Angelo Taningco
Economist, Treasury Group
No. Philippine merchandise trade deficit unexpectedly widened to a record-high $3.8 billion in November, well above the market consensus ($2.7 billion) on anemic export growth (1.6% yoy) and strong import growth (18.5% yoy). We suspect the sharp peso appreciation in November; the contraction in manufacturing production; government’s spending on infrastructure and other capital outlay projects; and inventory buildup may have all contributed to the increase in the trade deficit for the month.
The first 11 months of 2017, however, saw exports still stronger (10.8% yoy) compared to imports (9.3% yoy). We argue the trade deficit is manageable especially since foreign reserves are more than adequate to meet the import requirements. (Gross international reserves or GIR stood at $81.5 billion by end-December, with the amount being able to cover 8.3 months’ worth of total imports, well above the minimum requirement of 3 months.) This year, we still expect a trade deficit in goods, though we think this will narrow on the back of a resilient export sector amid robust import demand as well as depreciation in the Philippine peso.
Merchandise export growth plunged to 1.6% yoy in November, lower than its revised 7.1% in October, as overseas shipments of other manufactured goods (2nd-biggest export item) and machinery and transport equipment (4th-biggest) incurred relatively sharp decreases, outweighing the increase in electronic exports—the biggest contributor to export proceeds. On a more aggregated basis, manufactured exports—which accounted for around 83% of the overall export pie—slipped 1.5% yoy, likewise dragging down merchandise export growth; we surmise this can be attributed to the decline in manufacturing production for the month. But in the first eleven months of 2017, export growth stood at 10.8%, an improvement from its negative performance in the previous years.
Merchandise import growth accelerated to 18.5% yoy in November from 13.1% in October. Double-digit growth in the importation of raw materials and intermediate goods, capital goods, consumer goods, and mineral fuels, lubricants and related materials have all contributed to the high import growth rate. We conjecture that the inventory buildup amid the holiday season and government’s spending on infrastructure and other capital outlays may have both reinforced the strong import demand.
We also hypothesize the peso appreciation may have contributed to the widening in the trade deficit. We estimate the rate of peso appreciation in November at 2.7% mom, the sharpest for the year. A stronger peso makes exports more expensive and imports cheaper globally, and tends to make the trade deficit bigger.
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