FDI, trade, factory data pull Q3 GDP growth in opposite directions

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By Elijah Joseph C. Tubayan, Reporter, Jochebed B. Gonzales, Senior Researcher, and Minde Nyl R. dela Cruz

THE GOVERNMENT on Friday released foreign investment, trade and manufacturing data showing third-quarter gross domestic product (GDP) growth, which will be reported on Nov. 16, could go either way compared to the preceding two quarters.

GDP grew by 6.4% and 6.5% in the first and second quarters, respectively, resulting in a 6.45% first-semester average that compares to the government’s 6.5-7.5% full-year target for 2017.

Moody’s Analytics on Friday gave a 6.6% estimate for third-quarter GDP growth, saying in a note that “[d]omestic demand likely remained firm, as consumers benefited from steady inflows of overseas worker remittances and a healthy job market and investment stayed firm on the back of government-led infrastructure projects”.

The Bangko Sentral ng Pilipinas (BSP) on Friday reported that net foreign direct investment (FDI) inflow was biggest in 16 months at $1.203 billion, 70% more than the year-ago $708 million and nearly four times July’s $307 million.

It was the largest net inflow since April 2016’s record-high $2.244 billion.

“This reflected continued favorable investor sentiment in the Philippine economy on the back of the country’s strong macroeconomic fundamentals,” the central bank said in a statement.

A surge in net equity other than reinvestment of earnings to $611 million in August from just $8 million a year ago offset a 15.7% drop in lending by foreign firms to their local affiliates to $533 million and a 12.8% fall in reinvested earnings to $59 million.

“The bulk of equity capital placements during the month originated from the United States, Singapore, the Netherlands, Hong Kong and Japan,” the BSP said in a statement, noting these funds went “mainly to manufacturing; real estate; wholesale and retail trade; transportation and storage; and electricity, gas, steam and air conditioning supply activities”.

Angelo B. Taningco, economist at Security Bank Corp., said that the surge in foreign funds was due to the current administration’s efforts to ramp up spending, especially on public infrastructure, and a stable monetary policy stance.

“I think foreign investors continue to have a positive outlook on the Philippines in light of the government’s fiscal stimulus efforts and accommodative monetary policy measures, enabling them to actively invest for the long-term,” Mr. Taningco said in an e-mail.

Mr. Taningco said that he expects net FDI inflows to continue to grow for the remaining months of this year, and even surpass 2016’s $7.93 billion total.

“My outlook for FDI — to continue its upward trajectory for the remaining months of the year — stems from my view that foreign investor sentiment will turn more positive on the back of improving prospects for pickup in infrastructure spending, passage of first tax reform package and improvements in peace-and-order situation,” he said.

Michael L. Ricafort, head of the Economics & Industry Research Division of Rizal Commercial Banking Corp., said in an e-mail: “The increase in FDIs vs. a year ago was partly due to increased foreign investment pledges… amid improved Philippine ties/relations with the biggest economies of the world — China, Japan, US — compared to a year ago.”

“The Philippines remains among the fastest growing economies in Asia/ASEAN, reflecting improved economic and credit fundamentals, as well as favorable demographics,” he added.

July and August data show a boost to third-quarter GDP from a 25.729% year-on-year increase in cumulative net FDI inflows to $1.51 billion in those two months from $1.201 billion a year ago.

The eight months to August, however, still saw a 5.2% drop in net FDI inflows to $5.107 billion, as a 40.3% drop in net equity placements to $833 million offset an 8.4% hike to $3.678 billion in debt instrument investments and a 6.4% drop in reinvested earnings to $546 million.

“Equity capital infusions during the period came mostly from the US, Singapore, Japan, the Netherlands and Hong Kong,” the BSP said of inflows in those eight months, adding that funds “were invested mainly in manufacturing; real estate; wholesale and retail trade; financial and insurance; and electricity, gas, steam and air conditioning supply activities”.

Other government data released on Friday show merchandise exports slowing down and manufacturing output declining in September, posing risks to the country’s third-quarter economic growth in the third quarter.

Sales of Philippine-made products slowed in the final month of the third quarter. According to a report from the Philippine Statistics Authority (PSA), merchandise export sales, which account for as much as 40% of GDP, grew 4.3% to P5.594 billion — its tenth straight month of growth — but was slower than the 9.6% uptick in August and 8.1% increase in the same month last year.

Year-to-date, the total value of exported goods increased 12.2% to $47.712 billion from $42.518 billion, way above the government’s official five percent target for 2017.

On the other hand, import payments came in at $7.509 billion, growing 1.7% compared to the 10.4% growth last August and 18% in September 2016. On a cumulative basis, imports totaled $66.654 billion, up 7.4% from the same period last year and below the official 10% target for this year.

Consequently, the country’s balance of trade in goods in September registered a net deficit of $1.915 billion, narrower than the $2.020-billion gap registered in September last year. The first nine months saw a $18.942-billion trade deficit, improving from the year-ago $19.520 billion.

Total trade, which is the sum of exported and imported goods, was $13.103 billion in September, up 2.8% from the $12.743 billion registered during the same month last year.

In a separate report, the PSA reported a decline in September factory output, its lowest in almost six years.

In its latest Monthly Integrated Survey of Selected Industries, the PSA reported that the volume of production index — a measure of factory output — declined 3.7% in September year-on-year, a reversal from the 1.6% growth posted in August and 11.2% in the same period last year.

This was the worst turnout since December 2011 when factory output declined by 7.7%.

Year-to-date factory output growth averaged 4.7%, but the negative September turnout pulled output to a 1.9% decline in the third quarter, which could pose a downside risk to GDP in those three months.

The average capacity utilization rate in September — the extent by which industry resources are used for the production of goods — averaged 83.8%, with 11 out of the 20 major sectors operating at capacities of at least 80%.

“Decreases in the production of petroleum, transport equipment and export-oriented products led to the decline in manufacturing output for September 2017,” the National Economic and Development Authority (NEDA) said in a statement.

“Production continued to grow, however, in construction-related manufactures and food manufacturing.”

For Security Bank’s Mr. Taningco, the contraction in factory output may be attributed to higher production and import costs “amid a depreciation in the peso as well as lower business confidence.”

“[T]he sluggish manufacturing output performance may have likely tempered the growth of both the industry sector and GDP in the third quarter. This is because manufacturing accounts for a relatively large contribution to industry and GDP,” Mr. Taningco explained.

Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, Inc., said the contraction in the trade in factory figures “may have come from temporary reasons” that are seasonal in nature.

He added that the trade figures will have an important contribution to third-quarter growth.

“In previous years, the level of exports have languished due to the stronger peso and depressed external demand. This year, though, is quite different. The weak peso has made exports cheaper thus more competitive, while the government’s plan to ramp up infrastructure spending has also increased the level of imports via capital goods,” he said.

On manufacturing, Mr. Asuncion said that the contraction may “marginally and temporarily impact industry contribution for third-quarter GDP, but the government’s planned increase of infrastructure spending supported by further tax reform will underpin robust industry growth heading into 2018.”

Likewise, NEDA officer-in-charge and Undersecretary Rosemarie G. Edillon remains hopeful on trade’s contribution to growth in the coming months. “The third quarter growth performance of several major economies such as the Eurozone, US and China reflects an upbeat outlook for the global economy,” Ms. Edillon said. “Given this, we are optimistic that Philippine trade will pick up in the last quarter due to higher demand in the holiday season.”

She was also optimistic on manufacturing’s rebound, citing the BSP’s latest Consumer Expectation Survey showing consumers were generally more upbeat about prospects in the fourth quarter as they expect higher salaries and more jobs, along with improved peace and order.

It was noted in that survey that consumer confidence slipped to 10.2% in the third quarter from a record-high 13.1% in the previous quarter amid concerns on what was then ongoing conflict in Marawi City, as well as higher expenses.

UnionBank’s Mr. Asuncion shared this sentiment, saying: “With infrastructure investments expected to grow in the medium-term, the manufacturing sector output is expected to grow.”

“Domestic demand, as the Christmas season nears, is anticipated to increase, an upside moving into the last quarter of 2017.”

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