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THE reversal in the Philippines’ external trade to
a deficit in the first month this year from a surplus last year
underscores the country’s susceptibility to global commodity price
swings at a very bad time for the domestic economy.
Last January, the country
incurred a trade deficit, as it paid more for imports than it earned
from the sale of goods abroad. Rising imports historically has been
a sign of an expanding economy, as the country buys from abroad the
bulk of materials it processes into goods meant for both the local
and export markets.
The latest trade numbers however
paint a less promising picture of the country’s short-term
prospects. Data from the National Statistics Office showed that
while electronics boosted overall imports in the first month, the
surge in purchases from abroad was fueled by skyrocketing prices of
oil and food commodities.
If the country’s sales of goods
abroad were in tip-top shape, this wouldn’t be a cause for
concern. As in the past, we could live with deficits to a certain
degree, as part of the imports are fed into the export machine,
which churns out the dollars that we need to pay down our external
liabilities.
The problem is that the
Philippines’ largest export market, the US, is slowing down—and
may even be on the brink of a recession, defined as two consecutive
quarters of contraction.
No other export market comes
close to the size of what the US buys from us at a fifth of the
Philippines’ total sales abroad. Even our trade with galloping
China, which has been rising after we inked a free-trade accord with
the mainland, is a distant third after Japan, if we classify our
sales to Hong Kong as part of our shipments to Beijing.
Assuming our import of basic
commodities like oil and food continue at their present rate, we
doubt whether the remittances of overseas Filipino workers (OFW)
would be enough to stave off a foreign exchange liquidity crunch.
Talk of an external payments
crisis has long been relegated to the dustbin of history, especially
since OFW remittances began jumping by double-digits during the
latter part of the 1990s. In recent years, such talk would be
ridiculed as rantings of doomsday prophets, especially with the
record dollar reserves the Bangko Sentral ng Pilipinas (BSP) takes
pride in, thanks largely to OFW money and foreign investments in the
local stock market and other peso-denominated financial assets.
Unfortunately, foreign portfolio
money is fickle, leaving emerging economies like the Philippines for
the safe haven of dollar-denominated assets such as oil and gold, as
borne out by the recent volatility in global financial markets. As
for OFW money, the BSP earlier warned that inflows would start
slowing this year.
With regard to the usual safety
valve, foreign borrowings, the government had said it would limit
new debt to money sourced from the local market to prevent the peso
from further appreciating sharply and help remittance beneficiaries
and exporters preserve the purchasing power of their dollar
earnings.
Yes, a balance of payments crisis
may still be far off. But the way we’ve been importing oil and
food commodities highlights challenges in the demand and supply side
of these items for the local economy.
Overvalued peso
A strong peso has abetted the
country’s rising appetite for these commodities, as cheaper
dollars make it less expensive for us to import these items. This is
why despite their record prices in the world market, Philippine
inflation has kept at single-digit levels. More than two decades
ago, domestic price increases shot up to double-digit levels during
the Gulf War, as tight oil supplies caused international crude
prices to surge.
But beyond the distortion caused
by an overvalued peso there is the problem of our seemingly
unquenchable thirst for oil and our seeming lack of capacity to feed
our own people.
On oil, we have said in an
earlier editorial that something must be done about an incentive
scheme that encourages people—like PUV drivers and SUV owners who
let their engine run idle for hours while waiting for passengers and
their children—to consume fuel as if it were at rock-bottom
prices. They must be made to pay for their irresponsible use of such
costly resources.
Moreover, the search for
alternative energy sources requires a shot in the arm in these
trying times. We don’t know if the push for biofuels would address
this or worsen the situation with respect to our food requirements.
On food, we appear to be reaping
the consequences of decades of neglect of our land use policy. So
much land has been converted from farm use that we have little left
for planting food and staple products.
This wouldn’t have been a
problem had the government pursued farm modernization, thus raising
productivity even with a smaller area allotted for farming.
Unfortunately, farmers in many cases were left to their own devices.
The sad thing is that prices of
imported oil and food are likely to rise further given the
insatiable demand from emerging markets like China and India. While
both countries can well afford to pay the price of costlier
imports—thanks to their rapidly expanding economies—we cannot
say the same for us.
If we allow this situation to
persist, then we may be faced with a domestic shortage of oil and
food. Now that is a recipe for chaos.
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