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Factory activity in the Philippines expanded at a steady pace in August amid a “modest” improvement in operating conditions, with firms ramping up production, S&P Global said.

The S&P Global Philippines Manufacturing Purchasing Managers’ Index (PMI) stood at 51.2 in August, the same reading in July.

A PMI reading above 50 denotes improved operating conditions from the previous month.

“The Filipino manufacturing sector showed sustained and modest gains midway through the third quarter. Growth in output and new orders accelerated on the month, thereby highlighting improving demand trends,” S&P Global Market Intelligence economist Maryam Baluch said in a report.

“However, employment fell, and buying activity cooled, suggesting that manufacturers remain cautious about growth prospects,” she added.

Based on the latest PMI data, the Philippines had the second-highest reading out of five Southeast Asian countries, only behind Thailand (52). Meanwhile, Malaysia (49.7), Indonesia (48.9), and Myanmar (43.4) all showed contractions.

As of publishing time, there were no data on Vietnam and Singapore.

The headline PMI measures manufacturing conditions through the weighted average of five indices — new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).

For the Philippines, S&P Global data showed that overall growth in new orders was the strongest in three months.

“However, demand from foreign customers faltered in August, as new exports sales fell for the first time since the start of the year. The data thus suggesting that demand was domestically driven,” it said.

The pace of production accelerated in August from the four-month low in July.

S&P Global noted growth in business requirements prompted manufacturers to increase purchasing activity in August, although the rate of increase was the slowest in five months.

“The slowdown in buying activity was reflected in a softer buildup of pre-production inventories held at manufacturers. The upturn was slight and the weakest in the current six-month period of accumulation,” it said.

Post-production inventories dropped for the first time since February after five straight months of stock building, it added.

Philippine manufacturers were hesitant to hire new staff in August, reversing the uptick seen in July.

“Contractions have now been noted in three of the past four survey periods. Moreover, the tenacity of goods producers to complete workloads efficiently, despite a contraction in workforce numbers, highlighted sufficient capacity,” S&P Global said.

Inflationary pressures eased in August as input costs rose moderately, it said.

“Selling prices for goods were raised at a softer and only a slight pace, indicating that firms are in part absorbing costs in a bid to boost sales and remain competitive,” it said.

There were still delays in input from suppliers, with vendor performance deteriorating for the fourth month in a row. However, S&P Global said the recent delays were the “least pronounced” since May.

“The (manufacturing) slowdown could partly be attributed to the ghost month, inclement weather that led to some work/production disruptions,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

Looking ahead, S&P Global said that Philippine manufacturers expect output to expand further in the next 12 months, with its PMI reading to likely stay well above the 50 mark.

However, the latest data showed a dip in the firms’ level of confidence.

“Confidence levels also waned in the latest survey period and hit a four-month low, further confirming that expectations surrounding the production outlook have softened,” Ms. Baluch said.

The central bank’s recent rate cut and expected easing in the fourth quarter are seen stimulating factory activity in the coming months, Security Bank Corp. Chief Economist Robert Dan J. Roces said.

“The Aug. 15 rate cut and the anticipated 25-basis-point (bp) reduction in the fourth quarter could positively impact purchasing activity in the coming months, as it may encourage businesses to invest in their operations, leading to increased demand for materials and supplies,” he said in a Viber message.

The Monetary Board cut rates by 25 bps at its August meeting, bringing the benchmark rate to 6.25% from the over 17-year high of 6.5%.

Bangko Sentral ng Pilipinas Governor Eli M. Remolona, Jr. has also said the central bank can cut rates by another 25 bps before yearend.

Lower borrowing costs may also boost consumer spending, increasing the demand for manufactured goods, Mr. Roces added.

Mr. Ricafort said that further policy easing by the Philippine and US central banks may lead to cheaper credit for manufacturers, and bolster trade and investment activity.

Markets are widely expecting the US Federal Reserve to begin cutting rates this month. – Beatriz Marie D. Cruz, Reporter

Headline inflation likely eased in August and returned to within the central bank’s 2-4% target band amid a drop in prices of rice and fuel, analysts said.

A BusinessWorld poll of 15 analysts yielded a median estimate of 3.7% for the consumer price index (CPI) in August. This is within the 3.2-4% forecast of the Bangko Sentral ng Pilipinas (BSP) for the month.

August inflation would also be slower than the nine-month high of 4.4% in July and the 5.3% print in the same month a year ago.

The Philippine Statistics Authority (PSA) is set to release August inflation data on Thursday (Sept. 5).

“Higher electricity rates and higher prices for agricultural commodities, owing to unfavorable weather conditions, are the primary sources of upward price pressures for the month,” the BSP said.

“These factors are expected to be offset by lower domestic oil prices as well as lower rice, fish, and meat prices along with the peso appreciation,” the BSP said.

Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said August inflation likely slowed mainly due to the decline in rice prices.

“We expect the lower tariff rates for rice to be a key downward pressure on prices,” Sarah Tan, an economist from Moody’s Analytics, said in an e-mail.

Rice inflation eased to 20.9% in July from 22.5% in June, marking the fourth straight month of slower rice inflation. Rice typically accounts for almost half of overall inflation.

“August last year was the time when rice prices started to climb due to a global supply crunch. But due to lower tariff rates in 2024, rice prices have remained more or less stable, leading to headline CPI (consumer price index) dropping significantly on a year-on-year basis,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said.

In June, President Ferdinand R. Marcos, Jr. slashed the tariff on rice imports to 15% from 35% until 2028 in an effort to tame rice prices.

Slower inflation “may primarily have been driven by food basket inflation, attributed to weak rice imports and heavy rainfall disrupting local food production,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.

“These factors have likely led to sustained growth in domestic food prices, particularly affecting rice,” he added.

Meanwhile, analysts also noted that slower transport inflation may have contributed to inflation settling within BSP’s 2-4% target.

“The main drag from the 4.4% headline rate in July should come from a big fall in transportation inflation, going by the material drop in pump prices over the last few weeks,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

“Adding to the disinflationary impulse is the significant reduction in fuel prices throughout the month,” Mr. Dacanay said.

In August alone, pump price adjustments stood at a net decrease of P2.70 per liter for gasoline, P2.80 per liter for diesel, and P3.70 per liter for kerosene.

“We estimated a double-digit annual growth drop of 10% in retail petroleum prices, and diesel prices have the largest sales volume that could partially offset the estimated electricity rate hike of 6.7% year on year for August,” Mr. Asuncion said.

On the other hand, analysts also noted potential upside risks to inflation in August, such as the impact of Typhoon Carina and the southwest monsoon that hit Luzon in late July.

“The impact from Typhoon Carina that struck in July is expected to show up in August’s print in terms of higher prices for agricultural produce like vegetables,” Ms. Tan said.

Latest data from the Agriculture department showed that agricultural damage from Typhoon Carina and the southwest monsoon stood at PHP 4.73 billion. Rice was the most affected crop, accounting for 22.9% or PHP 1.08 billion of the overall damage.

“We believe that favorable base effects, especially for rice, will outweigh the lingering adverse impact of Tropical Depression Butchoy and Typhoon Carina on overall food prices,” Philippine National Bank economist Alvin Joseph A. Arogo said.

Also, Ms. Tan said utilities inflation likely accelerated in August as Manila Electric Co. (Meralco) raised electricity prices.

In August, Meralco hiked rates by P0.0327 per kilowatt-hour (kWh), bringing the overall rate of P11.6339 per kWh for a typical household from the previous month’s P11.6012 per kWh.

ROOM FOR MORE RATE CUTS?

With inflation likely in a downtrend, analysts expect that the central bank will be able to continue its easing cycle.

“Should the inflation print in August and the next couple of months confirm that July’s spike was just a blip, and that inflation is indeed in a downtrend as the BSP expects, this will give BSP confidence to deliver another rate cut in the fourth quarter,” Ms. Tan said.

In August, the Monetary Board reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%.

This was the first time the BSP cut rates in nearly four years or since November 2020.

The BSP could further reduce rates in order to match any US Federal Reserve rate cuts, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

“We think this will support the BSP’s rate-cutting cycle and we expect at least another 25-bp cut in the fourth quarter. If the Fed cuts aggressively at 50 bps, the BSP is likely to match this rate cut,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said.

Money markets are confidently pricing the Fed’s first 25-bp cut of this cycle at its September meeting, with a 33% chance of a jumbo 50-bp reduction, Reuters reported.

“Sustained deceleration in August could translate to one more RRP cut and a possible 0.5% to 1% reduction in the RRR before the year ends,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.

BSP Governor Eli M. Remolona, Jr. earlier said that they can deliver another 25-bp rate cut in the fourth quarter.

For his part, Mr. Dacanay expects to see the policy rate at 6% by end-2024.

“We also expect core CPI to continue its gradual moderation, many thanks to the central bank’s tight grip on monetary policy, providing the BSP room to cut policy rates by 25 bps to 6% by yearend,” he added.

On the other hand, De La Salle University economist Mitzie Irene P. Conchada said there are some risks that could delay the BSP’s continued policy easing.

“External factors such as calamities and external events could affect inflation and result in an upward trend towards the end of the year.  Furthermore, I think that the BSP will keep its interest rates in its next policy meeting,” she said.

The BSP’s last two policy meetings of the year are scheduled on Oct. 17 and Dec. 19. – Luisa Maria Jacinta C. Jocson, Reporter

More foreign portfolio investments entered the country than left in July, reflecting higher investments in government securities, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Transactions on foreign investments registered with the central bank through authorized agent banks posted a net inflow of USD 1.38 billion in July. This was higher than USD 961.58 million in the same month a year ago.

It was also a turnaround from the USD 27.26-million net outflow recorded in June.

Foreign portfolio investments are called “hot money” because of the ease with which they can enter or leave a jurisdiction, as opposed to foreign direct investments, which are considered less fickle.

BSP data showed that gross inflows for the month more than doubled to USD 2.43 billion from USD 1.04 billion in June. Year on year, gross inflows jumped by 54.3% from USD 1.58 billion.

The bulk of investments (71.3%) went to peso government securities. This was followed by investments in Philippine Stock Exchange-listed securities, mainly banks, holding firms, property, transportation services, and food, beverage and tobacco (28.7%).

In July, investments mostly came from the United Kingdom, the United States, Singapore, Luxembourg and Norway — accounting for 93.7% of total foreign inflows.

Meanwhile, gross outflows slipped by 1.9% to USD 1.05 billion in July from USD 1.07 billion in June. Year on year, gross outflows surged by 70.6% from USD 614.93 million in July 2023.

The United States received nearly half (45.3%) of total outward remittances, equivalent to USD 475.35 million.

In the seven month period, short-term foreign investments yielded a net inflow of USD 1.46 billion, skyrocketing by 830.7% from the USD 157.3-million inflows in the same period a year ago.

Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said that the higher net inflow in July was also due to “increasing investor confidence from developed economies due to improving macroeconomic indicators.”

Economic growth expanded by 6.3% in the second quarter, its fastest in five quarters. This was also faster than 5.8% in the first quarter and 4.3% in the second quarter of 2023.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort also noted more dovish signals from the US Federal Reserve and BSP that could support investment activity.

“For the coming months, possible Fed rate cuts later in 2024 up to 2026 could be matched locally and would lead to possible further gains in the fixed-income/bond markets and stock markets,” he said.

Money markets expect the Fed’s first 25-basis-point cut of this easing cycle at its meeting later this month.

BSP Governor Eli M. Remolona, Jr. has also signaled the possibility of delivering one more 25-bp rate cut in the fourth quarter.

This after the Monetary Board reduced rates by 25 bps last month to bring the key rate to 6.25% from the over 17-year high 6.5%.

“Likewise, fiscal consolidation in the Philippines is a good indicator of future economic performance as government spending is expected to be more targeted and productive,” Mr. Rivera said.

“This is supported by hot money coming in towards transportation, property, construction, services — all of which are booming especially in the foreseeable future,” he added.

The BSP expects foreign portfolio investments to end the year at a USD 3.1-billion net inflow. — Luisa Maria Jacinta C. Jocson