Data showed February factory output — as measured by the Volume of Production index — contracted by 8.5% in February 2019. — Reuters

By Christine Joyce S. Castañeda, Senior Researcher

THE country’s industrial production posted its third consecutive month of decline in February, the Philippine Statistics Authority (PSA) reported on Friday.

Preliminary results of the PSA’s Monthly Integrated Survey of Selected Industries (MISSI) showed that February factory output — as measured by the Volume of Production index — contracted by 8.5%.

The February result marked a third straight month of year-on-year decline after the contractions seen in January at 2.9% and December 2018 at 9.3%. It was also a reversal from the 15.2% growth posted in February 2018.

Year to date, the factory output decline averaged 5.7% versus the 13% growth in 2018’s comparable two months.

The report noted production of eight out of the 20 major industry groups fell, namely: food manufacturing (-19.5%); tobacco products (-4.4%); petroleum products (-0.5%); non-metallic mineral products (-12%); basic metals (-4.5%); machinery except electrical (-2.8%); electrical machinery (-8.2%); and furniture and fixtures (-6.5%).

In comparison, the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) was 51.9 in February, lower than January’s 52.3, but higher than February 2018’s 50.8.

A PMI reading above 50 signals improvement in business conditions from the preceding month, while a score below that point indicates deterioration.

Average capacity utilization — the extent by which industry resources are being used in the production of goods — was estimated at 84.3%. Eleven of the 20 sectors registered capacity utilization rates of 80% and above.

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort ascribed the continued decline in factory output to higher base effects, the downward trend in inflation, and “uncertainties” brought by the proposed rationalization of fiscal incentives and slower global economic growth.

“On local factors, the declining trend in both inflation and interest rates may have caused some manufacturers to wait for loan rates to go down further to save on borrowing costs… As a result, the borrowings for new and expansion projects, as well as for working capital, of some manufacturers may have been delayed/deferred…,” Mr. Ricafort said in an email.

Inflation further eased for the fifth straight month in March, the latest PSA data showed. Headline inflation was recorded at 3.3% in March, down from 3.8% in February and 4.3% a year earlier.

“On external factors, slower global economic growth and outlook largely due to the lingering trade war between the US and China, China’s recent economic growth among the slowest in about thirty years, [and] uncertainties related to Brexit that slowed down the economies of the UK and some European countries… have slowed down the demand/growth in exports and in related manufacturing industries locally,” Mr. Ricafort said.

The economist also noted that uncertainties related to the proposed rationalization of fiscal incentives may have led manufacturers to take a “wait-and-see” attitude before making new or additional investments in manufacturing facilities.

In a phone interview, Federation of Philippine Industries (FPI) Chairman Jesus L. Arranza said the contraction may be attributed to the decrease in demand of locally-produced goods due to increased imports, particularly food products.

“We have been importing a lot especially from China. If you look at food, you go to supermarkets, almost all are imported,” Mr. Arranza surmised.

Separate PSA data showed that in January, imports of consumer goods — which made up 17.8% of the total — grew 19.1% year-on-year. Imports of food and live animals, mainly for food, also increased by 22.8%.

Looking forward, Mr. Arranza said that the government should encourage corporate and non-corporate entities to support locally-produced goods for factory output to improve.

In a statement, the National Economic and Development Authority (NEDA) said the increase in demand during the summer season, election-related spending, and the easing inflation could help the sector recover.

“Despite [the decline in the volume and value of production indices], the heightened election-related spending will drive up demand for goods and services leading up to May and improve domestic demand in the second quarter of the year,” NEDA quoted its Officer-in-Charge (OIC) and Undersecretary Adoracion M. Navarro as saying.

For RCBC’s Mr. Ricafort, the easing inflation trend would lead to higher disposable income for consumers and businesses, which in turn, may lift factory production.

“Greater clarity on the proposed rationalization of fiscal incentives under the TRABAHO (Tax Reform for Attracting Better and Higher-Quality Opportunities) bill…, as well as the proposed gradual reduction in corporate income taxes, could again encourage some increase in investments in the manufacturing sector, especially by foreign/multinational companies,” he added.

The House of Representatives has approved on third and final reading the TRABAHO bill or House Bill No. 8083 which covers the reduction of corporate income tax and the rationalization of fiscal incentives.