Angelo Taningco
Economist, Treasury Group
The Philippines’ trade-in-goods deficit has expanded in the first two months of the year, and this we argue, has largely contributed to the balance of payments (BOP) deficit that was partly offset by growth in foreign direct investments (FDIs). The persistent trade-in-goods deficit may also help explain the drop in the country’s foreign reserves since the start of the year as well as the year-to-date (ytd) peso depreciation. For this year, we continue to expect a bigger trade-in-goods deficit, strong FDI inflows, adequate foreign reserves, and modest peso depreciation.
The merchandise trade deficit swelled 47% yoy to $6.2 billion in January-February. In February alone, the trade deficit widened 73.4% yoy to $3.1 billion as exports contracted 1.8% yoy and imports surged 18.6%. Cumulative export growth was an anemic 1.0% yoy in the first two months of the year on weak manufactured goods exports despite healthy manufacturing production and peso depreciation. In contrast, cumulative import growth was a strong 14.7% yoy amid robust import demand for capital, consumer, and intermediate goods and raw materials. The United States (US) stood as the biggest export market while China the largest import source for the Philippines. We recognize the ongoing US-China trade dispute as a downside risk to Philippine merchandise trade and economic growth. But at this juncture, this trade skirmish between the two largest economies in the world has not substantially affected the country’s trade-in-goods performance. We continue to expect a bigger trade deficit this year, with our 2018 forecast still pegged at $32 billion.
FDI net inflows soared 57% yoy to $919 million in January, with almost three-fifths of the investments made via equity placements and reinvestment of earnings and the remainder in debt instruments. We assert the country’s positive macroeconomic fundamentals given fiscal stimulus—TRAIN’s income tax cuts, government’s Build, Build, Build program—and accommodative monetary policy may have likely boosted investor sentiment, and thereby attracted the large FDI inflows for the month. FDI’s strong start for the year is consistent with our view that FDIs will likely perform healthily throughout the year, similar to 2017, with our 2018 FDI forecast at $9.5 billion.
Gross international reserves (GIR) stood at $80.1 billion at end-March, down $0.3 billion from February and $1.4 billion ytd; this is already hovering around the BSP’s end-2018 GIR forecast of $80 billion. Despite the GIR’s monthly decline, foreign reserve adequacy has remained high with the import cover and short-term external debt cover at 7.8 months and 5.6 times, respectively. However, we expect the BOP deficit for March to level off at around $0.3 billion. Thus far, we maintain our full-year BOP deficit forecast of $1.2 billion.
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