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During the second and third quarters of 2010, the Philippine trade sector showed some signs of a strong recovery — exports grew rapidly outpacing imports. Are we going to see more of the same next year? Or would net exports, that is exports less imports, be back to the negative territory as they have always been in recent history? It would be back to normal as exports face a slower and more uncertain world economy while imports are likely to rise as oil prices start to soar once more.
The Philippine economy will be faced with a slower, more volatile, and more uncertain world economy. A big part of Europe — Greece, Italy, France, Ireland, United Kingdom, Spain and Portugal — are on a path of fiscal austerity. The Euro area is expected to slow significantly.
The United States is expected to grow after its most recent round of tax cut and a possible third tranche of quantitative easing (called QE3), though its economy is expected to grow at a slower pace in 2011 compared to 2010.
The Japanese economy while showing signs of recovery is also expected to grow marginally. China has started to adopt measures to slow its overheating economy.
The US, Euro area, and Japan comprise some of the Philippines biggest export markets.
The reality is that Philippine exports, despite their strong performance in the second and third quarters of 2010, have not really turned the corner. A large part of the bounce may be attributable to base effects.
Philippines exports have sunk so low starting in 2008 and 2009 that the pickup in the second and third quarters of 2010 appear impressive. Philippine exports started to slow in 2007, growing at a modest 6.4%, dipped by 2.54% in 2008, then plummeted by 22.06% in 2009. Interestingly, the exports contraction in 2009 was worse than similar declines in exports for Malaysia (-21.07%), Singapore (20.24), Indonesia (-14.42), Thailand (-13.98), and Vietnam (-8.92).
Philippine exports in 2010 have yet to reach the peak that was registered in 2007, before the start of the Great Recession.
The other serious concern — not new — is the heavy concentration of Philippine exports in electronic products. Based on the January to October numbers, electronics product accounted for 57.8% of total exports in 2009 and for 61.5% in 2010. Exports of semiconductors accounted for 40.9 and 47.9% in 2009 and 2010, respectively.
Clearly the recovery in 2010 is brought about by the need for replacing the depleting inventory of electronics component owing to the recovery in the industrial countries. But a slowdown in industrial countries may also spell disaster for a country like the Philippines whose exports are heavily dependent on electronics product.
Philippine exports live by, or die by, the expansion or contraction (slowdown) of industrial countries.
The future of Philippine exports will depend on the sector’s ability to diversify exports quickly and to develop new markets. Doing both in a slower, harsher, and more volatile world economy is, to say the least, a major challenge.
World consumption demand is likely to slow, if not contract. The typical American consumer is poorer, heavily indebted, and is likely to have changed his buying behavior as a result of the recent and still ongoing crisis. The representative European consumer is likely to be poorer (his income after tax is lower due to higher income and consumption taxes) and is facing an uncertain future (with social entitlements constant or reduced.)
On the imports side, the major drivers in 2010 are telecommunications equipment and electric machinery, oil and oil products, passenger cars and motorized cycle, and rice. The imports for telecommunications are election-related. The imports for passenger cars were largely for the replacement of damaged cars owing to the twin killer typhoons Ondoy and Pepeng. They were also election related and due to government purchases.
In 2008 at the height of the oil and food crises, imports ($61.1 billion) exceeded exports ($48.2 billion), for a trade deficit of $12.9 billion.
But with recent oil prices exceeding $90 per barrel, expect the country’s oil import bill to increase in 2011. (This maybe good news for the Bureau of Customs but bad news for Filipino consumers.) With the looming power crisis, the demand for power generating and specialized machinery should pick up, too. But this depends on how quickly the government is able to put together an energy development catch-up plan.
There should be a stronger demand for cement and other construction inputs, assuming the public-private partnership projects start to take off.
Rice importation in 2011 is a certainty. It is the size of rice importation that is going to be a major policy question. Is this the year agricultural output will expand significantly in response to the recent adjustment of the price support for rice? Or will the country continue to be the world’s number one importer of rice?
My fearless forecast for 2011: imports will exceed exports and the trade deficit will approximate the 2008 level. Hopefully, a big part of the imports will go to investment in physical infrastructure rather than consumer goods. For the embattled Filipinos exporters: Brace for another challenging year.
