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CONTRARY to appearances, the recent surge in Philippine imports is
no sign that the country is thriving amid an economic slowdown in
its biggest market abroad.
While the Philippines registered a double-digit
increase in its purchases from abroad, a breakdown of that headline
number shows that the bulk of the expansion came not from
electronics, which we assemble to produce the country’s largest
dollar-earning shipment abroad.
Indeed, purchases of electronic components,
while comprising the bulk of the import bill at 41 percent, had
slowed in February to a 9.8 percent year-on-year growth from the 22
percent year-on-year expansion seen the month before.
Month-on-month, February imports of electronics actually contracted
by 18 percent.
This doesn’t bode well for the country’s
exports sector, which already has been reeling from the peso’s
appreciation, since a stronger local currency makes our shipment
abroad more expensive.
The surge seen in our imports in February was
due to higher purchases of oil and rice, the prices of which have
been skyrocketing in the international market. The National
Statistics Office (NSO) said our mineral fuel imports, which include
crude, grew 56 percent year-on-year.
Crude imports alone surged 106 percent. This has
been the story of the Philippines since last year when the
international price of the commodity began rising to fresh records.
Despite the costlier fuel, we seem to be importing more of the
commodity. Last week, its price hit an all-time high of $120 a
barrel.
A more recent development is the surge in the
country’s imports of rice. NSO data showed that imports of cereal
and cereal preparations jumped 343 percent year-on-year in February.
The agency blamed the surge on the country’s higher importation of
rice and wheat.
Rice imports alone surged 960 percent
year-on-year that month. Compared with our January purchases,
imports of the commodity catapulted 3,092 percent.
While rice only comprises a little over one
percent of our total imports, this speaks a lot about the sudden
increase in our requirements. As of February, cereal and cereal
preparations already was our fifth biggest import.
Watch the trade deficit
Should our import requirements of both rice and
oil continue to rise, we may be faced with a widening trade deficit,
which transpires if a country’s imports exceeds its exports. What
this means is that if we spend more dollars than we earn, then we
would have to dip into our foreign exchange reserves to fill the
gap.
In recent years, robust exports, foreign
investments—both direct and portfolio—and overseas Filipino
worker (OFW) remittances helped build up our dollar reserves to new
records, which in turn caused the peso to appreciate, thus
offsetting the rise in international prices of oil and other
imports. In short, a strong local currency helped temper inflation.
The problem this year is that all those sources
of foreign exchange are expected to weaken. As we mentioned above,
exports are seen to take a hit from a slowing US economy. The latest
imports data showing a contraction in electronics purchases says a
lot about the trajectory of our overseas sales.
Foreign investments, particularly portfolio
flows invested in local stocks and other peso-denominated financial
assets, have reversed to a net outflow as of end-March, according to
the Bangko Sentral ng Pilipinas (BSP). Porftolio investments were
responsible for the local stock market’s record run in the past
two years.
Widening risk aversion among investors,
especially foreigners, have led to their pull out from emerging
markets like the Philippines. The local bourse so far this year has
lost 19 percent of its value, making it one of emerging Asia’s
worst performing markets. True, other emerging markets are likewise
taking a beating, but not as big as what we’ve been enduring.
Unfortunately, portfolio flows presage foreign
direct investments (FDI), which are the hard currency used to build
businesses and expand existing ones. If foreigners are generally
risk-averse, then FDI is likely to ease this year.
The last pillar of a strong peso, ironically,
are OFW remittances. We say ironically since the more Filipinos
abroad remit their money back home, the weaker their
beneficiaries’ buying power becomes. Most forecasts are for an
easing of OFW remittances from their record levels last year.
If these trends persist, the government
therefore would be caught in a bind. Where would it source the
rising amount of foreign exchange needed to finance our growing rice
and oil import requirements?
If you said foreign debt, then you guessed
right. Of course, such a contingency would mean the Philippines
reversing its fiscal gains. Over the past years, the government has
successfully trimmed the country’s external debt by taking
advantage of a strong peso and low interest rates.
With interest rates widely seen to rise due to
inflationary pressures and the local currency expected to end its
record run, further reductions in the country’s foreign debt are
likely to taper off. Given this, we fear that the emerging scenario
is for a resumption in the uptrend of the country’s external
debts.
Clear the bottlenecks
The key to averting this trajectory is for the
government to remove the bottlenecks in both the demand and supply
sides that have kept inflation on the rise.
We should economize on the use of oil. The
country’s incentive system on oil use should be overhauled to
penalize wasteful use of the scarce commodity.
With respect to rice, meaningful solutions to
this crisis unfortunately are medium-term. We foresee our import
requirements to continue growing especially since we’ve lost much
of our internal production capacity. The government should dismantle
the remaining barriers to imports that have only kept the price of
this commodity at exorbitant levels.
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