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Supply disruptions feared

Posted on March 15, 2011

CONCERNS over supply chain disruptions were raised by key industries yesterday in the wake of the devastating earthquake and tsunami in Japan, with officials warning of production delays and export losses.

The government, however, said it was still too early to determine how the disaster would affect the domestic economy.

"It’s not so clear at this point," Socioeconomic Planning Secretary Cayetano W. Paderanga, Jr. told reporters, although he said any adverse effects "might start coming in the end of the second quarter."

Sec. Ricky A. Carandang of the Presidential Communications Development and Strategic Planning Office said "a better answer" could be available by Wednesday as the economic cluster holds its regular biweekly meeting.

Aid should be priority

Budget Secretary Florencio B. Abad said the country’s first duty was to offer aid to Japan, a key trade and development partner.

"The first thing that needs to be discussed is up to what extent we can be of assistance ... secondly, we need to discuss the extent of the crisis, because right now the assessment is still in progress ... then we discuss the possible impact on us in terms of trade and official development assistance (ODA)," the budget chief said.

Trade officials said they were already consulting affected industries, with Undersecretary Adrian T. Cristobal saying in a text message: "we’re gathering data from exporters now."

Export Development Council Executive Director Senen M. Perlada, in a separate text message, said: "We have been checking with exporters and other stakeholders."

Ryoichi Ito, executive director of the Japan External Trade Organization, said in a telephone interview that an analysis of the disaster’s impact on Japan’s demand for Philippine exports would be conducted.

Japan was the top market for Philippine exports last year, based on government data, with shipments amounting some $7.8 billion.

Sourcing problem

Logistics are a particular concern, officials of the Philippine Food Processors and Exporters Organization (Philfoodex), Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI) and the Philippine Automotive Competitiveness Council, Inc. (PACCI) told BusinessWorld.

SEIPI President Ernesto B. Santiago said the arrival of raw materials sourced from Japan such as glue and molding compounds would be delayed by around two weeks or more.

"The impact is disruption in the supply chain," Mr. Santiago -- whose group represents the country’s top export sector -- said in a telephone interview.

"We have not yet assessed the impact of the disruption," he added, noting that 18% of SEIPI’s members are Japanese firms while "a lot of others" source components from Japan.

PACCI Executive Director Benjamin C. Sevilla, meanwhile, said in a text message: "The impact on the local industry will vary on a company-by-company basis depending on the degree of their activities with Japan. Some realignment may be expected in terms of sourcing of inventory and logistics."

Chamber of Automotive Manufacturers of the Philippines, Inc. President Elizabeth H. Lee, for her part, said: "it’s business as usual" for local assembly of Japanese vehicle brands.

"Majority of vehicles sold in the market are sourced within ASEAN (Association of Southeast Asian Nations) although some are sourced from Japan," Ms. Lee said in another text message.

Philfoodex President Roberto C. Amores, meanwhile, said the destruction of transport and storage facilities in Japan would affect Philippine exports.

"The demand for our fruits and vegetables will be seriously affected due to the unavailable facilities," Mr. Amores also said in a text message.

Local impact admitted

In Malacañang, Mr. Carandang admitted that the disaster would have a local impact given the "extensive trade" between the Philippines and Japan. The fallout could extend to a planned Samurai bond offering, he added.

Earlier in the day, Deputy Presidential Spokesperson Abigail Valte also said it was too early to tell if there would be a slowdown in terms of trade and aid.

"We don’t want to really push them into something when the country is essentially in the middle of an emergency. We do not want to be insensitive that way," she said.

"[I]t is too early to tell at this point whether the tenor of the relationship will change."

Mr. Paderanga, for his part, said: "Numbers will start coming in after the rescue efforts are finished and they start looking really at what damage is there."

He said the Philippines could benefit as Japanese industries seek to restock, and added that there was no talk yet of any suspension or reduction of yen loans committed to the country.

"We will see. That hasn’t been raised," Mr. Paderanga said of a possible aid impact.

Any review of current macroeconomic assumptions would also have to take into account the crisis in the Arab world and not just the disaster in Japan, he said.

Finance Undersecretary Rosalia V. de Leon, meanwhile, said the Philippines could look elsewhere if Japan cuts the $200 million in ODA committed to the Philippines this year.

"Japan has not indicated that they are withdrawing their ODA. But, if they do, we can realign our plans and tap into the World Bank (WB) or the Asian Development Bank (ADB) for assistance," Ms. de Leon told BusinessWorld.

Japan terms favorable

She admitted, however, that Japan was still the better option since it offers cheaper rates and longer maturity periods.

According to the National Economic and Development Authority, the Japan Bank for International Cooperation’s yen loan packages carry interest rates of 1.8% and 0.75%, respectively, for a project’s capital and consultancy components. The loans are payable in 40 years, inclusive of a 10-year grace period.

The Asian Development Bank, in contrast, charges 5.5% interest for multi-currency loans and 6.7% for dollar loans. The term is 20 years, with a grace period of four to five years. The World Bank, has a variable lending rate but the loans are also payable in 20 years with a five-year grace period. Both also charge a 1% front-end fee.

The Philippines received $9.61 billion in ODA loans last year. Japan was the biggest donor with a 36% share of the fund. The WB accounted for a 21% share while the ADB contributed a tenth.

National Treasurer Roberto B. Tan said he remained confident assistance from Japan would not decrease.

"Based on experience, there were no substantial changes in the flow of ODA we receive in times of disasters [in Japan]," he told BusinessWorld in a telephone interview.

"We cannot preempt the Japanese government’s decision, but I don’t foresee any major constraint."

Focus on rebuilding

University of the Philippines economist Benjamin E. Diokno, however, pointed out that Japan -- also the source of 5% of remittances by overseas Filipino workers (OFWs) in addition to being a major market and providing a third of the ODA received by the country -- would have to concentrate its resources on rebuilding.

The astronomical costs that would come with the reconstruction effort, he said in an e-mail to BusinessWorld, would mean "less aid for developing and transition economies, including the Philippines".

There would also be "slower trade with Japan as it undergoes adjustment and recovery," he added.

"Some countries might be able to export more to Japan than others, depending on the nature of their exports. Countries which export construction materials -- steel, cement and others -- will benefit.

"But countries which export inputs (say, machinery and auto parts, electronics components, etc.) for Japan’s exports of final goods to the rest of the world may be disadvantaged since the three car manufacturers have stopped production as a result of the tragedy," Mr. Diokno said.

"The unprecedented triple tragedy -- quakes, tsunami and nuclear accident -- is a major blow to an already weak economy. I’m confident Japan would be able to bounce back but it might take awhile." -- reports from Ana Mae G. Roa, Johanna D. Poblete, Louella D. Desiderio, Diane Claire J. Jiao and Emilia Narni J. David