Angelo Taningco
Economist, Treasury Group

Philippine merchandise trade has intensified in August propelled by positive and healthy growth in both exports and imports of goods. Moreover, the trade-in-goods deficit has widened in the same month on the back of a strong rebound in imports and export growth moderation. Meanwhile, we empirically establish a negative relationship between the country’s trade balance and its real exchange rate, implying that an increase (decrease) in the trade deficit is partly induced by a real appreciation (real depreciation) in the Philippine peso.

Merchandise trade growth accelerated to 10.0% year-on-year (yoy) in August from 2.5% yoy in July mainly driven by import growth turning positive at 10.5% yoy versus its previous month’s negative rate (−3.2% yoy), and despite the deceleration in export growth to 9.3% yoy from 11.0% yoy. As a result of stronger growth in imports vis-à-vis exports, the merchandise trade deficit widened 13.2% yoy to $2.4 billion in August (Figure 1).

Figure 1: Merchandise Trade Indicators
Jan. 2016 – Aug. 2017

 
Focusing on merchandise exports, seven of the top ten export items recorded positive growth in August, and these were: electronic products (52% export share, 3.5% yoy), other manufactured goods (6.8% share, 13.8% yoy), machinery and transport equipment ( 4.9% share, 75.0% yoy), coconut oil (2.9% share, 61.2% yoy), metal components (2.5% share, 22.6% yoy), gold (2.2% share, 186.7% yoy) and electronic equipment and parts (2.0% share, 71.3% yoy). Manufactured goods exports have accounted for 83% of total merchandise exports for the month.

By export destination, the United States (US) was the biggest export market in August with 15.2% of total merchandise exports being shipped into this country, followed by Japan (15.0% export share), Hong Kong (14.4% share), China (11.0% share), and Singapore (5.4% share).

As regards merchandise imports, nine of the top ten import items posted increases in August, with the top three being electronic products (25.4% import share, 8.3% yoy), transport equipment (11.0% share, 2.2% yoy), and mineral fuels/lubricants and related materials (9.7% share, 23.8% yoy). Raw materials and intermediate goods as well as capital goods were the two-biggest major import categories with their import shares at 38.8% and 33.1%, respectively; both have posted relatively high respective growth rates at 10.6% yoy and 33.1% yoy.

China was the biggest source of goods imports given its 16.9% import share, but imports from this country incurred a 0.8% yoy decline. On the other hand, Japan stood as the second-biggest import source at 11.4% share and contributed to the import upswing with its 9.6% yoy increase. The other three top import sources were South Korea (8.9% share, 58.6% yoy), US (7.8% share, −7.5% yoy), and Indonesia (7.6% share, 27.2% yoy).

On a cumulative basis, merchandise trade expanded 10.3% yoy in January-August, spawned by 13.3% yoy growth in merchandise exports and 8.2% yoy increase in imports of goods. As a result of stronger cumulative growth in exports versus imports, the merchandise trade deficit narrowed 2.6% yoy in January-August.

Economic theory dictates that a country’s trade balance is a function of the real exchange rate, which takes into account the local currency’s purchasing power and competitiveness relative to another currency. We utilize a simple regression model in order to empirically establish the relationship between the trade balance and real exchange rate in the Philippine setting.

Our proxy for the country’s merchandise trade balance is the natural logarithm of the ratio of goods exports to its merchandise imports; a positive (negative) value in this proxy indicates a trade-in-goods surplus (deficit). Throughout our sample period from January 2005 to June 2017, there consistently was a trade-in-goods deficit. For the real exchange rate, we make use of the real effective exchange rate (REER), which we convert to natural logarithm. An increase (decrease) in the REER indicates a real appreciation (depreciation) in the Philippine peso.

Our empirical results reveal a negative and statistically significant relationship between the trade balance and the REER, implying that a real appreciation (real depreciation) in the Philippine peso tends to widen (narrow) the trade-in-goods deficit (Figure 2).

Figure 2: Merchandise Trade Balance & REER
Jan. 2005 – Jun. 2017

 
Disclosures Appendix
This material is confidential and intended for suitable counterparties. The data and information provided in this report accurately reflect the personal views of the specialists or were obtained from public sources believed to be reliable. No representation or warranty as to its accuracy or completeness, express or implied is hereby made, and the investor should not rely thereon without making any independent analysis or research on any topic therein. Any opinion or advice expressed herein may change without notice.

This report is not to be taken as an offer to sell or buy securities or any investment. Security Bank Corporation denies any liability that may arise out of any loss or may result in actual, direct or consequential damage from the use or reliance on any material hereof. Reproduction of this material, whether in whole or in part, is strictly prohibited without the prior consent of Security Bank Corporation. Security Bank Corporation, its directors, officers or staff or any of its subsidiary or affiliates may have taken a short or long position in any investments or securities mentioned herein upon the presentation of this report and may buy or sell the investments or securities at any time in the open market or otherwise, either as broker, dealer, principal or agent.