3.5 -8.7 -8.2 -9.8

Furnishings, Household 2.7 2.2 2.1 1.7

Equipment

Health 3.4 2.7 2.3 1.7

Transport 1.1 -0.7 0.0 -0.5

Operation of Personal

Transport Equipment2.2 -10.5 -8.6 -9.7

Communication 0.0 -0.1 -0.1 0.0

Recreation and Culture 1.3 1.1 1.1 1.0

Education 5.1 5.1 4.7 3.6

Restaurant and Miscellaneous 1.7 1.6 1.2 1.2

Goods and Services

Source of Basic Data: NSO, BSP

Food Inflation

Food inflation continued to ease in Q3 2015 at

1.1 percent from 3.1 percent in Q2 2015

attributed largely to lower prices of rice, corn, oils

and fats along with moderate price increases y-o-y

for the rest of the major food items. Despite the

lean season, rice prices remained subdued due

mainly to adequate domestic supply brought

about by the arrival of additional rice importation

in August.3

Similarly, non-alcoholic beverages decelerated in

Q3 to 1.8 percent from 2.2 percent in the previous

quarter. Alcoholic beverages and tobacco (ABT)

inflation was slightly lower at 3.7 percent in

Q3 2015 from 3.8 percent in the previous quarter

Non-food Inflation

Non-food inflation eased further during the

review quarter to 0.1 percent in Q3 2015

compared to 0.5 percent in the previous quarter.

The decline can be traced mainly to lower

oil-related CPI items such as electricity, gas, and

other fuels and transport prices which posted

negative outturns in Q3 2015. International oil

prices, which remained lower than year-ago

levels, resulted in price rollbacks of domestic

petroleum products during the quarter while

electricity rates were adjusted downward owing

to lower generation charges from energy

suppliers.

Except for communication and restaurants and

miscellaneous goods and services, all non-food

items recorded lower inflation rates in Q3 2015.

3 As of 14 August 2015, the 250 TMT government-to-government (G-to-G) contract awarded by the National Food

Authority to Thailand and Vietnam in June 2015 has arrived.

10

Private Sector Economists’ Inflation Forecasts

Mean inflation forecasts for 2015-2017 are

lower

1.0

2.0

3.0

4.0

5.0

Jan Feb Mar Apr MayJuneJuly Aug Sep Oct Nov Dec Jan Feb Mar Apr MayJuneJuly Aug Sep

2014 2015

2015 2016 2017 target range

BSP Private Sector Economists' Survey Mean forecast for full year, in percent

2015: 1.7

2016: 2.7

2017: 2.9

2016 2017

Q4 FY FY FY

1) Al-Amanah Islamic Bank 0.50 1.60 1.80 2.00

2) Asia ING 0.90 1.40 2.20 3.20

3) Bangkok Bank 1.00 1.50 3.50 3.00

4) Bank of Commerce 0.77 0.94 1.51 -

5) Bank of China 2.00 1.80 2.50 3.00

6) Banco de Oro 1.33 2.00 3.53 4.91

7) Bank of the Philippine Islands 2.10 2.00 3.50 2.50

8) Barclays Capital 1.50 1.60 2.70 -

9) Chinabank 2.10 1.80 3.10 3.20

10) Citibank 1.10 1.50 1.05 1.65

11) CTBC Bank 1.25 1.50 2.50 3.00

12) Deutsche Bank - 1.50 3.10 -

13) Eastwest Bank 1.20 1.50 2.10 2.50

14) IDEA, Inc. 1.70 1.80 4.20 3.90

15) Korea Exchange Bank 2.90 2.90 3.00 3.00

16) Land Bank of the Phils 1.40-1.70 1.70-2.00 2.10-2.40 2.10-2.40

17) Maybank 1.20 1.50 3.00 3.25

18) Maybank-ATR KimEng 1.40 1.60 2.00 -

19) Metrobank - 1.80 3.60 3.60

20) Multinat'l Inv. Banc 1.40 1.60 2.60 -

21) Mizuho 1.00 1.50 1.50 1.75

22) Nomura 2.30 2.00 3.20 3.10

23) Philippine Equity Partners 1.57 1.60 3.15 -

24) Robinsons Bank 1.00-1.75 1.50-2.00 2.00-3.00 2.00-3.00

25) Security Bank 1.80 1.50 3.10 3.30

26) Standard Chartered 2.00 1.90 2.90 3.80

27) UBS 1.30 1.50 3.30 -

28) Union Bank of the Phils. 1.80 1.70 2.20 2.10

Median Forecast 1.4 1.6 2.8 3.0

Mean Forecast 1.5 1.7 2.7 2.9

High 2.9 2.9 4.2 4.9

Low 0.5 0.9 1.1 1.7

Number of observations 26 28 28 21

Government Target 3.0±1.0 3.0±1.0 3.0±1.0 3.0±1.0

Private Sector Forecasts for Inflation, September 2015

Annual Percent Change

2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

<1 1.0 – 1.99 2.0 – 3.0 3.1 – 4.0 4.1 – 5.0 5.1 – 6.0 6.1 – 7.0

Probability Distribution For Analysts' Inflation Forecasts*

2015-2017

2015 2016 2017

*Probability distributions were averages of those provided by 23 out of 28 respondents.

(Source: BSP Survey)

Results of the BSP’s survey of private sector

economists for September 2015 yielded lower

mean inflation forecasts for 2015-2017 relative to

the results in June 2015.4 In particular, the mean

inflation forecast for 2015 was lower at

1.7 percent (from 2.3 percent in June 2015).

Similarly, the average annual inflation forecasts

for 2016 and 2017 declined to 2.7 percent and

2.9 percent (from 3.1 percent and 3.0 percent),

respectively.

The analysts attributed their lower inflation

expectations mainly to lower international food

and oil prices. These are likely to outweigh the

upside risks brought by the El Niño phenomenon,

the possible Federal rate hike, increased

expenditure from the upcoming election, holiday

spending, and the normalization of oil prices.

Based on the probability distribution on the

forecasts provided by 23 out of 28 respondents,

there is a 62.8-percent chance that average

inflation for 2015 will settle within the

1.0-1.99 percent range, which is below the

2-4 percent target range for the year.

Furthermore, the respondents said that there is a

19.8-percent chance that 2015 inflation rate will

fall within the 2-4 percent target range in 2015.

Meanwhile, for 2016, the respondents said that

there is a 64.3 percent chance that inflation will

fall within the 2-4 percent target band.

Results of the September 2015 Consensus

Economics inflation forecast survey for the

country also showed lower mean inflation

forecast for 2015 and 2016 at 1.9 percent

(from 2.4 percent in June 2015) and 3.2 percent

(from 3.5 percent), respectively.5

4 There were 28 respondents in the BSP’s survey of private sector economists in September 2015. The survey was

conducted between 3 to 22 September 2015. 5 There were 18 respondents in the Consensus Economics’ survey in September 2015.

11

Q3 2015 BES results indicate that more

respondents expect inflation to increase for the

current and next quarter

Consumers expect inflation to be stronger over

the next 12 months

Relative to the previous Business Expectation

Survey (BES), a lower majority of respondents in

Q3 2015 expect inflation to move up in the

current quarter (from a diffusion index of

11.6 percent to 10.2 percent). Meanwhile, the

number of respondents that expect inflation to

rise in the next quarter (from 15.7 percent to

26.4 percent) increased.

Given the higher spending outlook on basic goods

and services in Q3 2015, more respondents in the

Q3 2015 BSP Consumer Expectation Survey (CES)

anticipated prices to go up. The mean inflation is

expected to be higher at 4.2 percent in 2015

compared to the year-end inflation expectation in

Q2 2015 which was at 3.7 percent, indicating that

inflation is likely to be stronger in the next

12 months.

International oil price declines in Q3 2015

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 2017

Pri

ce i

n U

S d

oll

ars

pe

r b

arr

el

Spot and Estimated Future Prices of Dubai Crude Oil*

*Futures prices derived using Brent crude futures data.

30 June 2015

30 September 2015

Mixed forecasts on oil demand for 2015-2016

Energy Prices

The average price of Dubai crude oil dropped

anew in Q3 after posting an increase in the

previous quarter. International oil price declined

by 18.8 percent quarter-on-quarter (q-o-q) in

Q3 2015 on expectations of weaker global

demand amid concerns of a possible economic

slowdown in China. Furthermore, prospects of an

oversupplied oil market intensified over

indications that Iran would increase oil

production regardless of depressed prices to

defend its market share, which could further

exacerbate the global supply glut.

At the same time, estimated futures prices of

Dubai crude oil, which are based on movements

in Brent crude oil futures, in Q3 2015 showed a

lower path for 2015 to 2017 compared to the

estimates in Q2 2015.

In September 2015, the global oil demand

forecast for 2015 of both the International Energy

Agency (IEA)6 and OPEC7 were adjusted upward

to 1.7 million barrels per day (mmbd) from

1.4 mmbd and 1.5 mmbd from 1.2 mmbd,

respectively. The IEA estimated the oil demand

growth forecast for 2016 at 1.4 mmbd.

6 IEA, September 2015 Oil Market Report, www.iea.org 7 OPEC, September 2015 Monthly Oil Market Report, www.opec.org

12

Domestic prices of petroleum products track

movement of global oil prices

Quarter Gasoline Kerosene Diesel LPG

2014

Q1 53.75 50.87 44.25 41.73

Q2 54.95 51.54 43.70 40.44

Q3 52.15 47.99 40.70 38.74

Q4 41.20 37.39 30.05 33.87

2015

Q1 42.60 35.59 28.85 31.19

Q2 45.90 37.49 29.65 30.18

Q3 42.25 33.44 26.80 28.00

Q-o-Q (3.65) (4.05) (2.85) (2.18)

Y-o-Y (9.90) (14.55) (13.90) (10.74)

Domestic Retail Pump Prices (peso/liter)*End-quarter prices

* Average retail pump price for the Big Three oil

companies—Caltex, Petron, and Shell, Metro Manila prices

only.

Source: Department of Energy (DOE)

Lower generation charges lead to decreased

retail electricity prices

In contrast, the US Energy Information

Administration (EIA)8 global demand projections

were revised downward to 1.2 mmbd for 2015

from 1.3 mmbd in June 2015. For 2016, US EIA

maintained its projected global oil demand at

1.3 mmbd.

In Q3 2015, the domestic prices of gasoline,

kerosene, diesel, and LPG decreased by P3.65 per

liter, P4.05 per liter, P2.85 per liter, and P2.18 per

liter, respectively, relative to their end-Q2 2015

levels.

Comparing prices to year-ago levels, domestic

pump prices of gasoline, kerosene, diesel, and

LPG prices went down by P9.90 per liter,

P14.55 per liter, P13.90 per liter, and P10.74 per

liter, respectively.

Power

Overall electricity rates went down in Q3 2015

due to lower generation costs. During the review

period, average generation charge dropped by

P0.42 per kilowatt hour (kWh) to P4.47per kWh

from P4.89 per kWh in Q2 2015. According to

Meralco, the decline was driven mainly by the

lower generation cost from all suppliers.

In August and September, the average costs of

Independent Power Producers (IPPs) and cost of

power from the Wholesale Electricity Spot

Market (WESM) decreased due to the decline in

fuel cost. Likewise, the cost of power from the

Power Supply Agreements (PSAs) in September

went down due to improved dispatch levels.

The lower transmission charges and other bill

components also contributed to the downward

adjustments in the electricity rates during the

review quarter. However, generation charge went

up in July due to higher settlement rates driven

by numerous power plant outages; the increase

was offset by a decrease in the distribution

charge.

8 EIA, September 2015 Short-Term Energy Outlook, www.eia.doe.gov

13

MWSS implements rates adjustments for

concessionaires due to FCDA

There are potential sources of upside pressures

on electricity charges. Meralco has existing

petitions for rate increases with the Energy

Regulatory Commission (ERC) which include the

petition to implement the Maximum Average

Price for 2012, 2013, 2014, and 2015, amended

application for a rate increase in the January 2014

billing (consisting of incremental fuel costs and

deferred generation cost to be collected monthly

for six months); and petitions for the refund of

generation over/under recovery (GOUR),

transmission over/under recovery (TOUR), system

loss over/under recovery (SLOUR), and lifeline

subsidy over/under recovery (LSOUR) for the

period January-December 2011. In addition,

the Power Sector Assets and Liabilities

Management (PSALM) has several pending

petitions with ERC for the recovery of True-Up

Adjustments of Fuel and Purchased Power Costs

(TAFPPC), Foreign Exchange Related Costs

(TAFxA) and Purchased Power Costs and Foreign

Exchange Related Costs by the National Power

Corporation (NPC), and NPC’s Stranded Debt

portion of the universal charge. Likewise,

the National Grid Corporation of the Philippines

(NGCP) also filed several petitions to recover

connection charges and residual sub-transmission

charges for 2011-2013 and the costs of repair on

damages caused by force majeure events such as

earthquake, flooding, landslides, and lightning

incidents in 2011-2012.

Water

Effective 1 July 2015, foreign currency differential

adjustment or FCDA by Maynilad Water Services,

Inc. (MWSI) increased by P0.03 per cubic meter

while Manila Water Company, Inc. (MWCI)

decreased by P0.01 per cubic meter, respectively.

The Metropolitan Waterworks and Sewerage

System-Regulatory Office (MWSS-RO) reported

that the all-in-water rate charged by MWSI to its

customers this April 2015 rose by P0.05/cu.m. to

P45.73/cu.m. from P45.68/cu.m. while MWCI fell

by P0.01/cu.m. to P33.96/cu.m. from

P33.98/cu.m. The said adjustments were a result

of the foreign exchange movements in the third

quarter.

14

Aggregate Demand and Supply

The Philippine economy gained momentum in

Q2 2015

0

1

2

3

4

5

6

7

8

9

10

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2

ye

ar-

on

-ye

ar

gro

wth

in

pe

rce

nt

GDP GNI

5.6 pct 5.0 pct

Source: Philippine Statistics Authority

Gross Domestic Product (GDP) and Gross National Income (GNI)(at constant prices)

Household consumption remains robust on

improved employment conditions

-30

-20

-10

0

10

20

30

40

50

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2

ye

ar-

on

-ye

ar

gro

wth

in

pe

rce

nt

HH Consumption Govt Spending Capital Formation

6.2 pct 3.9 pct 17.4 pct


Gross Domestic Product By Expenditure Shares(at constant prices)

The country’s real gross domestic product (GDP)

grew by 5.6 percent in Q2 2015, higher than the

5-percent growth in the previous quarter but

lower than the 6.7-percent growth in Q2 2014.

Accelerated consumer and government spending

as well as increased investments, particularly in

construction, drove the second quarter growth.

Meanwhile, the services and industry sectors

continued to be the main drivers of growth on

the production side.

On a seasonally-adjusted basis, q-o-q GDP growth

accelerated to 1.8 percent in Q2 2015 from

0.4 percent in Q1 2015.

For the first semester of 2015, GDP grew by

5.3 percent, which is below the Government’s

growth target of 7.0–8.0 percent for 2015.

Nevertheless, the year-to-date GDP growth

remains above the long-term average growth of

4.9 percent.9

Gross national income (GNI) growth accelerated

to 5 percent in Q2 2015 from previous quarter’s

growth of 4.2 percent. Likewise, growth in net

primary income improved to 2.2 percent in

Q2 2015 (from 0.8 percent in Q1 2015).

Aggregate Demand

Household spending, which accounted for more

than half of the country’s output at

66.6 percent, rose by 6.2 percent in Q2 2015 from

a revised 6.0-percent growth in the previous

quarter. Household spending has remained

robust, benefiting from a low-inflation and

low-interest rate environment. The top

contributors to the growth of this sector are food

and non-alcoholic beverages (2.3 ppts),

miscellaneous goods and services (1.3 ppts) and

transport (0.9 ppts).

Capital formation likewise expanded by

17.4 percent in Q2 2015 from an 11.6-percent

growth in Q1 2015, due to higher accumulated

inventories and sustained growth in fixed capital

investments. Growth in fixed capital can be

9 Real GDP growth average for the period Q1 1999-Q2 2015.

15

ECONOMIC PERFORMANCE

at constant 2000 pricesgrowth rate in percent

Q2 Q1 Q2

Household Consumption 5.7 6.0 6.2

Government Consumption 0.0 1.7 3.9

Capital Formation 8.3 11.6 17.4

Fixed Capital Formation 6.9 10.0 8.9

Exports 7.9 6.4 3.7

Imports 4.9 8.7 12.7

20152014

BY EXPENDITURE ITEM

SECTOR

Source: Phi l ippine Statistica l Authori ty (PSA)

attributed to the expansion of investments in

construction by 13.1 percent from a 6.7-percent

growth a quarter ago. Meanwhile, durable

equipment, which was the main driver of growth

of fixed capital last quarter, grew by 6.6 percent

in Q2 2015 from 13.5 percent in Q1 2015.

This slowdown was due mainly to the higher

contraction of air transport by 64.7 percent in

Q2 2015 from a decline of 26.6 percent in the

previous quarter.

Government expenditures recorded a faster

growth of 3.9 percent in Q2 2015 from

1.7 percent in Q1 2015 owing to the sustained

growth in maintenance and other operating

expenses for the implementation of programs

and projects, specifically for the requirements of

social protection programs.

The overall exports growth slowed down to

3.7 percent in Q2 2015, lower than the

quarter-ago and year-ago growth rates of

6.4 percent and 7.9 percent, respectively.

The 31.1-percent growth in exports of services

was pulled down by the contraction in exports of

goods by 3 percent. The decline in exports of

goods was due to the negative performance of

the following export commodities: electronic data

processing (-17.8 percent); bananas, including

plantains, fresh or dried (-64.7 percent); and

others (-27.1 percent). Meanwhile, exports of

services growth accelerated by 31.1 percent in

Q2 2015 (from 14.1 percent in Q1 2015)—driven

by the 42.6 percent growth in miscellaneous

services from 18.4 percent a quarter ago.

Meanwhile, overall imports posted a 12.7-percent

growth in Q2 2015, higher than the quarter- and

year-ago growth rates of 8.7 percent and

4.9 percent, respectively; owing to the

double-digit growth in imports of services at

26.3 percent and the sustained growth in imports

of goods at 9.5 percent. Imports of

components/devices (106.8 percent) and

electronic data processing (26.6 percent)

contributed mainly to the growth of imports of

goods. Meanwhile, growth in imports of services

was driven by the 73.3 percent increase in

miscellaneous services (from 16.7 percent

a quarter ago).

16

Demand indicators show positive signals

Implied land values continue to trend higher

Office vacancy rate slightly lower amid

continued strong demand for office space

Other Demand Indicators

Demand indicators reported positive prints during

the review quarter with vehicle sales sustaining

its double-digit growth while composite PMI

remaining above the 50-point expansion

threshold in August, indicating continued firm

domestic demand. Moreover, while external

uncertainties dampened slightly current business

sentiments, next-quarter business confidence

turned upbeat on prospects of the coming

holidays. Meanwhile, consumer sentiment

showed optimistic trends, supported by favorable

macroeconomic conditions.

Property Prices

Land Values, Metro Manila

Data from Colliers International indicated that

implied land values10 in the Makati CBD and

Ortigas Center appreciated in Q2 2015 from

quarter- and year-ago levels. Implied land values

in the Makati CBD reached P452,500/sq.m.

in Q2 2015, higher by 2.0 percent and

23.5 percent relative to the levels recorded in

Q1 2015 and Q2 2014, respectively. Similarly,

implied land values in the Ortigas Center rose by

2.2 percent q-o-q and 10.5 percent y-o-y to

P165,000/sq.m.

Land values in the Makati CBD were above their

1997 levels in nominal terms, but only about

46.7 percent of their 1997 levels in real terms.

Meanwhile, land values in the Ortigas Center

were about 84.6 percent of their 1997 level in

nominal terms and 37.1 percent in real terms.

Vacancy Rates, Metro Manila

The office vacancy rate in the Makati CBD was

lower at 1.8 percent in Q2 2015 relative to

quarter-ago level of 2.2 percent. The office

vacancy rate in Q2 2015 was also lower than the

2.1 percent recorded a year ago. The continued

strong office demand in the Makati CBD amid the

lack of new supply has kept office vacancy rate at

record low. Office vacancy rate is estimated by

10 In the absence of reported closed transactions, implied land values based on trends are used by Colliers International

to monitor prices.

17

Strong take up of high-rise projects decreased

residential vacancy rate in Q1 2015

Office rental values rise further

Residential rental values increase slightly

Colliers to narrow further to 1.3 percent in

Q2 2016.

The residential vacancy rate in the Makati CBD

decreased to 7.6 percent in Q2 2015 from

8.0 percent in the previous quarter. Likewise, the

residential vacancy rate in Q2 2015 was lower

than the year-ago level of 10.6 percent due to the

strong take-up of high-rise residential projects

amid limited supply. However, the delivery of

new residential units within the next 12 months is

expected to increase vacancy rates to

11.8 percent by Q2 2016.

Rental Values, Metro Manila11

Monthly Grade A office12 rents in the Makati CBD

reached P894/sq.m. in Q2 2015, representing an

increase of 1.9 percent from the previous quarter.

Similarly, monthly Grade A office rents in the

Makati CBD were higher by 9.4 percent relative to

Q2 2014. Office rental values for Grade A offices

were above their 1997 levels in nominal terms. In

real terms, office rental values were about half of

the comparable levels in 1997.

Monthly rents for luxury three-bedroom

condominium units in the Makati CBD rose to

P863/sq.m. in Q2 2015 or a 1.7 percent growth

from the previous quarter. Likewise, monthly

rents for the 3-bedroom segment were higher by

5.2 percent compared to the year-ago levels.

Residential rental values for luxury

three-bedroom high-rise units were above their

1997 levels in nominal terms but were only about

79.6 percent of their 1997 levels in real terms.

11 Actual rentals for housing account for 13.8 percent of the 2006-based CPI basket. The NSO presently surveys rentals

only ranging from around P300-P10,000/month to compute rent inflation. However, the rental values discussed in this

section pertain to high-end rented properties, which may be considered as indicators of wealth and demand. 12 Grade A refers to office space with capital values between P65,000 and P75,000/sq.m..

18

Capital values for office and residential

buildings are higher

Capital Values, Metro Manila

Capital values13 for office buildings in the Makati

CBD in Q2 2015 were higher in nominal terms

than their quarter- and year-ago levels. Grade A

office capital values in the Makati CBD rose to

P103,500/sq.m., higher by 1.5 percent and by

10.2 percent compared to the quarter- and

year-ago levels, respectively. Grade A office

capital values were also higher than the 1997

levels in nominal terms. Nevertheless, in real

terms, office capital values were about

57.1 percent of the comparable levels in 1997.

Capital values for luxury residential buildings14 in

Makati CBD in Q2 2015 rose to P149,000/sq.m.

from their quarter- and year-ago levels. Average

prices for three-bedroom luxury residential

condominium units increased by 1.1 percent

quarter-on-quarter and 7.9 percent year-on-year.

Capital values for luxury residential buildings

were above their 1997 levels in nominal terms.

In real terms, residential capital values were

about 67.0 percent of the comparable levels in

1997.

13 Probable price that the property would have fetched if sold on the date of the valuation. The valuation includes

imputed land and building value. 14 In terms of location, luxury residential units are located within the CBD core and have quality access to/from and

have superior visibility from the main avenue. Meanwhile, in terms of general finish, luxury residential units have

premium presentation and maintenance.

19

Sales of new vehicles continue to grow albeit at

a slower rate

Total energy sales increase

-10

-5

0

5

10

15

20

25

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

July

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

July

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

July

Au

gu

st

2012 2013 2014 2015

Energy Sales

Year-on-year Growth (in Percent)

Total Energy Sales Residential Commercial Industrial

Q3 (July - August) 2015

Total Energy Sales: 9.3%

Residential: 11.7%

Commercial: 9.7%

Industrial: 6.5%

Vehicle Sales

Sales of new vehicles15 grew by 19.8 percent y-o-y

in the first two months of Q3 2015 from a

35.6-percent growth recorded in the same period

a year ago. The Chamber of Automotive

Manufacturers of the Philippines, Inc. (CAMPI)

attributed the continued growth in car sales to

the introduction of new car models, continuous

marketing efforts and attractive financing

programs of industry players.

Passenger car sales from CAMPI members grew

by 25.8 percent y-o-y in July-August 2015,

accruing to a total of 20,555 units from

16,336 units sold in the same period in 2014.

Similarly, commercial vehicles, which accounts for

about 60 percent of total vehicle sales, expanded

by 15.7 percent in the first two months of

Q3 2015. Commercial vehicles sold during the

quarter reached 27,195 units from 23,510 units in

the same period in 2014. Energy Sales

Meralco’s total energy sales for Q3 2015

(July-August) grew by 9.3 percent, higher

compared to the 1.0 percent growth reported in

the same period a year ago. Energy sales from all

sectors expanded with y-o-y growth rates of

11.7 percent, 9.7 percent and 6.5 percent for the

residential sector, commercial sector and

industrial sector, respectively.

15 Vehicle sales data is gathered on a monthly basis by the Chamber of Automotive Manufacturers of the Philippines

(CAMPI). CAMPI represents the local assemblers and manufacturers of vehicle units in the Philippine automotive

industry. The following are the active members of CAMPI: (1) Asian Carmakers Corp., (2) CATS Motors, Inc.,

(3) Columbian Autocar Corp., (4) Honda Cars Philippines, Inc., (5) Isuzu Philippines Corp., (6) Mitsubishi Motors

Philippines Corp., (7) Nissan Motor Philippines Corp., (8) Suzuki Philippines Inc., (9) Toyota Motor Philippines Corp.

and (10) Universal Motors Corp.

20

Capacity utilization in manufacturing remains

above 80 percent

81.8

82.0

82.2

82.4

82.6

82.8

83.0

83.2

83.4

83.6

83.8

Jan

20

12

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

13

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

14

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

15

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

g

in p

erc

en

t


Monthly Average of Capacity Utilization for Manufacturing

Manufacturing output shows mixed trends

-15

-10

-5

0

5

10

15

20

25

Jan

20

12

Feb

Ma

rA

pr

Ma

yJu

nJu

lA

ug

Se

pO

ctN

ov

De

cJa

n 2

01

3Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

14

Feb

Ma

rA

pr

Ma

yJu

nJu

lA

ug

Se

pO

ctN

ov

De

cJa

n 2

01

5Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

g

ye

ar-

on

-ye

ar;

in p

erc

en

t

VAPI VOPI


Volume and Value Indices of Manufacturing Production

Capacity Utilization

The average capacity utilization rate of the

manufacturing sector was unchanged at

83.3 percent in August 2015 from the month-ago

level based on the PSA’s Monthly Integrated

Survey of Selected Industries (MISSI). Of the

636 respondent-establishments, 59.2 percent of

which operated at least at 80.0 percent capacity

in August 2015. Data show that the

manufacturing companies have been operating

above the long-term average of 80.0 percent

since 2010.

Volume and Value of Production

Preliminary results of the MISSI showed that

volume of production index (VoPI) increased in

August 2015 by 3.7 percent year-on-year from a

0.3 percent (revised) slump in July 2015. The VoPI

showed positive growth for the first time after

contracting for three consecutive months since

May. This was led by the double-digit increments

in the production of miscellaneous manufactures

(75.9 percent), tobacco products (24.0 percent),

electrical machinery (14.6 percent), and

fabricated metal products (11.6 percent).

The expansion in factory output—as measured by

the VoPI—may be owed to the vigorous

construction activity and increased demand for

automotive products. However, the August 2015

number is still below the growth recorded in the

same month last year at 5.7 percent. Thus, to

ensure that the manufacturing sector will

continuously show output gains, NEDA said that

the government needs to boost domestic

demand by strengthening the link between the

agriculture and manufacturing sectors, which

could help balance off the weakening global

demand.16

In contrast, the value of production index (VaPI)

dipped in August 2015 by 4.6 percent from a

contraction of 7.1 percent (revised) in the

previous month. The VaPI has been in the

16 Based on the National Economic and Development Authority (NEDA) press statement dated 9 October 2015.

21

negative territory since January 2015 except in

March 2015. The drop in VaPI was driven by

double-digit declines in the following sub-sectors:

furniture and fixtures (-41.4 percent), wood and

wood products (-35.2 percent), basic metals

(-32.4 percent), petroleum products

(-22.0 percent), food manufacturing

(-13.9 percent), and printing (-10.5 percent).

Business sentiment declines in Q3 2015…

BUSINESS EXPECTATIONS SURVEY

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Current Quarter 37.8 50.7 34.4 48.3 45.2 49.2 41.4

Next Quarter 50.8 48.9 52.9 43.1 58.2 47.3 53.1

BUSINESS

OUTLOOK INDEX

2014 2015

Source: Bangko Sentra l ng Pi l ipinas (BSP)

…but turns more upbeat in Q4 2015

Business Expectations

Results of the Q3 2015 BES17 indicated a less

optimistic outlook for the current quarter as the

overall confidence index (CI) declined to

41.4 percent compared to 49.2 percent in

Q2 2015. This indicates that the number of

optimists declined but continued to be greater

than the number of pessimists during the quarter.

According to respondents, their less upbeat q-o-q

outlook was due to the following: (a) expected

slack in demand during the rainy season,

(b) lower crop production as a result of the

El Niño, (c) closed fishing season in Davao Gulf

from July to September, and (d) lower consumer

spending in view of increased expenditures on

education. The sentiment of businesses in the

Philippines mirrored the less buoyant business

outlook in the US, but was in contrast to the more

bullish views of those in the UK, Germany, Korea,

Singapore, Hong Kong, and India.

For the quarter ahead (Q4 2015), business

outlook turned more upbeat as the next-quarter

index rose to 53.1 percent from 47.3 percent in

the previous quarter’s survey. Respondents’ more

positive outlook for Q4 2015 was on account of:

(a) the expected uptick in consumer demand

during the holiday, harvest and milling seasons,

(b) increase in sales and orders translating to

higher volume of production, (c) business

expansion in retail trade, manufacturing, finance

and business process outsourcing (BPO) services,

(d) new and improved procedures/methods that

increase production in agriculture (e.g., poultry,

tuna fishing), (e) opening of high seas/fishing

operations in October, (f) steady flow of overseas

17 The Q3 2015 BES was conducted from 1 July to 17 August 2015 among 1,516 firms nationwide, drawn from the

Securities and Exchange Commission’s Top 7000 Corporations in 2010 and Business World’s Top 1000 Corporations in

2013.

22

Consumer confidence improves in Q3 2015…

CONSUMER EXPECTATIONS SURVEY

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Current Quarter -18.8 -17.3 -26.3 -21.8 -10.0 -16.2 -11.6

Next 3 Months 5.4 0.0 -1.0 0.7 4.4 -0.4 5.8

Next 12 Months 19.3 15.9 9.7 9.6 17.3 16.4 15.8

2014 2015

Source: Ba ngko Sentral ng Pi l ipinas (BSP)

CONSUMER

OUTLOOK INDEX

…and turns robust for Q4 2015

Filipinos’ (OFs) remittances, especially during the

holiday season, and (g) election-related spending

for the 2016 national elections. Respondents also

cited that the prevailing favorable

macroeconomic conditions (i.e., low inflation

partly as a result of declining oil prices and lower

peso) boosted their business confidence for the

next quarter.

Consumer Expectations

Results of the Q3 2015 CES18 show improved

consumer outlook as the overall CI rose to

-11.6 percent from -16.2 percent for Q2 2015.

The higher but still negative CI for Q3 2015 means

that the number of households with an optimistic

view increased but was less than those who think

otherwise. Respondents cited the following

reasons for their increased optimism:

(a) availability of more jobs; (b) increasing family

income due to salary increases and better

harvest, high production of goods, and stronger

business activity; and (c) lesser debt payments.

Respondents also cited that assistance from

government such as the Pantawid Pamilyang

Pilipino Program (4Ps), less corruption and good

governance also helped boost consumer

confidence for the current quarter. The outlook

of consumers in the Philippines mirrored the

upward sentiment of consumers in Australia, Euro

Area, South Korea, United Kingdom and the

United States but was in contrast to the less

optimistic views of those in Canada, China,

Indonesia, Japan, Thailand, and Taiwan for

Q3 2015.

For the next quarter (Q4 2015), consumer

confidence turned robust as the CI moved into

positive territory at 5.8 percent from -0.4 percent

a quarter ago. Similarly, consumers’ confidence

was sustained for the next 12 months as the

CI was broadly steady at 15.8 percent compared

to the previous quarter’s survey results.

18 The Q3 2015 CES was conducted during the period 1-15 July 2015 covering 5,894 households, of which 2,866

(48.6 percent) were from NCR and 3,028 (51.4 percent) from areas outside NCR.

23

PMI remains above the 50-point expansion

threshold

45

50

55

60

65

70

75

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

g

2011 2012 2013 2014 2015

Composite Manufacturing Retail/Wholesale Services

Purchasing Managers' IndexJanuary 2011 - August 2015

Purchasing Managers’ Index19

The composite PMI remained firmly above the

50-point expansion threshold20 at 56.01 in

August 2015, lower than the previous month’s

58.26 level. All the sectors posted modest

performance during the month that pulled down

the overall PMI. It has been the case that the

overall PMI decelerates in Q3 prior to the holiday

onths.21 In Q4 2015, respondent-companies

expect the index to show faster expansion.

The manufacturing PMI in August 2015

decelerated by 2.45 points to 53.5 from the

55.9 level in July 2015. The August 2015 PMI was

also lower than last year’s level which was at

56.4. Manufacturing companies reported that

weaker demand, lower overall production, fewer

number of new hires, and the decline in the level

of stockpiles contributed to the sluggish

performance of the sector compared to last

month. In addition, suppliers took a longer time

delivering production inputs in August from July.

Nine of the twelve manufacturing subsectors

grew at a slower pace compared to the

month-ago levels namely, textiles, paper

manufactures, fuel, rubber and plastic,

non-metallic minerals, basic metals, fabricated

metal, machinery, and communication and

medical equipment.

Likewise, the services PMI decreased to 57.9 in

August 2015 from 60.0 in July 2015. Nevertheless,

all sub-indices remained above the 50-point

expansion threshold. However, slower expansion

was noted in five of the six indices during the

month due to slower business activity, reduction

in new services contracted, lower number of task

orders in progress, smaller amount paid for

materials and services, and fewer number of job

positions actually filled up.

19 Data based on the monthly purchasing managers’ index report of the Philippine Institute for Supply Management. 20 The actual formula used to calculate the PMI assigns weights to each common element and then multiplies them by

1.0 for improvement, 0.5 for no change, and 0 for deterioration. As a result, an index above 50 indicates economic

expansion, and an index below 50 implies a contraction. PMI surveys are conducted on the last week of the month. 21 The composite PMI has been observed to expand at a slower rate during August (compared to July) in the last five

years, except in 2013 when the composite PMI rose by 0.21 index points.

24

Export performance remains negative on lower

external demand

EXPORTS OF GOODS

growth rate in percent

Q2 Q1 Q2

Coconut Products 14.7 25.9 -19.6

Sugar and Products -63.4 -74.6 -69.2

Fruits and Vegetables 39.2 -36.2 -45.5

Other Agro-Based Products 23.3 -6.5 -15.3

Forest Products 16.5 -11.8 -18.1

Mineral Products 48.1 19.2 -41.9

Petroleum Products -66.2 -63.2 -15.1

Manufactures 10.5 -0.1 -1.9

Special Transactions 76.8 143.8 -45.4

Total Exports 12.9 -0.2 -8.3

COMMODITY GROUP2014 2015

Source: BSP s taff computations based on data from the

Phi l ippine Stati s tica l Authori ty (PSA)

Goods imports continue to contract on

declining fuels prices

IMPORTS OF GOODS

growth rate in percent

Q2 Q1 Q2

Capital Goods -17.6 10.3 17.4

Raw Materials and

Intermediate Goods 12.9 2.1 2.2

Lubricants -3.9 -39.1 -36.2

Consumer Goods 3.7 6.6 12.3

Special Transactions -23.2 -4.0 28.2

Total Imports -0.3 -4.0 -1.6

Source: BSP sta ff computations bas ed on data from the

Phi l ippine Sta tis tica l Authori ty (PSA)

Mineral Fuels and

COMMODITY GROUP2014 2015

The retail and wholesale PMI also declined in

August to 52.6 from 55.1 in July. The purchases

and sales revenues sub-indices contributed

significantly to the sector’s lackluster

performance. The supplier deliveries index also

declined although this meant that trade activities

of retailers took lesser lead time in August from

the month-ago level. In contrast, the employment

and inventories sub-indices showed faster

expansion in August. Both the retail and

wholesale subsectors decelerated in August to

53.6 and 50.03 from 56.2 and 52.7 in July,

respectively.

External Demand

Exports

Exports of goods in Q2 2015 fell by 8.3 percent

y-o-y, a reversal from the year-ago growth of

12.9 percent and lower than the previous

quarter’s 0.2 percent decline. The decline in

exports is attributed to lower demand from the

country’s Asian trading partners22 which account

for the bulk of the country’s exports. Foreign

shipments across all export commodities

decreased except for manufactures which grew

by 15.7 percent.

Imports

Imports of goods declined by 1.6 percent in

Q2 2015, albeit an improvement from the

4.0-percent decline in the previous quarter. The

contraction in imports was due to the continued

decline in inward shipments of mineral fuels and

lubricants, which posted a double-digit

contraction of 36.2 percent y-o-y during the

quarter. Meanwhile, other commodities recorded

gains namely, capital goods (17.4 percent), raw

materials and intermediate goods (2.2 percent),

and consumer goods (12.3 percent).

22 East Asia (includes China, Hong Kong, Japan, Macau, Mongolia, North Korea, South Korea and Taiwan) and ASEAN

(includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam)

25

Services sector remains the main driver of

output growth on the production side

-4

-2

0

2

4

6

8

10

12

14

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2

ye

ar-

on

-ye

ar

gro

wth

in

pe

rce

nt

Agriculture Industry Services

-0.5 pct 6.1 pct 6.2 pct


Gross Domestic Product by Industrial Origin(at constant prices)

ECONOMIC PERFORMANCE

at constant 2000 pricesgrowth rate in percent

Q2 Q1 Q2

Agri., Hunting, Forestry and Fishing 3.4 1.1 -0.5

Agriculture and Forestry 4.5 1.9 -0.3

Fishing -1.6 -2.9 -1.5

Industry Sector 9.1 5.5 6.1

Mining and Quarrying 2.1 -3.1 2.4

Manufacturing 11.1 6.0 4.6

Construction 7.2 5.4 14.6

Electricity, Gas and Water Supply 3.0 5.1 3.0

Service Sector 5.9 5.4 6.2

Transport, Storage and

Communication 6.9 8.3 5.9

Trade and Repair of Motor Vehicles,

Motorcycles, Personal and

Household Goods 6.5 5.5 6.1

Financial Intermediation 6.1 4.3 5.8

Real Estate, Renting and

Business Activities 8.5 6.3 6.8

Public Administration and Defense;

Compulsory Social Security 1.2 -3.5 -0.3

Other Services 3.1 6.6 9.0

SECTOR2014 2015

Source: Phi l ippine Stati s ti ca l Authori ty (PSA)

BY INDUSTRIAL ORIGIN

Aggregate Supply

The services sector expanded by 6.2 percent in

Q2 2015, higher than the 5.4 percent growth in

Q1 2015 and the 5.9 percent growth in Q2 2014.

Major contributors to the sector’s growth were

trade and repair of motor vehicles, motorcycles,

personal and household goods (1.7 percentage

points), other services (1.6 percentage points),

and real estate, renting and business activities

(1.4 percentage points). Growth in trade and

repair of motor vehicles, motorcycles, personal

and household goods can be attributed mainly to

accelerated growth of retail trade to 5.3 percent

in Q2 2015 from 3.0 percent in the previous

quarter. Meanwhile, the growth in other services

is due largely to the accelerated increase of

recreational, cultural and sporting activities

(22.3 percent from 5.7 in Q1 2015). Similarly,

real estate, renting and business activities picked

up on higher growth of renting and other

business activities (10.9 percent from 4.9 percent

in Q1 2015).

Similarly, the industry sector grew by 6.1 percent

in Q2 2015, higher compared to the 5.5 percent

rise in Q1 2015 but lower compared to the

9.1 percent growth in Q2 2014. This is due mainly

to the following: (a) growth of manufacturing by

4.6 percent, albeit slower compared to the

6 percent growth in Q1 2015 and 11.1 percent

growth in Q2 2014; and (b) growth of

construction by 14.6 percent, higher than the

quarter- and year-ago growth rates of 5.4 percent

and 7.2 percent, respectively. Growth in

manufacturing came mainly from food

(3.3 percent) and chemical and chemical products

(12.8 percent) but was largely pulled down by the

decline in petroleum and other fuel products

(-7.9 percent); basic metal industries

(-16.3 percent); and office, accounting and

computing machinery (-8 percent). Meanwhile,

the upsurge in construction can be attributed to

the upturn of public construction (20.4 percent in

Q2 2015 from -24.0 percent in Q1 2015) and the

sustained positive growth of private construction

(10.2 percent in Q2 2015 from 15.3 percent in

Q1 2015).

26

In contrast, agriculture, hunting, forestry and

fishery (AHFF) contracted by 0.5 percent in

Q2 2015, lower than the 3.4 percent in Q2 2014

and 1.1 percent growth in Q1 2015. The sector’s

slowdown was attributed mainly to the

contraction of fishing and forestry, as well as the

decline in agricultural crops such as corn, palay,

coconut including copra and other crops. Fishing

dropped by 1.5 percent as production of fish

varieties like skipjack, roundscad, tilapia and

milkfish declined.

Labor Market Conditions

Unemployment rate improves

0

5

10

15

20

25

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

in p

erc

en

t

Unemployment Underemployment


Unemployment and Underemployment

Based on the Labor Force Survey (LFS) as of

July 2015, the Philippine labor market registered

an improvement but only in terms of

unemployment rate.23 In contrast, the country’s

level of employment declined while

underemployment and youth unemployment

rates both increased compared to the same

period in 2014.

Employment decreased by 0.3 percent in

July 2015 which resulted in job losses of 109,000,

a reversal from the 1.1 million employment

created in July 2014. The decline in the

employment level was due mainly to a

7.6-percent decline in employment in agriculture

sector (vs. 0.5 percent growth in July 2014) and

slower employment growth rate in services sector

at 2.5 percent (vs. 3.9 percent).

Agricultural employment, which accounted for

almost 30 percent of the country’s total

employment, was adversely affected by the

prolonged dry spell and drought caused by

El Nino.24 Meanwhile, employment growth in

services sector decelerated due to employment

losses in wholesale and retail trade and repair of

motor vehicles and motor cycles. In contrast, the

industry sector posted strong employment

growth of 4.1 percent (from 3.8 percent) during

the period, attributed mainly to the 8.8-percent

expansion in construction employment, which

offset the weak 0.6 percent growth in

manufacturing sub-sector.

23 Excludes Leyte. The Philippine Statistics Authority already released preliminary estimates incorporating the new

Leyte Master Sample for July 2015. However, the data used in this report still excludes Leyte to be comparable with the

July 2014 Labor Force Survey (LFS). 24 NEDA (2015), “Number of unemployed Filipinos down in July 2015,” 9 September. www.neda.gov.ph

27

Since the decline in the labor force was lower

than the drop in the employment level, the

country’s unemployment rate declined to

6.5 percent in July 2015 from 6.7 percent a year

ago. However, the unemployment rate among

the youth (15-24 years old) went up to

16.4 percent from 15.8 percent in the same

period last year as the decline in the level of

youth unemployment was offset by a larger

decline in youth labor force.25 Similarly,

underemployment rate also increased to

20.8 percent from 18.3 percent in July 2014 due

mainly to full-time workers who still want

additional hours of work.26 Nevertheless, the

increase in the mean hours of work in July 2015

to 42.4 (from 40.9) still indicates a pick-up in

economic activity during the period. 27

25 The youth composed half of the unemployed in July 2015. 26 NEDA (2015). 27 NEDA (2015).

28

II. MONETARY AND FINANCIAL MARKET CONDITIONS

Domestic Liquidity and Credit Conditions

Domestic liquidity grows at a broadly stable

pace…

...while bank lending decelerates slightly but

remains at double-digit growth

Money supply or M3 grew by 9.0 percent as of

August 2015 from 9.3 percent in end-Q2 2015.

Money supply continued to expand due mainly to

robust demand for credit. Domestic claims rose

by 13.0 percent as of August, faster than the

10.8-percent increase at end-Q2 2015 on

sustained bank lending growth. Meanwhile, net

public sector credit grew by 15.2 percent as of the

review period from 1.1 percent at the end of the

previous quarter.

The growth in net foreign assets (NFA) was

broadly steady at 8.0 percent y-o-y as of August,

the same pace as it was at end-Q2 2015.

The BSP’s NFA position continued to expand

during the month on the back of robust foreign

exchange inflows coming mainly from overseas

Filipinos’ remittances and business process

outsourcing receipts. The NFA of banks likewise

increased as banks’ foreign assets expanded at a

faster pace relative to that of their foreign

liabilities. Banks’ foreign assets rose due mainly to

the growth in their investments in marketable

debt securities, while banks’ foreign liabilities

grew on account of higher deposits and

placements made by foreign banks with other

banks.

As of August 2015, outstanding loans of

commercial banks, net of banks’ reverse

repurchase (RRP) placements with the BSP, grew

by 14.1 percent y-o-y relative to the 14.5 percent

and 20.5 percent growth posted at end-Q2 2015

and end-Q3 2014, respectively.

The sustained expansion of bank lending was

driven largely by loans for production activities,

which expanded by 13.8 percent y-o-y as of

August. The expansion in production loans was

due to the increased lending to the following

sectors: real estate activities; electricity, gas,

steam and airconditioning supply; wholesale and

retail trade, and repair of motor vehicles and

motorcycles; financial and insurance activities;

and, manufacturing. Meanwhile, loans for

household consumption grew by 14.0 percent as

of August 2015, higher than the 17.7 percent and

29

14.9 percent growth registered in end-Q2 2015

and end-Q3 2014, respectively.

Most respondent banks maintain credit

standards for loans to enterprises

Credit Standards

Results of the Q3 2015 Senior Bank Loan Officers’

Survey (SLOS)28 showed that most of the

respondent banks maintained their credit

standards for loans to both enterprises and

households during the quarter based on the

modal approach.29 This is the 26th consecutive

quarter since Q2 2009 that majority of banks

reported broadly unchanged credit standards.

Similarly, the diffusion index (DI) approach30,31

pointed to basically unchanged overall credit

standards for loans to enterprises in Q3 2015 as

the number of respondent banks reporting

tighter credit standards equaled the number of

respondent banks reporting easier credit

standards. Meanwhile, the DI-based results

showed slight net easing of credit standards for

loans to households. In the previous quarter,

credit standards for both corporate lending and

household loans were unchanged based on the DI

approach.

Lending to Enterprises

Most banks (87.5 percent of banks that

responded to the question) indicated that credit

standards for loans to enterprises were kept

steady during the quarter using the modal

approach. Respondent banks attributed their

unchanged credit standards to their unchanged

tolerance for risk and stable economic outlook. In

terms of specific credit standards, the results

were mixed. On the one hand, some respondent

28 The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of

universal/commercial banks (U/KBs) in the Philippines, as well as to factors affecting the supply of and demand for

loans by both enterprises and households. Survey questionnaires were sent to all commercial banks, except for one

bank that requested not to be included in the survey since it does not engage in corporate and retail lending.

Thirty-four banks responded to the current survey representing a response rate of 97.1 percent. As of June 2015,

U/KB loans accounted for about 85.9 percent of the banking system’s total outstanding loans. 29 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of

responses. 30 In the diffusion index approach, a positive diffusion index (DI) for credit standards indicates that the proportion of

banks that have tightened their credit standards are greater compared to those that eased (“net tightening”), whereas

a negative DI for credit standards indicates that more banks have eased their credit standards compared to those that

tightened (“net easing”). 31 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the DI approach in the analysis of survey results.

Beginning in Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Tightened considerably 3.7 3.6 0.0 0.0 3.4 0.0 0.0

Tightened somewhat 0.0 3.6 3.2 3.2 13.8 3.2 6.3

Remained basical ly unchanged 88.9 85.7 93.5 93.5 79.3 93.5 87.5

Eased somewhat 7.4 7.1 3.2 3.2 3.4 3.2 6.3

Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Diffusion Index for Credit Standards -3.7 0.0 0.0 0.0 13.8 0.0 0.0

Number of banks responding 27.0 28.0 31.0 31.0 29.0 31.0 32.0

General Credit Standards for Loans to Enterprises (Overall)

2015

Note: A positive diffusion index for credit standards indicates that more banks have tightened their credit standards

compared to those that eased (“net tightening”), whereas a negative diffusion index for credit standards indicates

that more banks have eased their credit standards compared to those that tightened (“net easing”).

2014

banks reported wider loan margins, increased

credit line sizes, and longer loan maturities. On

the other hand, several banks reported stricter

collateral requirements and loan covenants as

well as increased use of interest rate floors.32

By borrower firm size, overall credit standards for

top corporations and micro enterprises showed

slight net easing based on the DI approach.

Meanwhile, credit standards for large middle-

market enterprises and small and medium

enterprises (SMEs) showed a slight net tightening.

For the next quarter, most of the respondent

banks still expect credit standards for loans to

enterprises to remain unchanged. However, the

percentage of banks expecting a slight easing of

overall credit standards for loans to businesses

was higher compared to those expecting the

opposite, particularly for top corporations and

large middle-market enterprises. Respondent

banks cited expectations of higher risk tolerance,

more favorable economic outlook, and

improvement in banks’ portfolio as among the

reasons behind the expected net easing of credit

standards.

Most respondent banks report unchanged

credit standards for loans to households

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Tightened considerably 5.0 5.0 4.8 0.0 0.0 0.0 0.0

Tightened somewhat 10.0 0.0 9.5 14.3 10.5 9.5 4.2

Remained basically unchanged 80.0 95.0 81.0 85.7 84.2 81.0 87.5

Eased somewhat 5.0 0.0 4.8 0.0 5.3 9.5 8.3

Eased considerably 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Diffusion Index for Credit Standards 10.0 5.0 9.5 14.3 5.3 0.0 -4.2

Number of banks responding 20.0 20.0 21.0 21.0 19.0 21.0 24.0

2014

General Credit Standards for Loans to Households (Overall)

2015

Note: A positive diffusion index for credit standards indicates that more banks have tightened their

credit standards compared to those that eased (“net tightening”), whereas a negative diffusion index

for credit standards indicates that more banks have eased their credit standards compared to those

that tightened (“net easing”).

Lending to Households

The survey results likewise showed that most of

the respondent banks (87.5 percent) continued to

report unchanged overall credit standards for

loans extended to households. However, the DI

approach showed a slight net easing of credit

standards for household loans in Q3 2015,

reflecting banks’ increased tolerance for risk and

improved profile of borrowers. In particular,

banks’ responses indicated increased credit line

sizes, less strict collateral requirements and loan

covenants, and less use of interest rate floors

along with unchanged margins on loans and loan

maturities.

32 The survey questionnaire identified six specific credit standards: (1) loan margins (price-based); (2) collateral

requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) interest rate floors.

A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises,

under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking

certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, an

interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while

less use indicates otherwise.

31

Loan demand from both enterprises and

households is unchanged

Most of the respondent banks foresee

maintaining their overall credit standards over

the next quarter. However, some banks expect

overall credit standards to ease slightly,

particularly for housing and personal/salary loans,

due largely to expectations of banks’ increased

tolerance for risk, improvements in banks’

portfolio and borrowers’ profile, more aggressive

competition from banks and non-bank lenders,

and less strict financial system regulations.

Loan demand

Responses to the survey question on loan

demand indicated that majority of the

respondent banks continued to see unchanged

overall demand for loans from both enterprises

and households. Using the DI approach, however,

the results continued to show a net increase in

overall demand33 for loans from both enterprises

and households. The net increase in loan demand

of firms was attributed by banks to increased

inventory and accounts receivable financing

needs of borrower firms and clients’ improved

economic outlook, among others. Meanwhile, the

net increase in overall demand for household

loans reflected higher housing investment and

household consumption.

Looking ahead, most of the respondent banks

expect unchanged loan demand for loans to both

firms and households. However, a larger

proportion of respondents expect overall demand

for loans to increase further in the next quarter

relative to those who indicated the opposite.

Expectations of higher inventory and accounts

receivable financing needs of borrower firms

along with the improved economic outlook of

clients were cited by respondent banks as key

factors behind the anticipated increase in

demand for business loans. Meanwhile, the

expected net increase in household loan demand

was attributed by respondent banks to the banks’

more attractive financing terms and lower

interest rates.

33 The “DI for loan demand” refers to the percentage difference between banks reporting an increase in loan demand

and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan

demand compared to those stating the opposite, whereas a negative DI for loan demand implies that more banks

reported a decrease in loan demand compared to those reporting an increase.

32

Credit standards for real estate loans are

steady

Real Estate Loans

Most of the respondent banks (86.4 percent) in

Q3 2015 indicated unchanged overall credit

standards for commercial real estate loans using

the modal approach. However, based on the DI

approach, a net tightening of overall credit

standards was noted for commercial real estate

loans for the 13th consecutive quarter. The net

tightening of overall credit standards for

commercial real estate loans was attributed by

respondent banks largely to perceived stricter

oversight of banks’ real estate exposure. In

particular, respondent banks reported stricter

collateral requirements and loan covenants along

with wider loan margins, reduced credit line sizes,

shorter loan maturities, and increased use of

interest rate floors for commercial real estate

loans. For the next quarter, most of the

respondent banks expect to maintain their credit

standards for commercial real estate loans.

However, banks that anticipate a tightening of

their credit standards outnumbered those

expecting the opposite.

Demand for commercial real estate loans was

also unchanged in Q3 2015 based on the modal

approach. A number of banks, however, indicated

increased demand for the said type of loan on the

back of clients’ improved economic outlook and

increased customer investment in plant or

equipment. Over the next quarter, although most

of the respondent banks anticipate generally

steady loan demand, a number of banks expect

demand for commercial real estate loans to

continue increasing in the following quarter.

Similarly, most of the respondent banks

(78.9 percent) reported unchanged credit

standards for housing loans extended to

households. Using the DI approach, however,

a slight tightening of credit standards for housing

loans was noted in Q3 2015. The net tightening of

credit standards for housing loans was attributed

by respondent banks to deterioration in the

profile of borrowers. For the next quarter,

although most respondent banks foresee

maintaining their credit standards for housing

loans, a number of banks expect a slight net

33

easing of credit standards for this type of loan

amid expectations of higher tolerance for risk.

At the same time, results continued to show

increased demand for housing loans in Q3 2015

as well expectations of continued increase in

demand for the said type of loan in the next

quarter.

34

Interest Rates

T-bill rates in the primary market decrease

0

1

2

3

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

91-day T-bill Rate 182-day T-bill Rate 364-day T-bill Rate

Treasury Bill Rates

2012

in p

erc

en

t

2013 2014 2015

The yield curve declines

0

1

2

3

4

5

6

3Mo 6Mo 1Yr 2Yr 3yr 4Yr 5Yr 7Yr 10Yr 20Yr 25Yr

Sep 2014 Jun 2015 Sep 2015

Yields of Government Securities in the Secondary Market

Maturity

in p

erc

en

t

Interest rate differentials narrows

-50

0

50

100

150

200

250

300

350

400

450


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

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

Interest Rate Differentials

2012

qu

art

erl

y a

ve

rag

es;

in

ba

sis

po

ints

2013 2014 2015

Primary Interest Rates

In Q3 2015, the average 91-day, 182-day, and

364-day T-bill rates in the primary market

decreased to 1.861 percent, 1.922 percent, and

2.131 percent from 1.940 percent, 2.169 percent,

and 2.172 percent, respectively, in Q2 2015. The

decrease in T-bill rates reflected the market

players’ strong appetite for lower-tenored papers

amid global uncertainties.

Yield Curve

The secondary market yield of GS declined

generally, except for the 1-year, 3-year, 7-year,

20-year and 25-year GS, as of end-September

2015 relative to the end-June 2015 levels. The

yields for shorter maturities declined amid buying

activity as banks serviced their clients’

requirements.

Debt paper yields were lower by a range of

4.5 bps (4-year GS) to 55.6 bps (10-year GS)

compared to end-June 2015 levels. By contrast,

the interest rate for the 1-year, 3-year, 7-year,

20-year, and 25-year GS rose by 11.7 bps, 7.4 bps,

44.3 bps, 48.3 bps, and 472.8 bps, respectively.

Relative to year-ago levels, the secondary market

yields of GS increased generally by a range of

4.7 bps for the 6-month GS to 82.3 bps for the

1-year GS except for the 5-year, 10-year, and

25-year GS which declined by 50.8 bps, 39.5 bps,

and 32.1 bps.

Interest Rate Differentials

The average differentials between domestic and

US interest rates, gross and net of tax, narrowed

in Q3 2015 relative to the previous quarter.

The average 91-day RP T-bill rate declined q-o-q

by 8.8 bps to 1.861 percent in Q3 2015 from

1.949 percent in Q2 2015. Meanwhile, the

average US 90-day LIBOR and US 90-day T-bill

rate increased by 3.5 bps and 4.0 bps,

respectively to 0.314 percent and 0.108 percent

in Q3 2015. Foreign interest rates rose on

investor optimism after European leaders

reached an agreement over the bailout terms for

35

-1

0

1

2

3

4

5


BSP RRP Rate US Federal Funds Target Rate

2012

BSP RRP Rate and US Federal Funds Target Ratein

pe

rce

nt

2013 2014 2015

150

175

200

225

250

275

300


Risk-Adjusted Differentials

2012

in b

asis

po

ints

2013 2014 2015

Real lending rate increases

-1

0

1

2

3

4


(Aug)

Philippines' Real Lending Rate

2012

in p

erc

en

t

2013 2014 2015

Greece and the renewed expectation of an

interest rate hike by the US Fed in 2015.

The positive differential between the BSP's

overnight borrowing or RRP rate and the US

federal funds target rate was unchanged at

375 bps in Q3 2015, as the policy settings for both

central banks were kept steady. Meanwhile, the

interest rate differential between the BSP’s

overnight RRP rate and the US federal funds

target rate adjusted for country risk premium34

narrowed to 238 bps as of end-September 2015

from 275 bps in end-June 2015. This development

could be traced to the higher risk premium given

the decrease in the 10-year US note, relative to

the increase in the 10-year ROP yield, to

1.99 percent and 3.36 percent, respectively.

The 10-year US note declined following the

release of weaker-than-expected data on US

manufacturing, consumer spending, and

employment during the quarter, as well as the

continued decline in global oil prices and a

weakening Chinese economy. Meanwhile, the

increase in the 10-year ROP note reflected the

risk-off sentiment across the Asian financial

market.

The real lending rate35 rose to 3.2 percent in

August 2015 from 2.7 percent in June 2015.

This was due to the 60-bp decline in inflation to

0.6 percent in August 2015 from 1.2 percent in

June 2015 and the 10-bp decline in the actual

bank lending rate36 to 3.8 percent. The Philippines

posted the fifth lowest real lending rate in a

sample of 10 Asian countries, with Thailand

recording the highest real lending rate at

7.7 percent and Japan the lowest at 1.0 percent.

34 The difference between the 10-year ROP note and the 10-year US Treasury note is used as proxy for the risk

premium. 35 Real lending rate is measured as the difference between actual bank lending rate and inflation. 36 The actual bank lending rate for the Philippines is the weighted average interest rate charged by reporting

commercial banks on loans and discounts granted during the period.

36

Financial Market Conditions

Domestic financial market conditions reflect

external uncertainties

External headwinds saw the benchmark index

dip in Q3

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

ind

ex p

oin

ts

Q3 2015

7,285.93

Source: Philippine Stock Exchange, BSP

Quarterly Average PSEi

Other stock market indicators reflected

investors’ bearish sentiments

The favorable domestic outlook continues to be

supported by ample liquidity and credit growth

during the review quarter. However, external

headwinds emanating from the slowdown in the

Chinese economy and the uncertainties

surrounding the US interest rate lift-off have

contributed toward the uptick in investor risk

perception and a search for safe haven assets.

Nonetheless, the performance of the domestic

financial market remained favorable compared to

other countries in the region.

Stock Market

The Philippine Stock Exchange index (PSEi)

averaged 7,285.93 index points in Q3 2015, about

6.1 percent lower than the average of

7,760.08 index points registered in the preceding

quarter. Sentiments turned bearish during the

review quarter as concerns over the weakening

Chinese economy and uncertainty about the US

interest rate lift-off wiped out the stock gains

posted in the early months of the year. Hence,

from the 27th all-time high of 8,127.48 index points

posted on 10 April, the PSEi retreated to close

15.2 percent lower at 6,893.98 index points on

30 September.

In July, stocks declined on concerns over the

imminent hike in the US interest rate and signs of a

slowdown in the Chinese economy. The decline

was partly tempered by the Greek bailout deal

reached and the Chinese government’s

unprecedented intervention to boost its economy

and stock market. However, the index fell sharply

in August after the PBOC devalued the yuan,

reinforcing fears of a weakening Chinese economy

and resulting in a global sell-off on 24 August as

investors searched for safer havens. Furthermore,

the weaker manufacturing numbers reported by

China, the US and the Euro Zone in September

further deepened fears of another global

economic slowdown and escalated the turmoil in

global financial markets.

Mirroring the retreat of the benchmark index,

foreign investors continued to post net sales

amounting to P61.1 billion from July-September.

37

0

20

40

60

80

100

120

140

160

180

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

in b

illi

on

pe

sos

Q3 2015

P101.3B

Source: Bureau of the Treasury

Total Oversubscription of T-bill Auctions

Debt spreads widen due to uncertainties on

the external front

0

50

100

150

200

250

Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

in b

asi

s p

oin

ts

Quarterly Philippine Sovereign 5-Year CDS Spreads

Philippines Indonesia Thailand Malaysia109.3 bps 210.5 bps 129.0 bps 166.7 bps

Source: Bloomberg

Total stock market capitalization as of

end-September stood at P13.4 trillion, falling by

8.6 percent from P14.6 trillion registered in

end-June and by 6.5 percent from P14.3 trillion

posted a year ago. Moreover, data from

Bloomberg indicated that the price-earnings ratio

of listed issues declined from 21.4x posted in

end-June to 19.5x in end-September. Philippine

shares remained the second most expensive in the

ASEAN5, after Indonesia’s 22.7x.

Government Securities

Results of the T-bill auctions conducted in

Q3 2015 (July-September) continued to show

robust demand for T-bills with total

oversubscription for the quarter amounting to

P161.3 billion, about 2.7 times the P60.0 billion

total offered amount. The total oversubscription

for the quarter at P101.3 billion was higher than

the P34.4 billion oversubscription in the previous

quarter. Accordingly, the Auction Committee

awarded in full the total offering in the last two

auctions of the review quarter. In contrast, during

the 6-July auction, the Auction Committee made

full awards for the 91-day and 182-day T-bills,

respectively, while bids for the 364-day T-bills

were partially awarded to prevent a sharper

increase in interest rates for the tenor. The results

of the auction reflected government’s

expectations that interest rates would go up in the

near term as the market braces for the increase in

yields in the US.

Sovereign Bond and CDS Spreads

The cost of insuring Philippine sovereign debt

increased in Q3 2015. The country’s 5-year

sovereign credit default swap (CDS) spreads

averaged 109 basis points (bps) in 3Q 2015, up

from 2Q 2015 average of 89 bps. Against those of

neighboring economies, the Philippine CDS traded

lower than Indonesia’s average of 210 bps,

Malaysia’s 167 bps and Thailand’s 129 bps. The

risk premium from holding a Philippine sovereign

bond over a similarly tenured US Treasury bond

likewise climbed as indicated by the wider EMBIG

Philippine spreads which averaged 117 bps, higher

than the previous quarter’s 106 bps.

38

0

50

100

150

200

250

300

350

400

450

Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

in b

asis

poi

nts

Quarterly JPMorgan EMBI+ Sovereign Bond Spreads

EMBI+Philippines

119.4 bps

EMBI+Global

414.1 bps

Source: Bloomberg

The widening trend persisted during the entire

quarter with some episodes of temporary easing.

In July, debt spreads expanded as market

uncertainties grew over the potential negative

spillover effects from Greece’ debt issues and

China’s stock market sell-off. Likewise, the stock

market rout in China raised concerns on the

implications of a sharp slowdown in the Chinese

economy. The IMF’s downward revision in the

world growth outlook added further to market

fears that pushed bond yields higher and bond

spreads wider. By mid-July, debt spreads started

to ease as perceived risk of a “Grexit” softened

following the authorization of €7 billion bridge

loan and an extra €900 million in emergency

liquidity assistance (ELA) funding for Greek banks.

The turnaround in debt spreads was also helped

by the modest recovery in Chinese equities.

However, these developments were not enough

to sustain a narrowing trend.

Debt spreads continued to widen in August as

China decided to devalue its currency which

jolted financial markets in the region. The move

by the Chinese government resulted in negative

investor sentiment which pushed bond yields

higher and bond spreads wider. The widening in

debt spreads persisted and recorded an all-year

high in 24 August as a result of global market sell-

off triggered by concerns on the possible

slowdown in the Chinese economy and the slump

in commodity prices.

In the first half of September, debt spreads

slightly eased as investors traded on a

wait-and-see stance, awaiting for the result of the

US Fed policy meeting on 17 September.

After the meeting, debt spreads climbed by about

10 bps as investors fled to safe-haven trading,

bidding up prices of US Treasury bonds which

pushed yields down and widened spreads with

emerging market bonds. Debt spreads continued

to climb towards the end of the month driven

largely by the continued uncertainty over US Fed

lift-off combined with worries over slowing

emerging market growth and continuing decline

in global commodity prices.

39

By 30 September, the Philippines 5-year

sovereign CDS stood at 134 bps, higher than the

2Q’s end of 91.4 bps but remained lower than

Indonesia’s 270 bps, Malaysia’s 232 bps and

Thailand’s 162 bps. The EMBIG Philippines also

ended the quarter wider at 145 bps compared to

the previous quarter’s closing of 118 bps.

Banking System

Philippine banking system sustains growth

U/KBs account for the largest share in the

resource base

The Philippine banking system remains solid.

Banks’ balance sheets were marked by a

sustained growth in assets and deposits. Asset

quality indicators also continued to improve,

while capital adequacy ratios remained above

international standards, even with the

implementation of the tighter Basel III

framework.

Savings Mobilization

Savings and time deposits remained the primary

sources of funds for the banking system. Banks’

total deposits37 as of end-July 2015 amounted to

P6.8 trillion, 7.3 percent or P0.5 trillion higher

than the year-ago level. The growth in deposits

recorded in end-July 2015 was slower than the

8.2 percent growth posted in the previous month.

Savings and demand deposits expanded by

9.0 percent and 12.3 percent, respectively.38

Time deposits, however, declined marginally by

0.2 percent or by P4.2 billion during the review

period. Meanwhile, foreign currency deposits

(FCD-Residents) owned by residents, grew by

9.6 percent, y-o-y, to P1.4 trillion.39

Institutional Developments

The increase in the resources of the banking

system slowed down significantly to 8.6 percent

to P11.5 trillion as of end-June 2015 relative to

the year-ago growth of 18.7 percent. However,

the Q2 growth was a mild deceleration from the

previous quarter’s 8.7 percent owing to the

37 This refers to the total peso-denominated deposits of the banking system. 38 The domestic liquidity or M3 growth in March 2015 also reflects statistical base effects associated with the

significant increase in domestic liquidity a year ago of 35.3 percent, following the operational adjustments involving

access of trust entities to the BSP SDA facility, which were completed in November 2013. Along with the savings, time

and demand deposits, M3 includes currency in circulation and deposit substitutes. 39 M4 is the sum of M3 and FCD-Residents. Along with savings, time and demand deposits, M3 includes currency in

circulation and deposit substitutes.

40

reduced pace in bank lending. Meanwhile, U/KBs

continued to account for 90 percent of the total

resources of the banking system. As a percent of

GDP, total resources remained steady at

88.8 percent relative to Q1 2015.

The number of banking institutions (head offices)

fell to 638 as of end-June 2015 from the year- and

quarter- ago levels of 664 and 646, respectively,

indicating continued consolidation of banks as

well as the exit of weaker players in the banking

system. By banking classification, banks (head

offices) consisted of 36 universal and commercial

banks (U/KBs), 70 thrift banks (TBs), and 532 rural

banks (RBs). Meanwhile, the operating network

(head offices and branches/agencies) of the

banking system expanded to 10,528 offices in

Q2 2015 from 10,120 offices during the same

period in the previous year and 10,456 offices in

Q1 2015, due mainly to the increase in the

branches/agencies of U/KBs, and TBs.

The Philippine banking system’s gross

non-performing loan (GNPL) ratio, at 2.4 percent

as of end-June 2015, was an improvement

relative to the 2.7 percent and 2.5 percent posted

a year- and a quarter- ago, respectively.40 Banks’

initiatives to improve their asset quality along

with prudent lending regulations helped maintain

the GNPL ratio to a level below its pre-Asian crisis

at 3.5 percent.41 Compared with the previous

quarter, the Q2 2015 GNPL ratio reflected the

combined effect of the GNPL decline by

P0.6 billion, from P141.4 billion in Q1 2015 to

P140.8 billion in Q2 2015, and the banking

system’s total loan portfolio (TLP) expansion by

P155.7 billion, from P5.7 trillion in Q1 2015 to

P5.9 trillion. Similarly, the net non-performing

loan (NNPL) ratio decreased slightly to

0.6 percent from 0.7 percent posted a year- and

a quarter-ago. In computing for the NNPLs,

specific allowances for credit losses42 on TLP are

deducted from the GNPLs. The said allowances

increased to P102.9 billion in end-June 2015 from

the P102.8 billion posted a quarter ago.

40 For comparative purposes, computations for periods prior to January 2013 are aligned with Circular No. 772. Certain

ratios were rounded-off to the nearest hundredths to show marginal movements. 41 The 3.5 percent NPL ratio was based on the pre-2013 definition. 42 This type of provisioning applies to loan accounts classified under loans especially mentioned (LEM),

substandard-secured loans, substandard-unsecured loans, doubtful accounts and loans considered as loss accounts.

41

Asset quality of Philippine banks continues to

improve

Banks remain well-capitalized amidst tighter

capital requirements

The Philippine banking system’s GNPL ratio of

2.4 percent was higher relative to Indonesia

(2.1 percent), South Korea (1.5 percent) and

Malaysia (1.2 percent), and at par with Thailand

(2.4 percent).43

The loan exposures of banks remained

adequately covered as the banking system

registered an NPL coverage ratio of

117.9 percent. The Q2 2015 ratio was higher

than the 116.4 percent posted in end-March 2015

and the 116.3 percent posted a year-ago. The

ratio is indicative of banks’ continued compliance

with the loan-loss provisioning requirements of

the BSP to ensure adequate buffers against

potential credit losses.

Compliance with the BSP capital framework for

U/KBs under the Basel III framework44 took effect

in 1 January 2014. The new Basel III regime

incorporates adjustments to the treatment of

bank capital in ways that enhance the use of the

CAR as a prudential measure.

The CARs of U/KBs stood at 15.1 percent and

16.1 percent on solo and consolidated bases at

end-March 2015. These figures are well-above

the BSP regulatory threshold of 10.0 percent and

international minimum of 8.0 percent.

The CAR figures slid from 15.2 percent on solo

and 16.2 percent on consolidated bases posted in

the previous quarter.

The industry’s capital position remains driven by

Common Equity Tier 1 (CET 1), which is the

highest quality among instruments eligible as

bank capital. The CET 1 of U/KBs represented

12.4 percent and 13.5 percent of risk weighted

assets (RWA) on solo and consolidated bases at

end-March 2015. Meanwhile, the banks’ Tier 1

ratios stood at 12.6 percent and 13.7 percent on

43 Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q4 2014);

Malaysia (banking system [impaired loans/net loans], Q2 2015); Thailand (commercial banks, Q2 2015); and South

Korea (domestic banks, Q2 2015). 44 Basel III no longer counts towards “bank capital” those Basel II-compliant capital instruments that do not have the

feature of loss absorbency. Loss absorbency refers to the ability of bank-eligible capital instruments other than

common equity to behave and act in the same way as common equity shares at the point where the bank takes losses

and becomes non-viable. In addition, Basel III now deducts from capital the investments of banks in non-allied

undertakings, defined benefit pension fund assets, goodwill and other intangible assets.

42

Exchange Rate

Peso weakens due to confluence of factors

contributing to global uncertainties

39

40

41

42

43

44

45

46

47

48

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4 Q1

2015

Q2 Q3

Ph

p/U

S$

Q3 2015

P46.05/US$1

Source: Reference Exchange Rate Bulletin, Treasury Department, BSP.

Quarterly Peso-Dollar Rate

solo and consolidated bases during said period.

Tier 1 is composed of common equity and

qualified capital instruments.

The decrease in the end-March CAR was due to a

slight reduction in the U/KBs’ qualifying capital

brought about by a rise in capital adjustments

related to the banks’ investments in non-allied

businesses. This increase in capital adjustments

refers to specific exclusions that are no longer

allowed. With this change, the capital position of

banks can be better compared with the risks that

they take.

Nevertheless, the CAR of U/KBs on a consolidated

basis at 16.1 percent was higher than those of

Malaysia (15.2 percent) and South Korea

(14.1 percent), although lower compared to those

of Indonesia (18.7 percent) and Thailand

(16.7 percent).45

The peso depreciated against the US dollar in

Q3 2015. On a q-o-q basis, the peso weakened by

3.0 percent to average P46.05/US$1 from the

previous quarter’s average of P44.67/US$1.

Meanwhile, the peso depreciated by 5.0 percent

relative to the P43.77/US$1 average in the third

quarter of 2014.46 The weakness of the peso was

due primarily to global uncertainties stemming

from the prospect of rising US interest rates, the

slowdown in the Chinese economy, and the

devaluation of the yuan.

In July 2015, the peso depreciated to average

P45.26/US$1 relative to the previous month’s

average as strong US economic data bolstered

expectations that the US Fed will hike interest

rates this year.47,48 The peso further weakened in

August, averaging to P46.14/US$1, as concerns

over China’s slowing economic growth and

45 Sources: Various central bank websites, IMF and financial stability reports, Indonesia (commercial banks, Q4 2014);

Thailand (commercial banks, Q2 2015); Malaysia (banking system, Q2 2015); and Korea (bank holding companies,

Q2 2015). 46 Dollar rates or the reciprocal of the peso-dollar rates were used to compute for the percentage change. 47 Consumer price index (CPI) rose 0.3% last month after increasing 0.4% in May. Last month’s increase pushed the

year-on-year CPI rate into positive territory for the first time since December. (Source: Bureau of Labor Statistics) 48 Groundbreaking for new homes increased 9.8% to a seasonally adjusted annual pace of 1.17 million units in June.

Permits for future home construction increased 7.4% to a 1.34 million-unit rate, the highest level since July 2007.

(Source: www.census.gov)

43

2012 2013 2014 2015*

Chinese Yuan 1.00 2.60 -2.70 -2.40

Philippine Peso 6.80 -7.00 -0.70 -4.30

Singapore Dollar 6.10 -2.70 -4.50 -6.90

Thai Baht (Onshore) 3.00 -4.60 -0.70 -9.50

New Taiwan Dollar 4.30 -1.90 -6.20 -3.70

Japanese Yen -10.90 -16.30 -12.50 -0.20

Korean Won 7.70 1.10 -4.30 -7.80

Malaysian Ringgit 3.50 -5.50 -6.30 -20.60

Indonesian Rupiah -5.90 -19.10 -2.10 -15.40

Indian Rupee -3.10 -11.40 -2.90 -4.10

YEAR-TO-DATE CHANGES IN SELECTED DOLLAR RATES Appreciation/(-Depreciation), in percent

Notes :

- Negative va lue represents depreciation of the currency agai nst the US dol lar

- YTD changes are computed as the percent change between the clos ing pri ces

for the year indicated versus the cl os i ng prices for the preceding year (i .e.,

clos ing prices are based on Bl oomberg data as of 31 December except for the

Phi l i ppine peso which used cl os i ng price for the la s t tradi ng day of the year).

*Based on Bl oomberg data as of 4:00 p.m., 30 September 2015

China’s unexpected move to devalue its currency

painted a bleak outlook for emerging Asia’s

financial markets, which boosted the appeal of

the US dollar as safe haven. In September, the

peso depreciated further to average P46.75/US$1

due to weak exports data for July, reflecting

sluggish external environment.

On a year-to-date basis, the peso depreciated

against the US dollar by 4.3 percent on

30 September 2015 as it closed at P46.74/US$1,

moving in tandem with the rest of Asian

currencies.49

Meanwhile, volatility, as measured by the

coefficient of variation (COV) of the peso’s daily

closing rates stood at 0.99 percent during the

third quarter, higher compared with 0.65 percent

in the previous quarter.50

On a real trade-weighted basis, during the period

July to August 2015, the peso gained external

price competitiveness against the basket of

currencies of all trading partners (TPI), trading

partners in advanced countries (TPI-A), and

trading partners in developing countries (TPI-D)

as the real effective exchange rate (REER) index

of the peso decreased by 2.01 percent,

2.76 percent, and 1.47 percent, respectively,

relative to Q2 2015. These are due to the

combined effects of the nominal depreciation of

the peso and narrowing inflation differential

against these currency baskets.51,52

Relative to Q2 2014, the peso lost external price

competitiveness against the basket of currencies

of TPI, TPI-A, and TPI-D as the peso appreciated in

real terms by 4.71 percent, 9.34 percent, and

49 Based on the last done deal in the afternoon. 50 The coefficient of variation is computed as the standard deviation of the daily closing exchange rate divided by the

average exchange rates for the period. 51 The Trading Partners Index (TPI) measures the nominal and real effective exchange rates of the peso across the

currencies of 14 major trading partners of the Philippines, which includes US, Euro Area, Japan, Australia, China,

Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand.

The TPI-Advanced measures the effective exchange rates of the peso across currencies of trading partners in advanced

countries comprising of the US, Japan, Euro Area, and Australia. The TPI-Developing measures the effective exchange

rates of the peso across 10 currencies of partner developing countries which includes China, Singapore, South Korea,

Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, United Arab Emirates, and Thailand. 52 The REER index represents the Nominal Effective Exchange Rate (NEER) index of the peso, adjusted for inflation rate

differentials with the countries whose currencies comprise the NEER index basket. A decrease in the REER index

indicates some gain in the external price competitiveness of the peso, while a significant increase indicates the

opposite. The NEER index, meanwhile, represents the weighted average exchange rate of the peso vis-à-vis a basket of

foreign currencies.

44

1.50 percent, respectively, due mainly to the

effect of the nominal appreciation of the peso

against these currency baskets.

45

III. FISCAL DEVELOPMENTS

NG posts lower deficit as of end-July 2015

NATIONAL GOVERNMENT FISCAL PERFORMANCE

in billion pesos

Jan-Jul Jan-Jul

Surplus -55.7 -18.5 -67.0

Revenues 1,100.5 1,264.2 15.0

Expenditures 1,156.2 1,282.7 11.0

Growth

Rate

(in percent)

Source: Bureau of the Treasury (BTr)

* Tota ls may not add up due to rounding

2014 2015

The National Government’s (NG) fiscal deficit for

the period January to July 2015 was lower at

P18.5 billion compared to the P55.7-billion deficit

incurred during the same period in 2014. This was

a reversal from the surplus recorded in the first

half of the year. Netting out the interest

payments in the expenditures, the primary

surplus amounted to P190.7 billion, P38.5 billion

or 25.0 percent higher than the level recorded in

the same period a year ago.

Revenue collection increased by 15.0 percent to

P1,264.2 billion as of end-July compared to

P1,100.5 billion in the same period in 2014, due

largely to higher revenues from other offices.

Income from other offices rose by 138 percent to

P150.2 billion, reflecting the previously remitted

P60.1 billion Coco Levy fund. Similarly, the Bureau

of Internal Revenue contributed P824.1 billion to

total revenues, representing an increase of

8.0 percent from its year-ago level. The income

generated and collected by the Bureau of the

Treasury and Bureau of Customs also increased

by 15.3 percent and 2.4 percent to P81.2 billion

and P208.7 billion, respectively.

Expenditures in the period January-July 2015

amounted to P1,282.7 billion, 10.9 percent higher

than the expenditures in the same period in 2014.

Excluding interest payments, expenditures went

up by 13.2 percent to P1,073.5 billion.

Meanwhile, interest payment was P1.2 billion

higher compared to its year-ago level, reaching

P209.2 billion as of end-July 2015.

46

IV. EXTERNAL DEVELOPMENTS Softer economic activity in emerging markets

drags down global output growth

Growth in the US accelerates

Growth in the advanced economies has found

greater traction. By contrast, economic activity

across emerging markets weakens further.

The JP Morgan Global All-Industry Output Index

fell to 52.8 in September from 53.9 in August,

as output expansion in both the manufacturing

and services sector eased. Output growth in the

US, euro area, and Japan remained firm, while

activity continued to soften across emerging

markets, particularly in China and Brazil.53

US real GDP increased by 3.9 percent q-o-q in

Q2 2015 after expanding by 0.6 percent in the

previous quarter. On a y-o-y basis, real output

growth was slightly slower at 2.7 percent

compared to 2.9 percent in Q1 2015. The faster

q-o-q expansion during the quarter reflected an

upturn in exports, personal consumption

expenditures, state and local government

spending, and nonresidential fixed investment, as

well as a deceleration in imports.54

Meanwhile, the manufacturing PMI continued to

signal an expansion in manufacturing output even

as it declined to 50.2 in September from 51.1 in

August.55 Business sentiment remained largely

upbeat mainly on expectations of modest to

strong growth across sectors, although concerns

remain over a potential slowdown in exports.

Inflation on a y-o-y basis averaged 0.2 percent in

August, the same rate as in the previous month.

The index for gasoline declined sharply during the

month, while the food index rose as the indices

for eggs and fruits and vegetables increased

notably. Meanwhile, unemployment held steady

at 5.1 percent for the second consecutive month

in September. Total nonfarm payroll employment

increased by 142,000 during the month, with

gains noted in health care and information.

By contrast, the mining sector shed jobs.

53 JP Morgan Global Manufacturing & Services PMI, http://www.markiteconomics.com/ 54 US Bureau of Economic Analysis, “National Income and Product Accounts Gross Domestic Product: Second Quarter

2015 (Third Estimate),” news release, 25 September 2015.

http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp2q15_3rd.pdf 55 Institute for Supply Management, “September 2015 Manufacturing ISM Report On Business”, 1 October 2015,

https://www.instituteforsupplymanagement.org

47

Economic activity in the euro area remains

firm

Indicators point to a modest recovery of

economic activity in Japan

Measures of consumer confidence continued to

indicate a generally optimistic outlook by

households on account of improved economic

prospects, suggesting a favorable outlook for

household spending. The Conference

Board Consumer Confidence Index rose to 103.0

in September from 101.3 in the previous month,56

while the Thomson-Reuters/University of

Michigan Index of Consumer Sentiment eased to

87.2 in September from 91.9 in August.57

Similarly, in the euro area, on a q-o-q basis, real

GDP grew by 0.4 percent in Q2 2015 in Q2 2015,

slightly slower than the 0.5-percent expansion in

the previous quarter. On a y-o-y basis, real GDP

growth was faster at 1.5 percent in Q2 2015

compared to 1.2 percent in Q1 2015.58

The composite PMI for the euro area eased

slightly from 54.3 in August to 53.6 in September,

with new incoming business continuing to grow

at a solid clip.59

The seasonally adjusted unemployment rate was

steady at 11.0 percent in July and August.60

Meanwhile, inflation declined to negative

0.1 percent in September from 0.1 percent in the

previous month.61

The European Commission’s Economic Sentiment

Indicator for the euro area increased to 105.6 in

September from 104.1 in August, as confidence in

industry, services, and retail trade improved.

Consumer confidence was broadly stable.62

In contrast, Japan’s real GDP decreased by

0.3 percent, q-o-q, in Q2 2015 after expanding by

1.1 percent in the previous quarter.63 The q-o-q

contraction was due to the drop in industrial

production, reflecting weaker external demand

owing to the slowdown in overseas economies.

56 “Consumer Confidence Increased Moderately in September.” 29 September 2015. http://www.conference-

board.org/ 57 “Volatile Stock Prices and Persistent Job and Income Growth.” 25 September 2015.

http://press.sca.isr.umich.edu/press/press_release 58 Eurostat news release 152/2015 dated 8 September 2015. 59 Markit Eurozone Composite PMI – final data, http://www.markiteconomics.com/ 60 Eurostat news release 167/2015 dated 30 September 2015. 61 Flash estimate. Eurostat news release 168/2015 dated 30 September 2015. 62 European Commission. http://ec.europa.eu/ 63 Department of National Accounts, Economic and Social Research Institute, Cabinet Office.

http://www.esri.cao.go.jp/

48

Chinese manufacturing activity slows down

further

Growth eases in India

However, real GDP expanded by 0.8 percent y-o-y

in Q2 2015 following the 0.8-percent decline in

Q1 2015.

Meanwhile, the seasonally adjusted

manufacturing PMI declined to 51.0 in September

from 51.7 in August, as production expanded at a

slower pace. While domestic demand remained

firm, new export orders declined mainly on

reduced trade volumes with China.64

Inflation was stable at 0.2 percent y-o-y in August

from the same rate in July. The seasonally

adjusted unemployment rate increased to

3.4 percent in August from 3.3 percent in July.

Meanwhile, China’s real GDP grew by 7.0 percent,

y-o-y, in Q2 2015, the same pace as in the

previous quarter. Agricultural and industrial

production showed steady growth, while

investment in fixed assets slowed down. The

seasonally adjusted manufacturing PMI fell

marginally to 47.2 in September from 47.3 in

August as total new domestic and export orders

continued to decline, indicating softer demand

conditions.65

Inflation rose to 2.0 percent in August from

1.6 percent in the previous month. The prices of

food, particularly fresh vegetables as well as

meat, poultry and related products (especially

pork) drove inflation.

Finally, India’s real GDP increased by 7.0 percent,

y-o-y, in Q2 2015, slower than the 7.5-percent

expansion in the previous quarter.66 Meanwhile,

the composite PMI decreased to 51.5 in

September from 52.6 in August, reflecting a

slower increase in both output in both the

manufacturing and services sectors owing to

weaker domestic demand.

Inflation based on the consumer price index (CPI)

remained at 3.7 percent for the second

consecutive month in August.

64 Nikkei Japan Manufacturing PMI, http://www.markiteconomics.com/ 65 Caixin China General Manufacturing PMI, http://www.markiteconomics.com/ 66 Central Statistics Office of India. http://mospi.nic.in/Mospi_New/Site/home.aspx

49

Several central banks decided to ease their

monetary policy settings to support domestic

economic activity amid a benign inflation

environment

On 15 July 2015, the Bank of Canada reduced its

overnight rate by 25 bps to 0.5 percent from

0.75 percent to provide further stimulus to the

economy, prompted by the downward revision in

Canadian growth figures due to soft export

figures as well as by a below-target inflation

environment.

The Reserve Bank of New Zealand (RBNZ) also cut

its official cash rate by 25 bps each on

23 July 2015 and 9 September 2015 to

2.75 percent to support economic growth and to

steer inflation towards the announced target.

GDP growth, which was projected at around

2 percent in 2015, was below the 3.3-percent

average in 2014. Meanwhile, CPI headline

inflation was at 0.4 percent for Q2 and was

projected to stay on a downward path for the rest

of the year, well below the government of New

Zealand’s annual inflation target of 1-3 percent.

On 26 August 2015, the PBoC reduced the

one-year RMB benchmark loan interest rate and

deposit rate by 25 bps each to 4.60 percent and

1.75 percent, respectively, to reduce borrowing

costs of the corporate sector in a move to

support the domestic economy. The PBoC also

reduced the headline reserve requirement ratio

by 50 bps to ensure sufficient liquidity in the

banking system. The reserve requirement ratios

for targeted sectors such as rural banks and

financing companies were likewise reduced to

support the agricultural sector and small and

medium enterprises as well as boost domestic

consumption.

On 24 September 2015, the Central Bank of the

Republic of China (Taiwan) (CBC) reduced its

discount rate by 12.5 bps to 1.75 percent from

1.875 percent, effective 25 September 2015. This

is the first policy rate adjustment by the CBC since

2011. The CBC lowered its output growth

projections for the second semester of 2015 to

1.01 percent from 2.14 percent amid a

contraction in exports and manufacturing activity.

Meanwhile, CPI inflation remained negative due

mainly to declining prices of energy-related items.

On 29 September 2015, the Reserve Bank of India

lowered its policy repo rate by 50 bps to

50

6.75 percent from 7.25 percent in an effort to

steer headline inflation towards their midpoint

target. As of August 2015, India’s CPI inflation

stood at 3.66 percent in August—the lowest rate

since November 2014 but still within the target of

4.0 percent ± 2 percentage points. Meanwhile,

underlying economic activity has been weak due

largely to weak exports, adverse weather (rainfall

deficiency), and sluggish industrial production

and investment.

V. MONETARY POLICY DEVELOPMENTS

The BSP maintains monetary policy settings

during the quarter

0

1

2

3

4

5

6

7

Jan

20

12

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

13

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

14

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

Oct

No

vD

ec

Jan

20

15

Fe

bM

ar

Ap

rM

ay

Jun

Jul

Au

gS

ep

in p

erc

en

t

Overnight RRP Rate Overnight RP rate SDA rate

BSP Policy Rates

During its monetary policy meetings on 13 August

and 24 September, the BSP decided to maintain

its key policy interest rates at 4.0 percent for the

overnight borrowing or RRP facility and

6.0 percent for the overnight lending or RP

facility. The interest rates on term RRPs, RPs, and

SDAs were also kept steady. The reserve

requirement ratios were left unchanged as well.

The Monetary Board’s (MB) decision was based

on its assessment of the dynamics and risks in the

inflation environment over the policy horizon.

Latest baseline forecasts show that inflation could

fall below the inflation target range of 3 percent

± 1 percentage point for 2015 due to the

successive low inflation outturns in recent

months. Nevertheless, inflation is projected to

return gradually to a path consistent with the

inflation target for 2016-2017. Meanwhile,

inflation expectations remain anchored within the

inflation target band over the policy horizon.

The MB likewise noted that upside risks could

come from the impact of stronger and protracted

El Niño dry weather conditions on food prices and

utility rates as well as pending petitions for power

rate adjustments. In addition, the MB considered

the weakness in the global economy and the

continuing uncertainty in the global financial

markets.

In deciding to keep the BSP’s monetary policy

settings unchanged, the MB observed that the

recent benign inflation outturns have been the

result of favorable supply-side conditions, which

are seen as largely transitory. Over the policy

horizon, inflation is projected to rise gradually

51

and stabilize within the lower half of the inflation

target range. At the same time, the MB noted

that domestic demand conditions remain firm

despite the lower-than-expected second-quarter

output growth, supported by buoyant business

and consumer sentiment and ample domestic

liquidity.

Given these considerations, the MB believes that

the benign inflation outlook and the economy’s

underlying growth momentum provide ample

room to keep monetary policy settings

unchanged at this time. Going forward, the BSP

will continue to monitor emerging price and

output conditions to ensure that the monetary

policy stance stays in line with maintaining price

and financial stability.

In addition, the BSP announced on

30 September 2015 its plan to implement an

interest rate corridor (IRC) system by Q2 2016.

The IRC system will introduce key changes in the

framework for monetary operations designed to

enhance the effectiveness of monetary policy.

The shift to IRC will not represent a change in the

BSP’s monetary policy stance and is not expected

to have a significant impact on the general level

of interest rates. Nevertheless, the IRC system

will help improve the transmission of policy rate

adjustments through the conduct of active

liquidity management operations to effectively

implement the monetary policy stance.

Moreover, the IRC is expected to support the

development of capital markets by providing an

enabling environment for increased money

market transactions.

52

VI. INFLATION OUTLOOK

BSP Inflation Forecasts 67

Latest BSP forecasting exercises indicate

inflation could settle slightly below the low-end

of the 2015 target range and approach the

midpoint of the target range in 2016 – 2017

The latest BSP baseline forecasts show that

inflation could settle slightly below the

government’s target range of 3.0 percent ± 1.0

percentage point for 2015 before approaching

the midpoint of the target range in 2016 – 2017.

The inflation projection for 2015 is lower

compared to the previous quarter’s forecast due

mainly to the lower global crude oil prices as well

as the lower-than-projected Q2 2015 GDP

growth. Meanwhile, the slightly higher inflation

forecast for 2016 reflected a weaker peso and the

possibility of a longer El Niño episode.

Demand Conditions

Domestic growth fundamentals remain intact.

Following the lower-than-expected real GDP

growth in the previous quarter, the domestic

economy accelerated to post a 5.6-percent

expansion in Q2. Growth was driven mainly by

steady increase in private consumption and

marked improvement in investment. This brought

the first semester real output growth to

5.3 percent.

Other real sector indicators support the view of a

firm underlying growth momentum. More than

half of all major manufacturing sectors continued

to operate above 80 percent of their capacity.

The composite PMI has consistently remained

above the 50-point mark at 51.4 in June 2015.

There have also been improvements in labor

market conditions with the unemployment rate

lower compared to a year ago, based on the

results of the July 2015 LFS.

The optimistic outlook for real economic activity

has also been reflected in the results of the BSP

business expectations survey. While business

confidence may have been less buoyant in

Q3 2015, it showed a more bullish outlook for the

next quarter due to expectations of brisker

business during the holiday season and the

67 The inflation forecast path in this report refers to the forecasts presented during the 24 September 2015 Monetary

Policy Meeting. In the discussions, these forecasts are compared to the forecasts presented in the Q2 Inflation Report

(or the forecasts during the 25 June 2015 Monetary Policy Meeting).

53

Favorable supply prospects point to

manageable inflation environment over the

policy horizon

generally favorable macroeconomic conditions.

Meanwhile, in anticipation of more jobs and

higher income, consumer confidence rose in Q3

2015 as indicated by the results of the third

quarter BSP Consumer Expectations Survey. For

the fourth quarter, consumer expectations

likewise point to a more favorable outlook as

consumer confidence turned robust due to

expectations of higher family income, increased

employment opportunities, and brisker

businesses.

Supply Conditions

Commodity prices are likely to remain subdued,

reflecting ample supply conditions. Food inflation

is likely to remain benign over the near term

given prospects of good harvest of key

agricultural commodities. However, a

strengthening of the ongoing El Niño weather

disturbance could affect production, potentially

translating to higher food prices. Similarly,

international oil prices are likely to remain below

2014 levels as suggested by futures prices of oil

and forecasts by multilateral agencies with

modest gains over the medium term.

Global agricultural prices are expected to decline

in 2015 and remain at moderate levels over the

medium term. Forecasts by the IMF and the

World Bank suggest a continued decline in

benchmark prices of key grains (wheat, maize,

and rice) for 2015 and 2016. Despite the ongoing

El Niño weather phenomenon, ample supply

conditions should keep food price pressures at

bay.

In the domestic front, the 0.3-percent contraction

in agriculture output in Q2 was driven largely by

the 2.8-percent and 15.6-percent decline in palay

and corn production, respectively. However,

Q3 palay and corn production could strengthen

by 11.7 percent and 4.3 percent, respectively,

based on farmers’ planting intentions.

The anticipated growth in palay and corn output

in the third quarter could be traced to the likely

increase in harvest areas, attributable to

government interventions, such as the provision

of high-yielding seeds and the on-going

54

rehabilitation of water supplies.68

The intensifying El Niño levels, which could last

until the first half of 2016, could lead to moderate

to severe drought conditions during the said

period. The latest assessment of the Philippine

Atmospheric, Geophysical and Astronomical

Services Administration (PAGASA) showed that

slightly warmer average temperature and

significant reduction in rainfall could result in

moderate to severe drought conditions over the

forecast horizon. The weather bureau noted that

46 provinces are likely to experience drought,

14 provinces are likely to experience dry spell,

and nine provinces are likely to experience dry

conditions by December 2015. By February 2016,

provinces that could experience drought could

increase to 65, while those that could experience

dry spell and dry conditions will fall to one and

two provinces, respectively. Stronger El Niño

conditions could provide upside pressures on the

prices of agricultural commodities and utilities.

To help mitigate the impact of El Niño on

agricultural production, the Department of

Agriculture (DA) has activated its National El Niño

Task Force to coordinate the various response

measures. These programs include cloud seeding

operations, installation of alterative irrigation

systems, crop rotation, the use of hybrid crop

varieties, and other government assistance for

farmers.

In the oil market, international oil prices have

decreased compared to the previous quarter’s

level. The decline in crude oil prices could be

traced to a combination of ample supply, sluggish

demand, and a strong dollar.

Looking ahead, futures prices of oil as well as

forecasts by multilateral agencies suggest that oil

prices are likely to remain below 2014 levels.

Forecast by the EIA suggests that Brent crude oil

price could fall to US$ 54.07 per barrel in 2015 to

increase slightly to US$ 58.57 per barrel in 2016.

Similarly, projections by the IMF and the World

Bank show that crude oil prices could settle

below the 2014 levels. There is, however,

substantial uncertainty in its outlook with

68 PSA, Rice and Corn Situation Outlook Update, June 2015, available online at http://www.bas.gov.ph

55

Output gap estimate widens

concerns over the re-entry of Iran in the export

market, the strength of oil consumption growth,

and the responsiveness of non-OPEC production

to the current low prices. Nonetheless, the lower

prices of oil could imply a decline in input costs as

well as reduced demand for biofuels.69,70

The balance of demand and supply conditions as

captured by the output gap (or the difference

between actual and potential output), provides

an indication of potential inflationary pressures in

the near term. 71

Given the latest GDP data, preliminary estimates

by the BSP show a higher positive output gap in

Q2 2015 relative to the previous quarter. The

output gap widened as the q-o-q expansion in

actual output outpaced estimated potential

output growth during the review period.72

Key assumptions used to generate the BSP’s

inflation forecasts

The BSP's baseline inflation forecasts generated

from the BSP’s single equation model (SEM) and

the multi-equation model (MEM) are based on

the following assumptions:

1) BSP’s overnight RRP rate at 4.00 percent

from October 2015 to December 2017;

2) BSP’s reserve requirement at

20.0 percent from October 2015 to

December 2017;

3) NG fiscal deficits for 2015 to 2017, which

are consistent with the DBCC-approved

estimates;

4) Dubai crude oil price assumptions, the

trend of which is consistent with the

trend of the futures prices of oil in the

international market;

5) Increase in nominal wage of 5.6 percent

in April 2016 and April 2017;

69 IMF, Commodity Price Outlook and Risks, 12 August 2015, available online at http://www.imf.org 70 World Bank, Commodity Markets Outlook, July 2015, available online at http://www.worldbank.org 71 Inflation tends to rise (fall) when demand for goods and services exert pressure on the economy’s ability to produce

goods and services, i.e., when the output gap is positive (negative). 72 Based on the seasonally-adjusted GDP growth

56

Risks to the Inflation Outlook

Latest projected inflation path is lower for

2015, but slightly higher for 2016

Upside risks could come from the impact of

stronger and protracted El Niño dry weather

conditions on food prices and utility rates as

well as pending petitions for power rate

adjustments while the weakness in the global

economy could provide downside risk to

inflation

6) Real GDP growth is endogenously

determined in the BSP’s MEM; and

7) Foreign exchange rate is endogenously

determined in the BSP’s MEM through

the purchasing power parity and interest

rate parity relationships.

The risks to the inflation outlook may be

presented graphically through a fan chart. The fan

chart depicts the probability of different inflation

outcomes based on the central projection

(corresponding to the baseline forecast of the

BSP) and the risks surrounding the inflation

outlook.

Compared to the previous quarter, the latest fan

chart presents a downward shift in the inflation

projections for 2015 and a slightly higher path for

2016. The reduction in the inflation projections

for 2015 could be attributed mainly to the lower

global crude oil prices as well as the

lower-than-projected Q2 2015 GDP growth.

Meanwhile, inflation forecasts for 2016 increased

due to the projected depreciation of the peso

along with the impact of a protracted El Niño

episode.

The latest fan chart also shows that there are

uncertainties further out as shown by the

widening bands of the chart over time.

The BSP’s review of current price trends suggests

that there are risks surrounding the inflation

outlook. This assessment is captured in the latest

fan chart by the projected bands above and

below the central projection.

Pending petitions for power rate adjustments and

the impact of stronger and protracted El Niño dry

weather conditions on food prices and utility

rates represent upside risks to inflation. The

ongoing weakness in the global economy could

provide downside risk to inflation.

57

The occurrence of stronger-than-expected El Niño

weather disturbance could adversely impact

domestic food supply. The said weather condition

is expected to manifest as stronger-than-usual

typhoons, which could impact negatively the

planting season, ultimately posing a risk to food

prices. In addition, drier weather conditions as a

result of the El Niño weather phenomenon could

adversely affect hydro-powered generation plants

and raise the cost of electricity and water.

The pending petition of Meralco on the

December 2013 rate adjustment, which is still

under the temporary restraining order of the

Supreme Court, also continues to pose an upside

risk to the inflation outlook.

Meanwhile, the possibility of a slower global

economic growth could imply weaker demand-

related price pressures as well as further

uncertainties in the global oil market. Financial

market turbulence, particularly due to surprises in

the US Federal Reserve policy actions, re-

emergence of weakness in the euro area, dollar

appreciation, geopolitical tensions in the Middle

East, and weaker-than-expected performance of

China represent downside risks to the global

growth prospects.

58

The fan chart shows the probability of various outcomes for inflation over the forecast horizon. The

darkest band depicts the central projection, which corresponds to the BSP’s baseline inflation forecast. It

covers 25 percent of the probability distribution. Each successive pair of bands is drawn to cover a

further 25 percent of probability, until 75 percent of the probability distribution is covered. Lastly, the

lightest band covers the lower and upper 90 percent of the probability distribution. The bands widen

(i.e., “fan out”) as the time frame is extended, indicating increasing uncertainty about outcomes. The

band in wire mesh depicts the inflation profile in the previous report.

The shaded area, which measures the range of uncertainty, is based on the forecast errors from the past

years. In greater detail, it can be enhanced by adjusting the level of skewness of the downside and

upside shocks that could affect the inflationary process over the next two years in order to change the

balance of the probability area lying above or below the central projection.

59

VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE

The average headline inflation is projected to

be within the inflation target range over the

2016-2017 period

Inflation expectations reflected in forecast

surveys of private sector economists remain

well-anchored

Headline inflation and other price indicators

ease further

The latest baseline inflation forecasts have shifted

downward to average slightly below the target

range for 2015 but continue to move close to the

3.0 percent ± 1.0 ppt inflation target range for

2016-2017. The reduction in the forecasted

inflation path for 2015 could be attributed mainly

to lower global crude oil prices and

lower-than-expected Q2 2015 GDP growth.

Meanwhile, forecasted inflation is higher in

2016-2017 mainly due to a weaker peso and the

possibility of a longer El Niño episode.

Risks to the inflation outlook continue to be

broadly balanced. Potential adjustments in

electricity rates given pending petitions and the

impact of stronger-than-expected El Niño

conditions are seen as the key upside risks to

inflation. Slower global economic activity poses

downside risk.

Inflation expectations based on surveys of private

sector economists have remained within the

inflation target range over the policy horizon

while falling below the lower bound of the target

range for 2015. Results of the September 2015

BSP’s survey of private sector economists yielded

lower mean inflation forecasts at 1.7 percent for

2015 (from 2.3 percent in June), 2.7 percent for

2016 (from 3.1 percent), and 2.9 percent for 2017

(from 3.0 percent). Results of the September

2015 Consensus Economics inflation forecast

survey for the country also showed lower mean

inflation forecasts at 1.9 percent for 2015

(from 2.4 percent in June) and 3.2 percent for

2016 (from 3.5 percent).

In Q3 2015, the headline inflation slowed down to

0.6 percent from 1.7 percent in the previous

quarter. This brought the year-to-date average

inflation rate to 1.6 percent, which is below the

low end of the inflation target range of

3.0 percent ± 1.0 ppt for 2015. Similarly, core

inflation along with the three alternative

measures of core inflation estimated by the BSP

was lower in Q3 2015 relative to the previous

quarter. The lower inflation readings were traced

mainly to the deceleration in food and energy

inflation.

60

Domestic demand conditions remain firm

The global economy is expanding at a

moderate pace but recent market volatility has

created broader uncertainty

The Q2 2015 GDP data showed some recovery in

growth momentum, with the economy expanding

year-on-year by 5.6 percent. The second-quarter

performance was supported by growth in all

expenditure items, notably household

consumption, capital formation, and government

spending. However, while domestic sources of

growth continued to improve, weak global

demand, which affected the performance of

trade-in-goods sector, weighed on overall GDP

growth in Q2 2015.

Overall prospects for the domestic economy

remain favorable for the rest of the year.

Private domestic demand is expected to continue

to support the economy, aided by low inflation.

Continued and broad-based expansion in bank

lending is expected to continue to underpin

domestic economic activity. In addition, higher

capital formation should contribute to economic

growth as investments in durable equipment and

construction continued to expand. Stepped-up

fiscal spending in the third quarter should help

sustain faster growth momentum. While the

results of the most recent Business Expectations

Survey showed less optimistic business sentiment

for Q3 2015, business outlook appears to be more

upbeat for the fourth quarter. Meanwhile,

consumer sentiment has remained negative for

Q3 2015, albeit less so than in the previous

survey. Consumer confidence, however, is seen to

turn positive for the next quarter and is expected

to remain broadly steady over the next

12 months.

Recovering growth momentum in the US as well

as lower level of oil prices and accommodative

global financial conditions continue to support

global economic conditions. However, the growth

slowdown in China and soft conditions in the rest

of East Asia have clouded the outlook for the

global economy. Financial markets have been

considerably more volatile of late, associated with

developments in China and uncertainties arising

from the expected start of monetary policy

tightening in the US.

61

Current monetary policy settings remain in

view of the emerging outlook for inflation and

demand conditions

Inflation is projected to remain consistent with

the target while inflation expectations remain

well-contained over the policy horizon.

Deflationary risks are still seen to be minimal,

given firm demand-side conditions, and that

favorable supply-side factors continue to largely

underpin benign inflation readings.

At the same time, the BSP has some room to keep

monetary policy levers steady as most of the

newly available information continue to indicate

broad buoyancy in domestic demand. Thus, the

economy does not need further monetary

stimulus at the moment to drive domestic

consumption. Credit activity is recording

sustained growth, as liquidity growth continues to

keep pace with the overall requirements of the

economy. Notwithstanding the uncertainty in the

external environment, prevailing monetary policy

settings are expected to support aggregate

demand by providing insurance against global

economic headwinds. The current stance of

monetary policy is also deemed appropriately

aligned in terms of minimizing the risk of asset

price bubbles and maintaining financial stability.

Finally, it would be prudent to maintain present

monetary policy settings for the time being to

better gauge the impact of the expected US Fed

normalization. Over the period ahead, emerging

market economies (EMEs) could face the

challenge of potential capital flow reversals and

renewed volatility in financial markets. Keeping

policy settings unchanged will allow authorities to

consider further information on economic and

financial conditions that will become available the

period ahead, and provide flexibility in

responding to future monetary policy challenges

resulting from the critical early stages of policy

normalization in the US.

Going forward, the BSP will continue to monitor

domestic and external developments to ensure

that the monetary policy stance remains

consistent with its price and financial stability

objectives.

62

SUMMARY OF MONETARY POLICY DECISIONS

EFFECTIVITY DATE LEVELS (IN %)

MONETARY POLICY DECISION RRP OVERNIGHT RP OVERNIGHT

2008 JAN 31 5.00 7.00 The Monetary Board (MB) decided to reduce

by 25 basis points (bps) the BSP’s key policy

interest rates to 5 percent for the overnight

borrowing or reverse repurchase (RRP) facility

and 7 percent for the overnight lending or

repurchase (RP) facility. The interest rates on

term RRPs, RPs, and special deposit accounts

(SDAs) were also reduced accordingly. In its

assessment of macroeconomic conditions, the

MB noted that the latest inflation forecasts

indicated that inflation would fall within the

4.0 percent ± 1 percentage point target range

in 2008 and the 3.5 ± 1 percentage point target

range in 2009.

MAR 13 5.00 7.00 The MB decided to keep the BSP’s key policy

interest rates at 5 percent for the overnight

borrowing or RRP facility and 7 percent for the

overnight lending or RP facility. The MB also

decided to implement immediately the

following refinements in the SDA facility:

(1) the closure of existing windows for the

two-, three-, and six-month tenors; and (2) the

reduction of the interest rates on the

remaining tenors. The interest rates on term

RRPs and RPs were also left unchanged.

APR 24 5.00 7.00 The MB kept the BSP’s key policy interest rates

at 5.0 percent for the overnight borrowing or

RRP facility and 7.0 percent for the overnight

lending or RP facility. The interest rates on

term RRPs and RPs were also left unchanged.

JUN 5 5.25 7.25 The MB decided to increase by 25 bps the BSP’s

key policy interest rates to 5.25 percent for the

RRP facility and 7.25 percent for RP facility as

emerging baseline forecasts indicate a likely

breach of the inflation target for 2008 along

with indications that supply-driven pressures

are beginning to feed into demand. Given the

early evidence of second-round effects, the MB

recognized the need to act promptly to rein in

inflationary expectations. The interest rates on

term RRPs, RPs, and SDAs were also increased

accordingly.

JUL 17 5.75 7.75 The MB increased by 50 bps the BSP’s key

policy interest rates to 5.75 percent for the



facility. The interest rates on term RRPs, RPs,

and SDAs were also increased accordingly.

AUG 28 6.00 8.00 The MB increased by 25 bps the BSP’s key

policy interest rates to 6.0 percent for the

overnight borrowing or reverse repurchase

(RRP) facility and 8.0 percent for the overnight

lending or repurchase (RP) facility. The interest

rates on term RRPs, RPs, and SDAs were also

increased accordingly.

63



2008 OCT 6 6.00 8.00 The MB kept the BSP’s key policy interest rates

unchanged at 6.0 percent for RRP facility and

8.0 percent for the RP facility. The interest

rates on term RRPs, RPs, and SDAs were also

left unchanged.

NOV 6 6.00 8.00 The MB decided to keep the BSP’s key policy

interest rates steady at 6 percent for the


8 percent for the overnight lending or RP


and SDAs were also left unchanged.

DEC 18 5.50 7.50 The MB decided to reduce the BSP’s key policy

interest rates by 50 bps to 5.5 percent for the




and SDAs were also adjusted accordingly.

Latest baseline forecasts showed a decelerating

inflation path over the policy horizon, with

inflation falling within target by 2010. This

outlook is supported by the downward shift in

the balance of risks, following the easing of

commodity prices, the moderation in inflation

expectations, and the expected slowdown in

economic activity.

2009 JAN 29 5.00 7.00 The MB decided to reduce the BSP’s key policy

interest rates by another 50 bps to 5 percent

for the overnight borrowing or RRP facility and



and SDAs were also adjusted accordingly.

Latest baseline forecasts showed a decelerating

inflation path over the policy horizon, with

inflation falling within target by 2010. The MB

based its decision on the latest inflation

outlook which shows inflation falling within the

target range for 2009 and 2010. The Board

noted that the balance of risks to inflation is

tilted to the downside due to the softening

prices of commodities, the slowdown in core

inflation, significantly lower inflation

expectations, and moderating demand.

MAR 5 4.75 6.75 The MB decided to reduce the BSP’s key policy





and SDAs were also reduced accordingly. Given

possible upside risks to inflation, notably the

volatility in oil prices and in exchange rates,

increases in utility rates, and potential price

pressures coming from some agricultural

commodities, the MB decided that a more

measured adjustment of policy rates was

needed.

64



2008 APR 16 4.50 6.50 The MB reduced key policy rates by another

25 bps to 4.5 percent for the overnight

borrowing or RRP facility and 6.5 percent for

the overnight lending or RP facility, effective

immediately. This rate cut brings the

cumulative reduction in the BSP’s key policy

rates to 150 bps since December last year. The

current RRP rate is the lowest since 15 May

1992. Meanwhile, the interest rates on term

RRPs, RPs, and SDAs were also reduced

accordingly. In its assessment of

macroeconomic conditions, the MB noted that

the latest baseline inflation forecasts indicated

a lower inflation path over the policy horizon,

with average inflation expected to settle within

the target ranges in 2009 and 2010. In addition,

the MB considered that the risks to inflation

are skewed to the downside given expectations

of weaker global and domestic demand

conditions and a low probability of a significant

near-term recovery in commodity prices.

2009 MAY 28 4.25 6.25 The MB decided to reduce the BSP’s key policy

interest rates by another 25 bps to

4.25 percent for the overnight borrowing or

RRP facility and 6.25 percent for the overnight


term RRPs, RPs, and SDAs were also reduced

accordingly. Baseline forecasts indicated a

lower inflation path over the policy horizon,

with average inflation expected to settle within

the target ranges in 2009 and 2010. In addition,

the Monetary Board considered that, on

balance, the risks to inflation are skewed to the

downside given expectations of weaker global

and domestic demand conditions and a low

probability of a significant near-term recovery

in commodity prices.

JUL 9 4.00 6.00 The MB decided to reduce the BSP's key policy

interest rates by 25 bps to 4 percent for the



facility, effective immediately. The interest

rates on term RRPs, RPs, and SDAs were

reduced accordingly. This is the sixth time since

December 2008 that the BSP has cut its policy

interest rates.

AUG 20

OCT 1

NOV 5

DEC 17

4.00

6.00

The MB kept key policy rates unchanged at

4 percent for the RRP facility and 6 percent for

the overnight lending RP facility. The decision

to maintain the monetary policy stance comes

after a series of policy rate cuts since

December 2008 totaling 200 bps and other

liquidity enhancing measures.

65



2010

JAN 28

MAR 11

APR 22

JUN 3

JUL 15

AUG 26

OCT 7

NOV 18

DEC 29

4.00 6.00 The MB decided to keep the BSP's key policy

interest rates steady at 4 percent for the RRP

facility and 6 percent for the RP facility. The

interest rates on term RRPs, RPs, and SDAs

were also left unchanged.

2011 FEB 10 4.00 6.00 The MB decided to keep the BSP’s key policy





and SDAs were also left unchanged.

MAR 24 4.25 6.25 The MB decided to increase by 25 bps the BSP’s

key policy interest rates to 4.25 percent for the

overnight borrowing or RRP facility and 6.25

percent for the overnight lending or RP facility.

The interest rates on term RRPs, RPs, and SDAs

were also raised accordingly. The MB’s decision

was based on signs of stronger and broadening

inflation pressures as well as a further upward

shift in the balance of inflation risks.

International food and oil prices have

continued to escalate due to the combination

of sustained strong global demand and supply

disruptions and constraints.

MAY 5 4.50 6.50 The MB decided to increase the BSP’s key

policy interest rates by another 25 bps to

4.5 percent for the overnight borrowing or RRP

facility and 6.5 percent for the overnight


term RRPs, RPs, and SDAs were also raised

accordingly. Baseline inflation forecasts

continue to suggest that the 3-5 percent

inflation target for 2011 remains at risk, mainly

as a result of expected pressures from oil

prices.

JUN 16 4.50 6.50 The MB decided to keep policy rates steady at

4.5 percent for the overnight borrowing or RRP

facility and 6.5 percent for the overnight

lending or RP facility. At the same time, the

Board decided to raise the reserve requirement

on deposits and deposit substitutes of all banks

and non-banks with quasi-banking functions by

one percentage point effective on Friday,

24 June 2011. The MB's decision to raise the

reserve requirement is a preemptive move to

counter any additional inflationary pressures

from excess liquidity.

66



2011 JUL 28 4.50 6.50 The MB maintained the BSP's key policy

interest rates at 4.5 percent for the overnight

borrowing or RRP facility and 6.5 percent for

the overnight lending or RP facility. At the same

time, the Board increased anew the reserve

requirement on deposits and deposit

substitutes of all banks and non-banks with

quasi-banking functions by one percentage

point effective on 5 August 2011. The MB's

decision to raise the reserve requirement anew

is a forward-looking move to better manage

liquidity.

SEP 8

OCT 20

DEC 1

4.50

6.50

The MB decided to keep the overnight policy

rates steady. At the same time, the reserve

requirement ratios were kept unchanged.

2012 JAN 19

4.25 6.25 The MB decided to reduce the BSP's key policy





and SDAs were also reduced accordingly The

MB's decision is based on its assessment that

the inflation outlook remains comfortably

within the target range, with expectations well-

anchored and as such, allowed some scope for

a reduction in policy rates to help boost

economic activity and support market

confidence.

MAR 1 4.00 6.00 The MB decided to reduce the BSP's key policy

interest rates by another 25 bps to 4.0 percent

for the overnight borrowing or RRP facility and



and SDAs were also reduced accordingly. The

MB is of the view that the benign inflation

outlook has allowed further scope for a

measured reduction in policy rates to support

economic activity and reinforce confidence.

APR 19 4.00 6.00 The MB decided to keep the BSP’s key policy


overnight borrowing or RRP facility and 6



were also left unchanged.

2012 JUN 14 4.00 6.00 The MB decided to keep the BSP’s key policy





and SDAs were also left unchanged. The MB’s

decision was based on its assessment that the

inflation environment remains manageable.

Baseline forecasts continue to track the lower

half of the 3-5 percent target range for 2012

and 2013, while inflation expectations remain

firmly anchored. At the same time, domestic

macroeconomic readings have improved

significantly in Q1 2012.

67



2012 JUL 26 3.75 5.75 The MB decided to reduce the BSP’s key policy





were also reduced accordingly. This is the third

time in 2012 that the BSP has cut its policy

rates. The MB’s decision was based on its

assessment that price pressures have been

receding, with risks to the inflation outlook

slightly skewed to the downside. Baseline

forecasts indicate that inflation is likely to

settle within the lower half of the 3-5 percent

target for 2012 and 2013, as pressures on

global commodity prices are seen to continue

to abate amid weaker global growth prospects.

At the same time, the MB is of the view that

prospects for global economic activity are likely

to remain weak.

SEP 13 3.75 5.75 The MB decided to keep the BSP’s key policy

interest rates steady at 3.75 percent for the




were also left unchanged. The MB’s decision

was based on its assessment that the inflation

environment remains benign, with the risks to

the inflation outlook appearing to be broadly

balanced.

OCT 25 3.50 5.50 The MB decided to reduce the BSP’s key policy





were also reduced accordingly. This is the

fourth time in 2012 that the BSP has cut its

policy rates. The MB’s decision was based on its

assessment that the inflation environment

continued to be benign with latest baseline

forecasts indicating that the future inflation

path will remain within target for 2012-2014. A

rate cut would also be consistent with a

symmetric response to the risk of below-target

inflation.

2012 DEC 13 3.50 5.50 The MB decided to keep the BSP’s key policy





and SDAs were also left unchanged. The MB’s

decision was based on its assessment that

current monetary settings remained

appropriate, as the cumulative 100-basis-point

reduction in policy rates in 2012 continued to

work its way through the economy.

68



2013 JAN 24 3.50 5.50 The MB decided to keep the BSP’s key policy




facility. The interest rates on term RRPs and

RPs were also maintained accordingly. The

reserve requirement ratios were kept steady as

well. At the same time, the MB decided to set

the interest rates on the SDA facility at

3.00 percent regardless of tenor, effective

immediately, consistent with the BSP’s

continuing efforts to fine-tune the operation of

its monetary policy tools.





The interest rate on the RRP was also set at

3.50 percent regardless of tenor. Following its

previous decision to rationalize the SDA facility

in January 2013, the MB further reduced the

interest rates on the SDA facility by 50 bps to

2.50 percent across all tenors effective

immediately.

APR 25 3.50 5.50 The MB decided to keep the BSP’s key policy




The interest rate on the RRP was also set at

3.50 percent regardless of tenor. Meanwhile,

the SDA rate was further reduced by 50 basis

points to 2.0 percent across all tenors.

JUN 13 3.50 5.50 The MB decided to keep the BSP’s key policy





and SDA were also maintained.

JUL 25 3.50 5.50 The MB decided to keep the BSP’s key policy






SEP 12 3.50 5.50 The MB decided to keep the BSP’s key policy




The interest rates on term RRPs, RPs, and SDA

were also maintained.

OCT 24 3.50 5.50 The MB decided to keep the BSP’s key policy






69



2013 DEC 12 3.50 5.50 The MB decided to keep the BSP’s key policy






2014 FEB 6 3.50 5.50 The MB decided to keep the BSP’s key policy











were also maintained. Meanwhile, the MB

decided to increase the reserve requirement by

one percentage point effective on 11 April

2014.

MAY 8 3.50 5.50 The MB decided to keep the BSP's key policy





were also maintained. Meanwhile, the MB

decided to increase the reserve requirements

for U/KBs and TBs by a further one percentage

point effective on 30 May 2014.

JUN 19 3.50 5.50 The MB decided to keep the BSP's key policy




The interest rates on term RRPs and RPs were

also maintained. The reserve requirement

ratios were left unchanged as well. Meanwhile,

the MB decided to raise the interest rate on the

SDA facility by 25 basis points from 2.0 percent

to 2.25 percent across all tenors effective

immediately.

JUL 31 3.75 5.75 The MB decided to increase the BSP's key

policy rates by 25 bps to 3.75 percent for the



The interest rates on term RRPs and RPs were

also raised accordingly. The rate on special

deposit accounts (SDA) was left unchanged.

Meanwhile, the reserve requirement ratios

were also kept steady.

SEP 11 4.00 6.00 The MB decided to increase the BSP's key

policy rates by 25 bps to 4.0 percent for the




were also raised accordingly. Meanwhile, the

reserve requirement ratios were left

unchanged.

70



2014 OCT 23 4.00 6.00 The MB decided to maintain the BSP’s key

policy interest rates at 4.0 percent for the




rates on term RRPs, RPs, and special deposit

accounts were also kept steady. The reserve

requirement ratios were left unchanged as

well.

DEC 11 4.00 6.00 The MB decided to maintain the BSP’s key








well.

2015 FEB 12

MAR 26

MAY 14

JUN 25

AUG 13

SEP 24

4.00 6.00 The MB decided to maintain the BSP’s key








well.

The BSP Inflation Report is published every quarter by the Bangko

Sentral ng Pilipinas. The report is available as a complete document in

pdf format, together with other general information about inflation

targeting and the monetary policy of the BSP, on the BSP’s website:

www.bsp.gov.ph/monetary/inflation.asp

If you wish to receive an electronic copy of the latest BSP Inflation

Report, please send an e-mail to [email protected].

The BSP also welcomes feedback from readers on the contents of the

Inflation Report as well as suggestions on how to improve the

presentation. Please send comments and suggestions to the following

addresses:

By post: BSP Inflation Report

c/o Department of Economic Research

Bangko Sentral ng Pilipinas

A. Mabini Street, Malate, Manila

Philippines 1004

By e-mail: [email protected]

mpss form no. 03-012 * version 0 * 06 march 2015 file/ref ... · headline inflation continued its...

Documents