The country can fall into a debt crisis if exports don’t pick up. Here’s why…
Last week, the Department of Budget and Management (DBM) reported that the national debt will top $151 billion by the end of 2019, and $167.3 billion by the end of 2020. This is due to massive borrowing to fund the government’s infrastructure program.
Government authorities say that acquiring more debt is a necessary evil given our need to fill the infrastructure gap. The hope is that when these infrastructure projects are completed, better roads, bridges and ports will translate into a spike in economic activity and, inevitably, more revenues for government. These revenues are what will repay the loans.
At this point, Government is not worried about its rising debt load. They say that a 41% debt-to-GDP ratio is still within manageable levels. Besides, tax revenues have been rising steadily. On the back of the TRAIN law, collections of the Bureau of Internal Revenue rose by 10.6% while collections from the Bureau of Customs rose by 8.5%. Further, non-tax revenues grew by 6.9% due to higher dividends from government-owned and -controlled corporations and profits from PAGCOR. Government expects even more tax revenues to flow in once the CITIRA Law (the second tranche of the tax reform program) is passed.
With tax revenues on the rise, government is confident that it will continue to maintain a healthy balance between debt and revenues. This is true… for now. But I worry about our current account deficit.
For those unaware, a country’s current account is the surplus (or deficit) after taking into consideration trade in goods, trade in services, investment incomes, OFW remittances, and travel receipts. From a surplus of $601 million in 2015, it swung into deficit territory in 2017, clocking in at negative $2.52 billion and worsening to negative $7.9 billion in 2018. The Bangko Sentral ng Pilipinas sees the deficit widening to negative $10.1 billion this year.
Deficits will have to be filled by debt. So unless we reduce the deficit, or, better yet, turn it into a surplus, the country’s debt load will continue to rise.
The problem lies in our trade deficit (exports, minus imports). The gap is so wide that foreign direct investments, OFW remittances, and tourism revenues can no longer cover for it.
In 2018, merchandise exports dropped 1.8% to $67.488 billion from $68.713 billion in 2017. This occurred while imports grew by a whopping 13.4% from $96.093 billion to $108.928 billion. This resulted in a trade deficit of $27.38 billion and $41.44 billion, for 2017 and 2018, respectively.
The good news is that we have an astute Secretary of Trade and Industry who is well aware of the problem. Last year, Secretary Mon Lopez crafted a plan to accelerate exports of both goods and services so as to minimize the trade deficit. The plan, dubbed the Philippine Export Development Plan 2018-2022, was completed last June. It was ratified by President Duterte.
At the heart of the plan is to accelerate exports to between $122 billion and $130 billion by 2022 on the back of three action points.
The first is to improve the overall climate for export industries. This will be done by removing regulatory impediments for exporters, by raising productivity and competitiveness, by improving benchmarks of quality for export goods, by improving access to export finance, and, by enhancing exporter’s innovative capacities.
The second is by exploiting opportunities from trade agreements. The Philippines enjoys preferential export access and special tariff terms with certain countries by virtue of trade agreements in which we are a signatory. Among them are the ASEAN Economic Community, the Asia-Pacific Economic Cooperation (APEC), the European Free Trade Association and its General System of Preference-Plus status, among others. The Department of Trade and Industry (DTI) recognizes that the country has not maximized its preferential export rights to many markets, thus, Secretary Lopez’ plan lays out the ways and means to do so.
The third is to develop a new set of export winners. Products identified as having good export potentials are electronics, processed food, fresh vegetables and beverages. Surprisingly, footwear, textiles, yarns, fabrics, and garments were products that waned in the 1990s but are now showing signs of a comeback.
In terms of services, the IT-BPO sector is still seen to generate the lion’s share of export revenues. However, tourism-related services (e.g. services provided by hotels, restaurants, travel agencies, tour operators, etc.) is growing at twice the pace of IT-BPOs. This is a category to watch out for. Financial services, construction services, and product assembly services are also showing healthy upticks.
In addition, the DTI finds it necessary to create a robust atmosphere for start-ups and venture capitalists. Start-ups are trailblazers of innovation. They lead in design enhancements and are agile enough to adjust their internal processes to gain a competitive edge.
All these taken into consideration, it will still take much more to turbo-charge our export industries. The prohibitive provisions of the constitution relating to foreign investment, expensive power cost, difficulty in doing business, and government’s lack of spending on research and development (R&D) are some of the reasons why our manufacturing sector has not developed at the same pace as our neighbors.
These impediments need to be sorted out in order for our manufacturing sector to thrive and for us to export more. There is a lot of catching up to do as our export revenues are but a third of Vietnam’s.
To accelerate our industrialization, the DTI recently launched a new industrial plan called the Inclusive Innovation Industrial Strategy, or i3S for short. Its purpose is to develop globally competitive industries, large and small, using innovation as an enabler.
Having identified our new export winners, the goal is to enable our exporters to tap new markets and/or expand market share either through the introduction of new innovative products, new product features, or more competitive pricing.
For industries that produce intermediate parts, the goal is for them to deepen their participation in global supply chains through cost efficiency innovations.
The road is long before our export revenues can cover our current account deficit. The good thing is that the plans have been laid-out to make it happen. Its all about the execution now.
Andrew J. Masigan is an economist.