II.

MARKET CONDITIONS

A. GDP

2015 A 2016 F 2017 F

5.6% 6.3% 4.5%

The Philippines economy grew by 5.2% in the first quarter of 2015 – the lowest in

3 years – as government spending stays weak and exports decline. It is lower than the

5.6% growth of the gross domestic product in the same period last year, and down from

6.6% in the fourth quarter of 2014. It is the lowest since the 3.8% growth recorded in

2011. While growth in the private sector remains robust, the slower-than-programmed

pace of public spending, particularly the decline in public construction, has slowed down

the overall growth of the economy. Drop in public construction spending was due to

delays in some projects of government agencies. The 4.8% growth in public

consumption in the first quarter is "much faster" than in the same period last year driven

by the 19.2% increase in disbursements for maintenance and other operating expenses

primarily on social protection programs, bottom-up budgeting projects, and the country’s

hosting of the Asia-Pacific Economic Cooperation meetings. Although the second

quarter growth is higher than the first quarter GDP performance of 5%, still lags behind

the government's and economists' forecasts. The growth was mainly driven by the

services sector, which accelerated to 6.2% from 5.9%. This makes the Philippines still

an attractive market with strong economic fundamentals. The GDP growth reflects

significant improvement in government spending, especially in public construction and

indicates the sustained strong performance of the private sector. The rebound in
government spending is expected to spur growth through the rest of this year and in

2016. In July, growth in public expenditure excluding interest accelerated to 31% year

on year. Election-related spending will also support domestic demand through May

2016, when elections will be held. Private consumption and investment are expected to

maintain solid growth in 2016 and the assumption that global oil prices will increase only

slightly in this year and that global food prices will be stable. Economic growth could

further decelerate this year through 2017. There are some uncertainties attached to any

change in power, including in the Philippines even if the country is having its national

election in May next year. The global debt watcher had said in May that it could upgrade

the country’s credit score anew if reforms lead to an improved investment environment

and increased growth potential, or if ongoing changes in governance and the policy

environment lead us to a better assessment of institutional and governance

effectiveness.

B. INFLATION

2015 A 2016 F 2017 F

0.6% 2.5% 4.1%

Philippines annual inflation rate eased to 0.6% in August of 2015 from 0.8% in

July and below market consensus. It is the lowest figure in more than two decades as

cost of housing, utilities and transport declined further and prices of food and non-

alcoholic beverages slowed. The approved medium-term inflation target of 3.0% for

2017 is based on the recent assessment of current and prospective inflation trends

which indicates a manageable outlook over the medium term. Structural changes in
inflation dynamics and improvements in the economy’s productive capacity support a

low inflation environment that is consistent with the economy’s growth trajectory.

Inflation has been within target in the last six years and is expected to remain so over

the medium term. Upward pressure on inflation could come from drought induced by El

Niño if it damages crops and reduces hydropower supplies. Merchandise exports fell by

12.9% in US dollar terms in the first half and imports fell by 8.3%. The trade deficit

widened but growth in remittances and services exports, mainly from business process

outsourcing and tourism, kept the current account in surplus. Moreover, the BSP’s

credible commitment to price stability has kept inflation expectations well anchored to

the target. Going forward, the BSP will continue to monitor price developments to

ensure that the monetary stance remains appropriate in keeping inflation within target,

thus safeguarding price stability.

C. INTEREST RATES

2015 A 2016 F 2017 F

4% 4% 4%

Philippines central bank kept its overnight borrowing rate on hold at 4% for the

seventh consecutive time on August 13th, as widely expected. Policymakers expect the

inflation rate to remain within target over the rest of the policy horizon.

Latest baseline forecasts show that inflation could settle slightly below the target range

for 2015 but is likely to remain within the target range of 3%. Inflation expectations also

continue to be anchored within the inflation target band. Meanwhile, the Monetary

Board noted the upside risks coming from pending petitions for power rate adjustments
and the impact of stronger-than-expected El Niño dry weather conditions on food prices

and utility rates. On the other hand, modest rise in food and commodity prices, and

slower global economic activity could pose downside risks to inflation. In deciding to

keep the BSP’s monetary policy settings unchanged, the Monetary Board 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 and stabilize within the lower half of the inflation target range.

The BSP will continue to keep a watchful eye on domestic and external conditions to

ensure that the monetary policy stance stays in line with maintaining price and financial

stability.

D. REMITTANCES

2015 A 2016 F 2017 F

2,077,833.30 2,005,215 2,649,942

Remittances in Philippines decreased to 2,077,833.30 USD Thousand in July

from 2,173,543.40 USD Thousand in June of 2015. In June, cash remittances from

Overseas Filipino Workers increased 5.8% over the same month last year, reaching

USD 2.2 billion. The overall trend improved slightly as cash remittances totaled USD

25.0 billion in the 12 months up to June, coming in slightly above May’s USD 24.9 billion

and marking yet another record high. The increase represented a 5.7% expansion over

the same period last year, which met May’s result. Remittances, which accounted for

approximately 8.5% of GDP in 2014, are an important source of income for many

Filipino families and thus a key driver of private consumption. According to the Central
Bank, cash remittances mainly came from the United States, Saudi Arabia and the

United Arab Emirates. Factors that powered private consumption in 2014 are growth in

employment, modest inflation, and higher inflows of remittances that are projected to

continue through the forecast period. Election-related spending will provide a boost to

domestic demand through May 2016, when national and subnational elections are held.