Angelo Taningco
Economist, Treasury Group

Philippine merchandise trade deficit ballooned to $3.6 billion (b) in April, way above market’s median forecast of $2.8b and March’s $2.5b. Exports were again lethargic as its year-on-year (yoy) rate was again negative for the fourth-straight month. Conversely, imports bounced back with double-digit growth. We expect this trade deficit widening to curtail second-quarter (Q2) GDP growth. Meanwhile, gross international reserves (GIR) fell by $0.6b in May to $79.0b at month-end, its lowest level since Dec. 2014. Declining foreign reserves and persistent trade deficits alongside risk-off sentiment prevailing in emerging markets (EMs) are exerting depreciation pressures on the peso.

Total merchandise trade recovered from its 2.7% yoy contraction in March by posting an 8.8% expansion in April (Figure 1). This was however mainly bolstered by a rebound in import growth (22.2% in Apr vs. 0.3% in Mar) that outweighed the continual negative export growth performance (-8.5% in Apr vs. -6.8% in Mar). Exports’ fall was felt in six of the top ten exportable items for the month, including machinery and transport equipment and other manufactured goods. Conversely, the strong showing of imports was witnessed in the double-digit increases of capital goods, consumer goods, and raw materials and intermediate goods. The five-largest markets for exports in April were Hong Kong, United States (US), Japan, China, and Singapore. For imports, the top five country sources were China, South Korea, Japan, US, and Thailand.

In the first four months of the year, merchandise trade growth was positive at 3.4% yoy with the yoy changes in cumulative exports and imports at -6.2% and 10.5%, respectively. Moreover, the cumulative trade-in-goods deficit amounted to $12.2b, which is 59.3% bigger compared to its level during the same period last year. We maintain our 2018 merchandise trade deficit forecast of $32b, as we foresee monthly trade deficits to narrow on a potential export recovery.

Foreign reserves dropped for the second-straight month in May, with GIR incurring a $0.6b monthly decline to level off at $79.0b at month-end, the lowest since Dec. 2014 (Figure 2). On a year-to-date basis, the GIR has contracted by $2.6b. We still hold on to our end-2018 GIR forecast of $81b in anticipation of more US dollar inflows from Overseas Filipinos (OF) remittances, foreign investments, and foreign-currency bond issuances. Moreover, we deem external buffers to remain more than adequate in meeting import requirements (import cover at 7.7 months) and short-term (ST) external debt obligations (ST external debt cover at 5.4 times). We observe that both falling foreign reserves and persistent trade deficits alongside EM currency depreciations have been responsible for the peso’s weakness. However, the country’s sound macro fundamentals (ex. growth prospects) relative to other EMs may help temper a further drop in the peso.

Figure 1: Merchandise Trade

Figure 2: Foreign Reserves

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