The Philippines aims to boost exports in order to narrow trade deficit

In 2018 the Philippines posted a record trade deficit of $41.4bn, the largest gap in the nation’s history. This was a major increase on previous years, compared to $27.4bn in 2017 and $26.7bn in 2016. However, the results from the first few months of 2019 suggest that the deficit is beginning to narrow. In April 2019 the balance of trade in goods decreased year-on-year for the first time that year, from $3.7bn to $3.5bn.

The balance of imports and exports is affected by both domestic and external factors. Uncertainties in the global economy were likely a major factor behind the Philippines’ changing export fortunes, while changes in domestic tax and Customs duty regimes have helped to reduce the import bill in 2019.

Moving beyond these short-term factors, however, the country faces the long-term challenge of shifting its overall balance of trade into positive territory. This means a move towards higher-value exports, more competitive business practices, and less reliance on imported goods and services to ramp up domestic output. There are signs that this shift is in progress, even if there is still some way to go.

Global Headwinds

The ballooning deficit in 2018 was the result of a sharp increase in imports combined with a decline in exports, with the former up 13.4% compared to 2017, while goods exports fell by 1.8%. There was also a record current account deficit in 2018, reaching $7.9bn, or 2.4% of GDP. This was the highest current account deficit that had been recorded since the 1997-98 Asian financial crisis.

The rising import bill has been attributed to a number of factors. The government’s major infrastructure development plans, under the Build, Build, Build initiative, have required an increase in imports of capital goods. Public infrastructure plans were in large part responsible for the rising trade in goods deficit in 2018, which expanded by 22% that year.

This was despite a fall in imports in other sectors, most notably automotives. In 2017 the car industry posted record sales of almost 474,000 units. However, additional excise taxes introduced in 2018 caused a 17% decline in sales that year. At the same time, between May and November 2018 the central bank – Bangko Sentral ng Pilipinas – aggressively tightened interest rates to counter inflation, with the bank raising its base rate by 175 basis points. These factors contributed to overall imports contracting by approximately 9.4% in December 2018.

In terms of exports, the decline was partly a result of global economic factors, such as the US-China trade dispute, and slowing growth in other key markets, such as the EU. The US rivals Japan as the Philippines’ largest export destination, accounting for 15.4% of the total in March 2019. Meanwhile, China is the country’s largest import source market, with 21.4% of the total.

Export figures for 2018 were not entirely negative. Electronics, which accounted for around 57.2% of goods exports, increased by approximately 2.8%. However, this was slower than previous years, largely as a result of the US-China trade dispute, as Philippine-manufactured electronic components were impacted by disruption to international value chains.

Growing Pains 

In 2019 many of the external uncertainties of the previous year remained in play, with figures for February showing minimal growth for electronics exports. Economic growth will require significant imports of intermediate and capital goods in particular, especially when a major infrastructure programme is being rolled out and when businesses are attempting a significant shift up the value chain. This requires a delicate balancing act between the beneficial longer-term boost to productivity and quality deriving from imports, and the shorter-term disadvantages of a weakening current account and balance of trade. In the years ahead it will become clear whether the Philippines’ strategies to increase both the quality and quantity of its exports have been successful in this uncertain global marketplace.

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The Report: The Philippines 2019

Trade & Investment chapter from The Report: The Philippines 2019

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