Slowing growth in China and continuing tepid growth in Japan will continue to provide headwinds against the Philippines’ trade position, but the impact on the overall current account will be limited, Fitch-owned BMI Research said.
“The Philippines’ trade position has taken a blow from the slowdown in regional trade over recent months, with total merchandise exports falling by 7.3 percent year-on-year over the course of January to April versus the same period in 2015,” it said in a new report.
With this, the Philippines’ trade deficit surged to $5.7 billion in the January to April period from the $1.8 billion in the same period in 2015, as strong domestic demand growth clashed with weak external conditions.
The think tank said total exports, including services, fell by 2 percent year-on-year over the period, while total imports climbed at a robust rate of 11.4 percent.
“This is part and parcel of a trend that we have been highlighting for some time; the Philippines’ healthy domestic economy is boosting demand for imports even as the economies of its largest regional trade partners such as China and Japan falter,” it pointed out.
BMI noted that although China is just the fourth largest export destination for the Philippines behind Japan, the US, and Hong Kong, a significant proportion of the country’s exports to Hong Kong are likely bound for the mainland.
As such, total exports to greater China–including Hong Kong, but not including Taiwan–are also a useful gauge of the Philippines’ total trade exposure to the mainland.
“Using this categorization, China’s importance as a trade partner is close to that of the US, trailing only Japan (while total greater China exports eclipse total exports to Japan, we will still assume that a proportion of shipments to Hong Kong is not bound for the mainland),” it stated, noting that in the four months through April, merchandise exports to greater China fell by 6.9 percent year-on-year, and dropped 16.3 percent for China alone.
“Given our view that the Chinese economy is set for a deeper slowdown over the near-term (and perhaps even over the long-term, the Philippines’ trade orientation towards China (and, to a lesser extent, Japan) will keep its export growth subdued over the coming quarters,” it added.
Nevertheless, BMI said its outlook for the Philippine exports is not sufficiently deep to suggest a significant deterioration in the country’s overall external position.
It now forecasts the current account to chalk up a slightly smaller surplus of 3.1 percent of gross domestic product (GDP) from its previous forecast of 3.5 percent of GDP in 2016.
“This is still larger than 2015’s surplus of 2.8 percent, and speaks to both the strong growth that the Philippines is achieving in services exports (largely on the back of the booming business process outsourcing industry), as well as the country’s structural income surplus (due to remittances from overseas Filipino workers, or OFWs),” it added.
The current account is a major component of the country balance of payments. It consists of transactions in goods, services, primary income and secondary income, and measure the net transfer of real resources between the domestic economy and the rest of the world.