A Recurring Dilemma

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Industrial production in the Philippines has long been dominated by the manufacturing and export of electronic goods, which have fallen prey to the global downturn as demand slows worldwide.

The year 2008 was a particularly difficult one during which Filipino manufactured exports were considerably lower than the previous year. Some experts believe that 2009 will prove to be an even more challenging year for the industrial sector as recession in the country's two largest trading partners, the US and Japan, comes into full swing.

Filipino exports to the US were down 20.8% in December and continued to fall sharply with a 33.6% decrease in January. Exports to Japan, meanwhile, fell 28.5% in December and 39.7% in January. Of the Philippines' major export markets, only Germany, the country's third-largest trading partner, recorded positive growth in trade, with an annual increase of 7.3%.

In fact, in a statement to local press Felipe Medalla, the former director-general of the National Economic Development Authority predicted a 15-20% decrease in exports this year. Recent data suggests that Medalla's predictions may be validated. Total exports fell 41% in the year to January, following a 40.3% drop in December.

The Philippines supplies roughly one-tenth of the world's semiconductors, and the industry comprises around three-quarters of the country's total electronics manufacturing. The semiconductors are used primarily in consumer electronics, such as personal computers and mobile phones, which are currently under pressure from slowing global demand. The electronics and semiconductor industries posted an annual decrease of 8.31% in 2008, and experts are predicting a sharp 20-30% decrease in 2009.

According to Arthur Young, the president of the Semiconductor and Electronics Industries of the Philippines, the first quarter of 2009 will be difficult for the semiconductor industry. He remains positive though. "Next year (2010) will be a good growth year, albeit in the single digits…and we expect to see recovery in 2011, when the money will be flowing back into the market and we will again see double-digit growth," Young told the media in Makati City on March 12.

Further hampering industrial manufacturing are high input costs, especially with regards to energy. The Philippines has some of the highest energy costs in the region – a fact that has deterred industrial growth in the past. Young told OBG that one solution is for government to cap energy costs, thus allowing manufacturers to stabilise their cost base and appropriately prepare for the future. Other leading executives have called for industrial incentives that favour industrial manufacturing as one of the key sources of revenue for the country, despite short-term difficulties.

Some sceptics question the viability of such measures at a time when almost all sectors of the economy are under pressure. However, the government signed a major trade agreement with Japan in October of 2008. The agreement, known as Japan-Philippines Economic Partnership Agreement (JPEPA), has been considered one of the most important bilateral trade agreements in over 50 years. It includes measures that aim to eliminate major trade tariffs from both sides, liberalise trade in services such as banking or tourism, enhance access to employment opportunities to Filipino caregivers for an ageing Japanese population and develop bilateral cooperation in human resource development.

The agreement is not without its critics though, as many experts claim it is heavily skewed in favour of the Japanese. However, with free trade agreements out of favour globally and the possibility of what some economists are referring to as a resurgence of protectionist ideologies, the government's decision to sign JPEPA sends a strong positive signal to foreign investors.

The automotive industry appears to be holding up, with sales down 2.5% in January and February compared to a year earlier. Insiders remain hopeful the automotive industry will meet its targeted 2-4% growth over the course of 2009 and take comfort from the fact that February sales increased 2.7% from the previous month.

In a move to support growth in the automotive manufacturing industry, the Board of Investments is considering easing the enforcement of its requirements for the Automotive Export Programme and Motor Vehicle Development Programme (MVDP).

Currently the MVDP requires each new participant to invest $10m for passenger-car assembly or $8m for commercial-vehicle assembly during the first year of investment, while the AEP rules state that, "The availment of preferential tariff rates is contingent upon export performance on a yearly basis, i.e. minimum 10,000 units at minimum value of $5000 per unit."

The proposed agenda contains various caveats allowing registered participants of the programmes to defer some required minimum investment and export requirements. Should it be approved, it would go a long way in keeping the sector positively buoyant during what is shaping up to be a challenging year.

However, the industrial sector's reliance on electronics, specifically semiconductors, will surely outweigh any growth made in other manufactured products. The country's lack of diversification in industrial production could prove to be a costly mistake as demand for consumer electronics plummets around the world, but it would not be the first time the sector has seen hardship. In 2001 the global electronics industry was hit with another strong down-cycle, yet it managed to bounce back over the subsequent eight years. Nevertheless, the focus in the future is likely to be on diversification and using counter-cyclical measures in a downward year.

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