Trade gap biggest on record in November; factory production continues to slide — PSA

By Lourdes O. Pilar, Researcher
and Camille A. Aguinaldo

THE COUNTRY’s trade-in-goods deficit continued to widen in November last year, bringing the gap to yet another record high after merchandise import growth outpaced exports’ increase.

Preliminary data released yesterday by the Philippine Statistics Authority (PSA) showed the November trade deficit reaching $3.781 billion, wider than the $2.491 billion shortfall in 2016’s comparable month and the previous record-high $2.819 billion deficit in October 2017.

The country’s import bill increased by 18.5% in November — its fastest pace in 11 months — to $8.744 billion, surpassing October’s 13.1% growth albeit slower than the 21% seen in November 2016.

Imports of all commodity groups grew annually in November, with double-digit growth seen in organic and inorganic chemicals (44.9%); mineral fuels, lubricants and related material (38.6%); telecommunication equipment and electrical machinery (32.8%); miscellaneous manufactured articles (29.6%); iron and steel (26.4%); and electronic products (23.4%).

All item types posted double-digit increments, with imports of raw materials and intermediate goods increasing by 18.9% to $3.312 billion. Likewise, imports of mineral fuels, lubricant and related materials ($899.981 million); capital goods ($2.881 billion); and consumer goods ($1.615 billion) went up by 38.6%, 16.1%, and 14.4% respectively.

In contrast, merchandise exports grew just 1.6% to $4.963 billion, its slowest since November 2016. November’s increase was also slower than the 7.1% posted in October, but was still a turnaround from the 4.5% decline recorded in November 2016.

Sales of mineral products ($364.284 million) and petroleum products ($44.201 million) grew respectively by 128.5% and 130.4%, offsetting the declines in export sales of manufactured goods (-1.5% to $4.133 billion) and agro-based products (-28.5% to $288.479 million).

Electronic products, which account for 58.1% of the total outbound shipments, also expanded by 12.7% to $2.884 billion in November.

YEAR-TO-DATE COUNT
Merchandise exports increased by 10.8% to $58.099 billion in the 11 months to November, surpassing the government’s five percent target for 2017.

The same comparative 11 months saw a 9.3% merchandise import growth, a few points shy of the 10% official target for 2017.

Analysts point to the continued increase in imports to the government’s bid to ramp up infrastructure spending, but that its magnitude was unexpected.

In a research note, Nomura cited the slow export growth as “the main source of surprise” with the turnout way lower than the market’s (nine percent) and Nomura’s (13.7%) consensus.

“The strong import growth reflects a strong domestically driven economy. The recovery in imports of capital equipment underpins expectations that the economic capacity is also increasing to meet rising domestic demand and economic growth,” said ING Bank N.V. Manila economist Jose Mario I. Cuyegkeng.

“Data continues to indicate a strong economy. But the flip side is that a challenging trade and current accounts would pressure the Philippine peso again this year.”

ANZ Research economist Eugenia FabonVictorino was of a similar opinion: “Following the stabilization of the deficit in the second and third quarter [of last year], the unexpected widening of the deficit in October may once again add to the expectations of a current account deficit in 2018.”

“It is ironic that despite strong growth, the peso has been one of the worst performers in the region in 2017. A persistent widening of the deficit in 2018 could put the peso under renewed downward pressure,” she added.

Despite this, the robust growth in imports is seen to be positive in the long-run, according to Socioeconomic Planning Secretary Ernesto M. Pernia in a statement released by the National Economic and Development Authority (NEDA), which he heads.

“The timely implementation of the government’s infrastructure program will be critical to bringing down the cost of doing business and, thus, should make our exporters more competitive,” Mr. Pernia was quoted in NEDA’s statement as saying.

Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion concurred, adding that the trade deficit will persist as the country is further driven from being consumption-led to investment-driven.

The economist also said that in the long-run, this will boost competitiveness of the country’s exports due to lower cost of doing business “brought by easier movement of goods and services.”

“So, at this point, the widening of the trade deficit is not a major concern because it is an intended consequence as more investments contribute to economic growth,” he said.

For Nomura: “[t]he negative implications of the widening trade deficit on the deteriorating current account balance add to our cautious view on PHP.”

“While strong imports (particularly of capital goods) and recent tax reform add to positivity on the growth front, flow dynamics for the Philippines continue to look challenging.”

MANUFACTURING CONTINUES DROP
Also yesterday, PSA’s latest Monthly Integrated Survey of Selected Industries showed factory output in November continuing to tread in negative territory.

The volume of production index (VoPI) declined by 8.1% in November — its worst since the 12.5% contraction recorded in October 2011.

The November reading was worse than the four percent and 5.8% declines in September and October 2017, respectively.

Year-to-date factory output averaged 2.5%, slower than the 10.5% logged in 2016’s comparable 11 months.

Average capacity utilization, which is the extent by which industry resources are being used in the production of goods, was estimated at 83.9% with 11 of the 20 sectors registering capacity utilization rates of at least 80% in the 11 months to November last year.

NEDA said in a statement that “[t]he decrease in production volume can be partly attributed to the lower production of tobacco” in anticipation of implementation of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that was signed into law on Dec. 19 last year and which took effect last Jan. 1. Among others, that first of up to five planned tax reforms raised the excise tax on tobacco products, along with a host of other items.

Looking forward, Mr. Pernia said the manufacturing output is expected to rebound this year due to increased state spending on infrastructure and by households that benefit from RA 10963’s reduction of personal income tax rates. “Despite the recent performance of the manufacturing sector, we remain optimistic given strong domestic and external demand. There are also considerable public and private investments in the country,” he said.