By Christine Joyce S. Castañeda and Jochebed B. Gonzales,
Senior Researchers

THE Philippines’ trade deficit hit a new record high in December as exports contracted for the first time in more than a year and imports posted double-digit growth.

Preliminary data released by the Philippine Statistics Authority (PSA) showed the December trade deficit reaching $4.017 billion, wider than the previous record-high of $3.845 billion in November and the $2.468 billion recorded in the same period in 2016.

Prior to the December results, the country’s trade deficit recorded three record-highs: in May ($2.737 billion), in October ($2.819 billion) and in November ($3.845 billion).

This brought the country’s trade deficit last year at $29.786 billion, the highest on record.

For the first time since November 2016, merchandise exports contracted in December 2017 by 4.9% to $4.721 billion. This was a reversal from the previous month’s 2.7% growth and the 6.6% growth in December 2016. Historically, export performance for the month was slowest since the 10.9% decline in July 2016.

In contrast, the country’s import bill continued to increase by double-digits. In December, imports grew 17.6% to $8.738 billion, decelerating from the 20.1% seen in November and 19% in December 2016.

“Imports and exports posted 10.2% and 9.5% growth rates, respectively, exceeding the Development Budget Coordinating Committee’s emerging estimates (as of December 2017) of 9% for imports and 8% for exports,” the National Economic and Development Authority (NEDA) said in a statement.

For Union Bank of the Philippines (UnionBank) chief economist Ruben Carlo O. Asuncion, the widened trade deficit was “expected” especially “for a high-growth and investment-driven economy.”

“The growth in imports have largely geared towards investments in the economy for more economic activities and expansion,” Mr. Asuncion said.

“This shows that the Philippines’ economic growth gears are moving and moving strong. The demand for more imports comes from the push for more infrastructure investments by both government and consequently the private sector.”

Security Bank Corp. economist Angelo B. Taningco, for his part, pointed to the strong demand during the holiday season, which led to double-digit increments in the imports of raw materials and intermediate goods (17% to $3.126 billion) and consumer goods (13.3% to $1.507 billion).

Other major type of goods registered sharp increases as well with mineral fuels, lubricant and related materials jumping by 61.8% to $1.180 billion in December. Capital goods, meanwhile, increased 8.4% to $2.886 billion.

“Likewise, relatively low inflation in the top country sources for our imports (e.g. China, South Korea, Japan, US) may have encouraged our importers to purchase more,” Mr. Taningco said.

Meanwhile, Mr. Asuncion attributed the decline in exports to the top export losers for December — coconut oil (-56.7%) and ignition wiring set and other wiring sets used in vehicles, aircrafts and ships (-27.1%).

“This is not to mention other manufactured goods and metal components also contributing to the export December decline. Demand for these products might have been weaker-than-expected,” he added.

Sales of the country’s manufactured goods were down 1.1% to $4.149 billion in December. Exports of agro-based products took a hit as well, declining 61.7% to $150.398 million in December from $392.743 million in the same period a year prior.

Bucking the trend were exports of electronic products, which expanded by 15% to $2.859 billion. This constituted 60.6% of the country’s total exports revenue.

Hong Kong was the Philippines’ top export market in December with a 16.7% share at $789.61 million, a 27.3% increase from 2016.

The US came in second, albeit, export receipts were down 7.6% resulting in a 13.9% share of the total.

On the other hand, orders from Japan declined by 34.4%, albeit still with a 13.5% market share during the month.

Meanwhile, China was the country’s top source imports with a 28.3% increase of inbound shipments during the month for a 18.9% share, followed by Korea’s 62.7% (for a 10.7% share) and Japan’s 12.7% decline (for a 9.5% share).

FACTORY OUTPUT WORST IN MORE THAN 6 YEARS
In a separate release, the PSA reported a steep decline in factory production to its worst in six years last December.

In the latest Monthly Integrated Survey of Selected Industries (MISSI), factory output, as measured by the Volume of Production Index (VoPI) — fell 9.7% year-on-year, worse than the 9.1% contraction in November and a reversal of the 21.7% uptick in December 2016.

The December turnout was the worst since the 12.5% plunge in October 2011.

For the entire 2017, manufacturing dipped 0.4%, in contrast to the 11.7% average growth in 2016.

Eight out of 20 sectors dragged the VoPI led by chemical products whose output shrank by 67.3%. Other sectors that posted sharp declines were footwear and wearing apparel (-42.9%); tobacco products (-31.8%) and textiles (-30.5%).

Average capacity utilization, the extent by which industry resources are being used in the production of goods, stood at 84%.

UnionBank’s Mr. Asuncion said the decrease in factory output may have played a role in the export slump: “It could also be that manufacturers have been holding back temporarily because of expected market structural changes that can impact their outputs in the longer-run,” he said.

Michael L. Ricafort, economist at Rizal Commercial Banking Corp., noted that there were stockpiling among firms last year in anticipation of the increase in excise taxes.

“At the same time, generally for all commodities, there were some upward trend in prices from the lows. [The contraction] was also reflective of the export performance which slowed down and exchange rate was also volatile last year,” he added.

OUTLOOK
“The recent declines in manufacturing are a cause for concern, but we are also fully aware of the opportunities that lie ahead: robust domestic consumption demand, increased demand from government, and government’s resolve to improve the ease of doing business,” said Socioeconomic Planning Secretary Ernesto M. Pernia in a statement.

“Inflationary pressures, higher global raw material costs, and peso depreciation will continue to be a challenge to the sector’s growth,” Mr. Pernia added on the prospects of factory output.

Despite the negative turnout, Union Bank’s Mr. Asuncion remained upbeat on the prospects of manufacturing: “The expectation is that both external and internal demand for goods and services are on the uptrend, with the global economy continuing to grow and recent structural fiscal reforms have provided more spending for local consumers, respectively,” he said.

“So, this trend of decreasing production may dissipate in the coming months. This also is supported by continuing confidence of both consumer and business sentiments in the economy.”

For RCBC’s Mr. Ricafort, manufacturing may soon rebound as local and foreign direct investments, especially by exporters, materialize into production of output.

For trade, the analysts expect imports to outperform exports: “My forecast is for the trade deficit to edge up to $32 billion this year (2018),” Security Bank’s Mr. Taningco said.

UnionBank’s Mr. Asuncion was of the same opinion: “I expect exports to be softer, but imports will definitely [be] stronger, as expected.”