By Elijah Joseph C. Tubayan, Reporter
MANUFACTURING ACTIVITY in the Philippines saw “a modest improvement” in August as new business inflows and optimism picked up and more jobs were generated, even as production growth slowed and input costs and prices rose “at marked rates,” according to a survey conducted by IHS Markit for Nikkei, Inc..
The Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) improved to 51.9 in August from 50.9 in July, described by the report as a “modest improvement in the health of the sector.”
The manufacturing PMI is composed of five sub-indices, with new orders having the heaviest weight at 30%, followed by output at 25%, employment with 20%, supplier delivery time with 15% and stocks of purchases with 10%. A PMI reading above 50 indicates improvement in business conditions from the preceding month, while a score below that mark signals deterioration.
“Business conditions in the Philippines’ manufacturing sector improved further midway through the third quarter. While output growth softened, new business inflows picked up pace, and optimism improved. Job creation was also reported for the first time in three month,” the report read.
“Firms continued to scale up purchasing activity, which contributed to further accumulation in input inventories. Meanwhile, inflationary pressures remained strong, with both input costs and output prices rising at marked rates.”
The report noted the “improvement in client demand” as order book growth recovered that month to become “solid overall,” coming from a record-low point in the previous month.
“Despite firmer sales growth, production volumes increased at the slowest rate for nearly a year,” it added.
Survey results show that higher sales and increased operating capacity were drivers for the output growth, where it also noted that bad weather disrupted production schedules.
It also said that firms reported delivery delays due to “inclement weather, supply shortages and poor traffic conditions.”
At the same time, “survey details revealed that domestic markets were the primary driver of higher demand as export sales grew at a noticeably slower pace. Growth in export orders was the weakest in the current six-month period of expansion,” the report added.
“The Nikkei survey data indicated that the Philippines manufacturing sector looks to have regained some growth momentum in August, raising hopes that the demand slowdown in July was just a blip,” IHS Markit Principal Economist Bernard Aw was quoted as saying in the report.
It also noted that firms ramped up acquisition of inputs to “meet greater operating demand” despite elevated costs — particularly on increased material prices including metal, sugar, rice — a weaker exchange rate and tax hikes under the Tax Reform for Acceleration and Inclusion law (TRAIN). “Input cost inflation remained sharp in August, partially reflecting the impact of the TRAIN law rollout at the start of this year. Consequently, firms raised selling prices further to pass on higher costs to customers. Output prices increased at a marked pace,” the report read.
The law hiked tax rates for automobiles, minerals, tobacco, fuel and documentary stamps, among others; imposed new excise levies on sugar-sweetened drinks and removed some value-added tax exemptions, even as it reduced personal income tax rates as well as estate and donors tax rates.
“With the indicators of price gauges remaining elevated, the August survey sends a hawkish message to policy makers,” said Mr. Aw.
The central bank’s Monetary Board has hiked benchmark interest rates for three straight meetings by a cumulative 100 basis points so far this year — the first such increases in nearly four years — and is widely expected to continue policy tightening towards yearend.
Michael L. Ricafort, an economist at Rizal Commercial Banking Corp., attributed the latest PMI readings to strong growth in real estate and construction.
“The faster reading in Philippine manufacturing as of Aug. 2018 compared to a month ago and versus a year ago may partly reflect the continued growth in real estate and construction and the positive impact on industries allied to/related to real estate and construction, as well as the new record highs in foreign direct investments (FDIs) recently that have led to increased manufacturing activities as they become operational, as the Philippines is still among the fastest-growing economies in Asia,” he said in an e-mail.
He attributed slower export order volumes to the proposed second tax reform package — or the Tax Reform For Attracting Better and High-quality Opportunities (TRABAHO) bill — that seeks to cut corporate income taxes to up to 20% from 30% currently, while removing fiscal incentives which the government considers redundant.
“This may have caused some upcoming/new investments in export-oriented industries that are currently entitled to fiscal/tax incentives [to take] on a wait-and-see attitude or make investments adjustments accordingly,” said Mr. Ricafort.
Sought for an outlook, Mr. Aw said that the “Philippines’ manufacturing sector continues to expand on a steady pace, with forward-looking indicators pointing towards similar growth rates in coming months.”

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