Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

 

Facts are stubborn things, but statistics are pliable—Mark Twain

 

In this issue

Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

I. Unveiling the Statistical Mirage Behind Merchandise Trade Growth

II. Export Boom? Semiconductor Up YoY but on a Downslide while Agro-Based and EDP Exports Rebound

III. Import Trends: Capital, Consumer, and Raw Materials Up YoY, Yet in Downtrend—Where Are the Investments?

IV. A Revival of the Domestic Manufacturing Sector?

V. Private Sector S&P PMI Survey Diverge from the PSA; Rising USD Peso Points to Risks of Stagflation

 

Analyzing the Philippines’ February Merchandise Trade: Unveiling the Impact of Statistical Base Effects on a 'Growth' Rebound

 

Government and media pounced on the positive YoY sign on Philippine Merchandise Trade, interpreting it as "growth."  However, filtering noise from signal tell us otherwise.

 

I. Unveiling the Statistical Mirage Behind Merchandise Trade Growth

 

Businessworld, April 12: Preliminary data from the Philippine Statistics Authority (PSA) showed the country’s trade-in-goods balance — the difference between exports and imports — stood at a $3.65-billion deficit in February, slipping by 6% from the $3.88-billion gap in February last year. Month on month, the trade gap also narrowed from the revised $4.39 billion in January. The trade deficit in February was the smallest in five months or since the $3.55-billion deficit in September last year. Outbound sale of goods expanded for the second straight month by 15.7% annually to $5.91 billion in February. This was faster than the revised 9.1% growth in January and a turnaround from the 18.3% decline in February last year. This was the quickest exports growth in 16 months or since the 20.6% surge in October 2022. Meanwhile, imports rose by 6.3% to $9.55 billion in February, ending two months of decline. This was a turnaround from the revised 6.1% contraction in January and the 11.8% decline in February 2023. Imports growth was also the fastest in 16 months or since 7.7% in October 2022. (italics mine)

 

YoY February exports grew by 15.7%, while imports increased by 6.34%, and total external trade expanded by 9.74%. As a result, the trade deficit improved by 6%.

 

Great news, right?

 

That's if you discount the overall trend.

 

In reality, February's boost was a mirage—a product of the statistical "low" base effect.

Figure 1

 

From a noise versus signal standpoint, February's USD performance only reinforced the downside drift of the nation's trend in external trade. (Figure 1, topmost graph)

 

It is no coincidence that the fall in external trade deficit has resonated with the easing of the fiscal deficit manifesting the "twin deficits."  (Figure 1, middle window)

 

The easing of public spending has reduced the "crowding effect," freeing up more resources for the market economy's use. (Figure 1, lowest chart)

 

Still, despite the imbalances from the structural shift in bank lending operations, the declining import trend demonstrates mounting strains on consumers from inflation.

 

However, both deficits translate to an economy spending more than it produces, thereby requiring borrowing to fund the savings-investment gap.

 

II. Export Boom? Semiconductor Up YoY but on a Downslide while Agro-Based and EDP Exports Rebound

 

Export boom?

Figure 2

 

Though semiconductor exports soared by 31.9% in February, export volume in USD has been down 2.14% MoM. It has been trending down since September 2023/October 2022. (Figure 2, topmost image)

 

The microchip % share of exports accounted for 44.8% in February 2024, slightly lower than 45.5% in January and substantially higher than 39.3% from the same month a year ago.

 

What other sectors grew in volume and in percentage?

 

Agro-based exports jumped 24.1% YoY, accounting for 7.2% of the total share. (Figure 2, middle diagram)

 

Electronic Data Processing exports also vaulted by 23.1% YoY, with a 7.5% share of the total. (Figure 2, lowest graph)

 

Electronic products (which include the semiconductor and EDP sectors) soared by 27%, accounting for 58% share of the total.

 

The thing is, only a handful of sectors benefited from February's export growth.

III. Import Trends: Capital, Consumer, and Raw Materials Up YoY, Yet in Downtrend—Where Are the Investments?

 

How about imports?

 

Last February, capital goods imports fell by only 3.4% YoY, while consumer goods imports grew by 9.2%.

Figure 3

 

But both sectors suffered a plunge in USD volume of 13.6% and 16.3% MoM, and they have shown signs of further weakening (Figure 3, topmost image)

 

So based on capital goods imports, the avalanche of news headlines about the proposed massive investment flows from a peripatetic leadership selling politically related investments to the US and their allies have yet to happen.

 

Still, the government reported that Foreign Direct Investment (FDI) flows almost "doubled" in January 2024, mainly from a surge of debt flows. Debt flows accounted for 90% of the FDI. Investments, eh?

 

Curiously, despite the wonderful headlines predicated on YoY, the FDI trend in million USD remains southbound. (Figure 3, middle visual)

 

And this bifurcation applies to raw materials imports, which expanded by 11.8%, despite the downtrend since 3Q 2022. Raw material imports serve as a pulse on the manufacturing sector. (Figure 3, lowest chart)

 

IV. A Revival of the Domestic Manufacturing Sector?

 

Yet, authorities tell us that growth in the manufacturing sector has been picking up.

Figure 4

 

First, the sector's bank credit growth more than doubled from 2% in January to 5.9% in February. The sector's bank credit growth has dovetailed the Producers Price Index (PPI) or "measure of change in the prices of products or commodities produced by domestic manufacturers and sold at farm gate prices to wholesale/other consumers in the domestic market." (PSA, Openstat)

 

Will the PPI follow the rebound in bank credit?

 

Second, manufacturing volume and value were up 8.9% and 7.5% in February 2024, even as net sales in volume and value contracted by 0.5% and 1.7%.

 

Generally, producers have been ramping up in production despite slower sales—implying substantial inventory accumulation.

 

V. Private Sector S&P PMI Survey Diverge from the PSA; Rising USD Peso Points to Risks of Stagflation

 

Figure 5

 

But, the S&P PMI survey for March diverged from the PSA:

 

The latest PMI® data by S&P Global indicated only a modest improvement in the health of the Filipino manufacturing sector during March. Though the pace of expansion was largely sustained from the previous survey period, growth in new orders remained historically subdued. Furthermore, production lapsed back into contraction for the first time since July 2022 amid material shortages. Companies raised their employment and buying activity at stronger rates and renewed their efforts to replenish inventories. That said, the degree of confidence in the outlook for output over the coming year dropped to a near four-year low. In terms of prices, the rate of input cost inflation softened to the weakest since October 2020. Additionally, charges levied for Filipino manufactured goods fell for the first time in nearly four years. (SPI Global, April 2024)

 

Both indicators shared the replenishment of inventories and the account of disinflation via the PPI, but instead of output growth, the SPI indicated a production lapse.

 

The Philippine PMI appears to have been plagued by a "rounding top." (Figure 5, topmost image)

 

In summary, government data points to an upturn in the manufacturing sector in the GDP, which diverges from the SPI’s outlook.

 

Dialing back to imports, only one major category registered increases in both YoY and MoM volume: fuel imports, which were up by 8.3% YoY and 28.4% MoM, driven by rising oil prices. (Figure 5, middle chart)

 

As noted above, due to the "low" base of 2023, government data recorded growth—a chimera.

 

However, the general trend for merchandise trade exhibits ongoing weakness in capital goods, consumers, and manufacturing, along with rising risks of stagflation.

 

The rising US dollar-Philippine peso $USDPHP suggests that the easing of this deficit (and the twin deficits) must be ephemeral. (Figure 5, lowest diagram)

 

___

References:

 

S&P Global Philippines Manufacturing PMI Filipino manufacturing output slides into contraction for the first time since July 2022, April 1, 2024, spglobal.com

 

 

 

January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

 

All government taxation and spending diminishes saving and consumption by genuine producers, for the benefit of a parasitic burden of consumption spending by nonproducers—Murray N. Rothbard

 

In this issue:

 

January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

I. January 2024’s Seasonal Fiscal Surplus

II. January Interest Payments Soared as Government Liquidity Hits All-Time High

II. DBCC’s 5.1% 2024 Deficit-to-GDP Target

IV. Sharp Decline in January’s Trade Deficits? Capital Goods Import Fell Anew

V. 2023 Decline in FDIs Reinforces its 7-Year Downtrend

VI. Twin Deficits and BSP’s USD Standard: Philippine External Debt Soared to a Record High in 2023!

VII. The Challenge from Higher for Longer International Rates

 

January 2024’s Seasonal Fiscal Surplus in the Shadow of DBCC’s 5.1% Deficit-to-GDP Target, What Higher for Longer International Rates Means

The Philippines recorded a significant budget surplus in January, but the "twin deficits" will continue to shape the political and economic conditions, according to the DBCC's target.

 

I. January 2024’s Seasonal Fiscal Surplus

 

Manila Bulletin, March 15, 2024: The Marcos administration's budget surplus nearly doubled in the first month of the year due to strong revenues generated by the government's two main tax agencies.  The Bureau of the Treasury reported that the national government posted a fiscal surplus of P88 billion last January, a significant jump of 92 percent compared to P45.7 billion in the same month in 2023. “The fiscal outturn was brought about by a faster 21.15 percent year-over-year increase in revenue collection outpacing the 10.39 percent expansion in government spending,” the Treasury said in a statement. Total revenues rose to P421.8 billion from P348.2 billion last year, driven by higher tax collections which comprised 91.31 percent of the total…“The improvement for the period was largely driven by the shift in VAT [value added tax] remittance from monthly to quarterly, pushing the crediting of fourth-quarter 2023 collections over to January 2024,” the Treasury said.

 

News articles like this drool over the supposed accomplishment of the government, where January's budget "doubled" from "strong revenues."

 

The politically slanted article ignores the following facts:

Figure 1

 

First. Government spending exploded to a historic high last December 2023! (Figure 1, upper window)

 

Since authorities raced to fill their coffers, the unprecedented December binge extrapolated to year-end budget overspending.  Naturally, it had to reduce its expenditures in the advent of 2024.

 

No trend moves in a straight line, as they say.

 

Further, since authorities shifted towards relying on its fiscal tool to goose up the GDP, surplus months occurred in the 1H of each year since 2016 (except 2020). (Figure 1, lower chart)

 

Second.  The 2023 budget deficit was the third largest in history and was only 9% off the 2021 zenith.

 

By the same token, why the strategical drift from fiscal "stabilizer" to fiscal "dominance?"  Is the Philippine economy at risk of a massive downturn to rely on sustained stimulus?  Or, why has the economy deepened its dependence on deficit spending?

 

What tools will authorities be left with when the rainy day arrives?

 

As noted in early March,

 

If the Philippine government continues to use its fiscal tool to bolster the GDP at the present pace, it could lose its latitude to unleash policy "stabilizers" when the "sturm and drang" emerge—unless it decides to play with the Russian Roulette of hyperinflation. (Prudent Investor, March 2024)

 

Third.  The article admits that "the shift in VAT [value added tax] remittance from monthly to quarterly" contributed to the revenue spike.

 

A change in the collection schedules represents an administrative task and not a gauge of economic health.

 

II. January Interest Payments Soared as Government Liquidity Hits All-Time High

 

Lastly, the biased article crows at January's "primary surplus"...

 

"Excluding interest payments, the government recorded a P162.2 billion primary surplus for January, growing by 75 percent due to the higher revenue outturn for the period.”

 

Yet, dampening the impact of the soaring scale of debt interest payments, the article continues...

 

Interest payments rose to P74.2 billion, driven by premia from Treasury Bonds and Global Bonds issuance...interest payments (IP), which accounted for the remaining 22.23 percent, rose to P74.2 billion.

 

Figure 2

 

If authorities have been controlling debt levels and servicing costs, then primary surpluses would matter. 

 

But public debt sprinted to a historic Php 14.79 trillion in January 2024 in the backdrop of the upsurge in interest payments. (Figure 2, upper diagram)  

 

The share of interest payments to total expenditure (excluding amortizations) appears to be testing its 2019 resistance level—where a breakout seems imminent. (Figure 2 lower image)

 

In addition, monetary authorities claim that the economy has been impacted by increasing interest rates or "tightening." However, this may only be true for small and medium-sized enterprises (SMEs), but not for the government.

Figure 3

 

In reality, the Treasury's change in cash reserves surged to an all-time high in January (Php 1.08 trillion!) due to a combination of the surplus, public borrowings, and infusions from the financial industry.  (Figure 3, upper graph)

 

And so, while banks and parts of the economy scuffle for liquidity, the government has been swimming with it! 

 

Rephrasing the great George Orwell:  "War is peace.  Freedom is Slavery.  Ignorance is strength."  Tightening is abundance.

 

Simply amazing!

 

II. DBCC’s 5.1% 2024 Deficit-to-GDP Target

 

Guess what happens to the January cash surplus? 

 

In 2024, the Development Budget Coordination Committee (DBCC) predicts a Php 1.395 trillion deficit or 5.1% of the GDP, rendering surpluses insignificant in the era of deficit spending.  (Figure 3, lower table)

 

Given the government's intuition to spend other people's money bountifully, spending targets may overshoot, like in 2023.

 

Besides, the high rates of the GDP have served as the typified basis for these deficit-to-GDP projections, which means that while authorities have programmed spending for the year, revenues mainly depend on economic variability, aside from administrative efficacy.

 

Even more, a sharp downdraft in the GDP would not only spike the ratio but would be justified to accelerate spending for public "safety net" reasons.

 

Therefore, the political tendency is to embrace a higher deficit-to-GDP. Government targets are inconsequential.

 

IV. Sharp Decline in January’s Trade Deficits? Capital Goods Import Fell Anew

 

That's for the fiscal side of the "twin deficits."

 

Businessworld, March 13, 2024 THE PHILIPPINES’ trade deficit in goods narrowed sharply in January, as exports returned to positive territory while imports growth contracted, the Philippine Statistics Authority (PSA) reported on Tuesday. reliminary data from the PSA showed the country’s trade-in-goods balance — the difference between exports and imports — reached a deficit of $4.22 billion in January, 24% smaller than the $5.56-billion deficit in January last year. Month on month, the trade gap ballooned from the revised $4.18 billion in December.

 

The pivotal changes in the banking system's business model and the "era of deficit spending" alternatively translate to sustained and enlarged external merchandise deficits.

 

Since the political economy prioritizes (government and consumer) consumption over production, its adaptive framework increasingly relies on imports of goods and services and access to foreign savings.

 

As recently noted,

 

In any case, consumer and government consumption deepens the nation's dependence on external trade and financing, which galvanizes the credit-financed misallocations from the "twin deficits." (Prudent Investor, March 2024)

 

Sure, January's fiscal surplus signified a deviation.

Figure 4

 

Still, while January 2024 posted a 24% YoY improvement in the trade deficit—mainly a function of base effects—internal configurations remain almost unaltered.  (Figure 4, topmost image)

 

January's 9.1% export boom?  That's also mainly due to the low base effects.

 

Semiconductor exports, which accounted for a 45.5% share of the total, jumped 19.9% on low base effects. (Figure 4, middle graph) But nominal figures have been declining. 

 

The 7.6% contraction of imports?  Capital goods imports declined by 6.5%, while consumer goods imports increased by 15.8%.  In nominal USD terms—imports have been an uptrend for consumer goods, while capital goods have traded sideways. (Figure 4, lowest chart)

 

High GDP predictions?  Slowing imports of capital goods have barely presaged a high GDP.  Economic growth requires investments.  Aside from replacements, stagnant capital goods imports reinforce the deepening dependence on consumer imports. 

 

V. 2023 Decline in FDIs Reinforces its 7-Year Downtrend

 

How about Foreign Direct Investments (FDIs)?

 

Despite a peripatetic leadership, supposedly selling the Philippines as an investment hub, FDI investments slipped 6.6% in 2023 in the face of a weaker peso.   In short, aside from the politicized pitch towards nations belonging to the US-NATO alliance, the weak currency has hardly attracted economically significant investments.

Figure 5

 

An even more troubling sign has been the downtrend of FDI flows since 2017 (On the assumption that 2021's debt spike appears to be an anomaly). (Figure 5, upper graph)

 

Worst, debt flows, which don't guarantee productive investments, constituted the gist of FDI flows since 2012. (Figure 5, lower chart)

 

VI. Twin Deficits and BSP’s USD Standard: Philippine External Debt Soared to a Record High in 2023!

 

The thing is, this Keynesian-inspired spending splurge via the "twin deficits" requires financing. 

 

With the government and major corporations as net borrowers and the low levels of household savings, the domestic political economy increasingly depends on foreign savings to fill its FX requirements gap.

Figure 6

 

Philippine external debt was up by 12.7% YoY to hit a fresh record of USD 125.4 billion in 2023. This data excludes external liabilities of shadow banks/financial institutions.

 

The accelerated rise of the nation's external debt has been in tandem with fiscal deficits. (Figure 6, upper diagram)

 

Public sector borrowing was up 17.9% in Q4 2023 to an all-time high of USD 72.7 billion. (Figure 6, lower window)

 

Public sector borrowing accounted for 58% of the total.

Figure 7

 

Philippine external debt has exceeded the comparable BSP's December Gross International Reserves (GIR), which stood at USD 103.8 billion in December 2023. (Figure 7, topmost image)

 

External borrowings have boosted the Philippines' Balance of Payments (BoP) flow to a surplus (Q4 and 2023) via the Financial Account.

 

Financial Account. The financial account recorded net inflows (or net borrowings by residents from the rest of the world) of US$6.4 billion in Q4 2023, higher by 208.5 percent than the US$2.1 billion net inflows in Q4 2022…

 

Financial Account. The financial account registered net inflows (or net borrowing by residents from the rest of the world) of US$15.4 billion in 2023, higher by 11.0 percent than the US$13.9 billion in 2022. (BSP, March 2024)

 

Yet a part of the borrowing spree may have accounted for the buildup of the GIR.

 

Or, since 2018, the BSP has relied on "borrowed reserves" (including Other Reserve Assets--ORA) to manage its GIR/assets. [data based on IMF’s International Reserves and Foreign Currency Liquidity—IRFCL) (Figure 7, middle chart)

 

And since the BSP embarked on its aggressive QE via its balance sheet expansion to save the banking system in 2020, the mix in favor of international assets—which functioned as the de facto US Dollar anchor—has been drastically altered.

 

Since 2010, the BSP has kept its FX holdings in a tight range of 85-87% share, again, implicitly an anchor to the de facto USD standard.  (Figure 7, lower graph)

 

However, the BSP's mass acquisition of domestic assets in 2020 pulled lower the share of FX holdings. 

 

Therefore, aside from funding the FX gap from the "twin deficits" to showcase the facade of a "sound macroeconomy," perhaps a portion of this debt has been allocated for BSP assets/GIR.

 

VII. The Challenge from Higher for Longer International Rates

 

The challenge is that "borrowed reserves" or "USD shorts" depend on the sustained global easy money regime. 

 

Higher for longer international rates translate to increased cost of acquiring and maintaining "borrowed reserves."

 

Higher for longer also translates to a costlier access to FX savings. 

 

It also means a weaker peso or requiring more peso revenues to pay for extant dollar liabilities.

 

Most of all, a restrictive international monetary regime also exposes the unsustainability and the inherent fragility of credit-financed "twin deficits."

 

___

References

 

Prudent Investor Newsletters, 2023 Philippine Deficit Spending: Surging Debt and Debt Servicing and the Widening Impact of the Crowding Out Effect; December’s Unreported Historic Data! March 3, 2024, Substack

 

Department of Budget and Management, Review of the Medium-Term Macroeconomic Assumptions and Fiscal Program for FY 2023 to 2028, 186th DBCC Joint Statement, December 15, 2023

 

Prudent Investor Newsletters Stagflation Ahoy! Philippine February CPI Rebounds as January Employment Rate Fell, March 10, 2024

 

Bangko Sentral ng Pilipinas BOP Position in Q4 2023 Posts a Higher Surplus, Reverses to a Surplus in Full-Year 2023 March 15, 2024