Angelo Taningco
Economist, Treasury Group

Philippine merchandise trade deficit expanded more-than-expected to $3.7b in May (market consensus: $3.5b), the widest negative trade gap since the start of the year. Exports fell for the fifth-straight month, incurring a 3.8% yoy decline while import growth was again in double-digits at 11.4% yoy. In Jan-May, cumulative trade deficit totaled $15.8b, which is 55% larger compared to the same period last year. We expect the trade deficit to persist and to grow this year as the global trade war and the country’s widening inflation differential vis-à-vis its trading partners will suppress an export rebound and will strengthen import demand for capital goods (ex. machinery) as well as raw materials and intermediate goods (ex. iron and steel).  We maintain our full-year trade-in-goods deficit and end-year USD/PHP forecasts at $32b and 53.25, respectively, with the risks to our trade and foreign exchange projections both tilted to the upside.

The bigger cumulative trade deficit was on account of weak export supply performance and strong import demand. Exports were down 5% yoy in Jan-May due to a sharp contraction in exports of agro-based products (−26% yoy) and a decline in manufactured goods (−4.7% yoy), the latter accounting for 84% of total export proceeds. We posit that part of the reason for the anemic export performance is domestic demand catching up with domestic production. This is probably apparent in the manufacturing sector in which despite its robust output performance, local demand for manufactured products has intensified fueled by vibrant business spending. This is also evident in the agriculture sector where low productivity and adverse weather conditions have disrupted food supply that led to a contraction in agro-based exports. Conversely, cumulative imports were larger 10.9% yoy in Jan-May on relatively strong import demand for capital goods (11.6% yoy), consumer goods (9.5% yoy), and raw materials and intermediate goods (9.1% yoy). We assert the country’s strong business investment and aggressive government spending amid its infrastructure push have led to more robust import demand for capital goods (ex. telecom equipment and electrical machinery) as well as raw materials and intermediate goods (ex. iron and steel). Furthermore, healthy household consumption—buttressed by income tax cuts, steady OF remittance inflows and tourism receipts—has positively contributed to import demand.

We also conjecture that the widening inflation differential between the Philippines and its major trading partners may have also spurred the trade deficit to grow further; this is because as the country’s inflation increases more vis-à-vis its trading partners, its exportable items will incur a loss in its international competitiveness position while making importable items relatively more attractive.

The global trade war, we think, could potentially expand the country’s trade deficit. China is the biggest import source and third-largest export market of the Philippines. Global tariffs on aluminum and steel may lead China to export more of these products to the Philippines. Moreover, US tariffs on Chinese goods that contain “industrially significant technologies” may dampen Philippine exports of electronic parts and components (semiconductors) to China.

Figure: Merchandise Trade

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