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

 

 

 

The Philippine October Trade Deficit Plunged by 32% MoM! A Semiconductor-Powered Export Boom Amidst Declining Global Trade? Import Growth Decline on Oil Prices

Economic planners appear to be blind to the true origin of trade deficits. In a sound money environment, everyone is forced to pay their bills. If you buy something, whatever its origin, you will have earned or borrowed sound money from someone else to pay for the goods purchased. Therefore, trade deficits, other than those arising from self-correcting timing differences on settlements, cannot exist. Attempts to correct trade deficits by manipulating the exchange rate, while pursuing unsound monetary policies, are in consequence futile—Alasdair Macleod 

 

In this issue 

The Philippine October Trade Deficit Plunged by 32% MoM! A Semiconductor-Powered Export Boom Amidst Declining Global Trade? Import Growth Decline on Oil Prices  

I. Amidst a Global Trade Downturn, A Semiconductor Powered Export Boom in October? 

II. Imports Retreat on Oil Prices, October Trade Deficit Decreased by 32% MoM! 

III. Jawboning the Financial Markets via the Merchandise Trade Data? 

 

The Philippine October Trade Deficit Plunged by 32% MoM! A Semiconductor-Powered Export Boom Amidst Declining Global Trade? Import Growth Decline on Oil Prices  

 

As a result of a semiconductor export spike and a retreat in import growth, the Philippine October trade deficit plunged by 32% MoM! But has this data been used to influence market prices? 

 

I. Amidst a Global Trade Downturn, A Semiconductor Powered Export Boom in October? 

 

Inquirer.net, December 14: Exports hit a new monthly record in October, thus narrowing the Philippines’ trade deficit to a 14-month low, although the cumulative deficit for the year approached a new annual high. Preliminary data at the Philippine Statistics Authority show that in October, export receipts surged by 20 percent to $7.7 billion from $6.4 billion, 10 times as fast as the 2-percent growth recorded last year. 

 

Did exports really sizzle in October, as reported by authorities? 

 

Figure 1 

 

First, it would be misguided to attribute the record exports to the weak peso. (Figure 1, higher window) It was semiconductor exports that drove this growth rather than prime commodities.  (see explanation below) 

 

Second, since 2021, emerging market exports have powered global trade growth (data from Patrick Zweifel of Pictet Asset Management). (Figure 1, lower window)  

 

But with exports of advanced economies slowing sharply, this should drag emerging markets activities lower. And the slowdown signs are becoming apparent, which brings us to the next relevant but contradictory signal. 

Figure 2 

Third, the Philippines seems to be the "odd man out" among its ASEAN contemporaries, which predominantly exhibited export declines in October and the last few months. (Figure 2, higher window; charts from Tradingeconomics.com) 

 

Local exports boomed as everyone else in the region faltered! 

 

Fourth, according to the S&P Markit, new export orders have been contracting since March! (all bold highlights mine) 

 

Businessworld, November 3: Philippine manufacturing companies reported improved demand in October, driving growth in production and new orders for a second straight month, S&P Global said. “While overall factory orders increased, volumes of new work from abroad contracted at the sharpest pace since the recent sequence of decline began in March,” it said. 

 

S&P Markit, December 1: That said, export conditions remained weak during November, thereby extending the current sequence of contraction in new export orders observed since March. Weak foreign client demand weighed on total new order growth across the sector which was primarily driven by domestic demand. Nonetheless, the downturn in export sales softened from October's recent low. 

 

So, from the S&P Markit's perspective, instead of a boom, export orders have contracted since March.   And since export orders become actual transactions in a month or the next, exports should have posted declines than a growth spike.  

 

But, of course, the unaudited government data tells a different story. 

 

And to recall, the prospects of weak exports prompted firms located in the Mactan Economic Zone to retrench about 4,000 factory workers last September. 

 

Fifth, there are material discrepancies in the trade data of counterparties or bilateral partners. 

 

For instance, after Hong Kong, the US was the second-largest export market of the Philippines in October, which accounted for a 15.3% share, and the largest export market in 2022 with a 15.7% pie. 

 

According to the PSA, Philippine exports to the US jumped 22.6% in October, which pulled the YTD export growth to 5.6%. 

 

Yet, US imports from the Philippines registered a paltry 4.07% over the same period, according to UStradenumbers.com. (Figure 2, lowest pane) 

 

So which represents the accurate data, the US or domestic official numbers? 

 

Figure 3 

 

Also, semiconductors constituted most of the domestic export growth.  And as a result of its spike, its % export share of the total ballooned to 66%! (Figure 3, middle window) 

  

So again, the gist of the fantastic export growth data was from computer chips!   

 

Paradoxically, global revenues of semiconductors fell by 5% in October, according to the Semiconductor Industry Association!  (Figure 3, topmost pane) 

 

And oddly, the fabulous growth spike came amidst the erection of trade barriers by the US government against Chinese chip exporters allegedly for "national security" reasons in October.   The governments of Japan and the Netherlands recently joined the US to establish chip curbs against Chinese producers/exporters.  

 

To counter this, the Chinese government raised this trade dispute with the WTO a few days ago.  

 

On this note, China's semiconductor output fell in November anew, but less than the record low before the trade dispute. 

 

Also, the price of the US-listed benchmark PHLX Semiconductor Sector Index (SOX), a capitalization-weighted index composed of 30 semiconductor companies, has been declining since the advent of 2022, even before the trade restrictions.  

 

The SOX posted a 33% deficit YTD. (Figure 3, lowest pane) Developing softness in demand has likely brought about the bear market in the SOX. 

 

The crux is, while demand for semiconductors has been decreasing globally, worsened by trade disputes, Philippine exports defied the global trend!  Wonderful! 

 

As a side note, ironically, weakened domestic demand caused PC shipments here to plummet by 19.8% in Q3, according to the International Data Corporation!  

 

Amazing contradictions! 

 

II. Imports Retreat on Oil Prices, October Trade Deficit Decreased by 32% MoM! 

  

Figure 4 

Meanwhile, import growth slackened to only 7.5% last October. (Figure 4, topmost pane) 

 

But instead of "growth," imports represented another story of "imported" inflation. 

 

The deceleration in oil prices (+4.25% YoY) mirrored the cutback in the growth rate of fuel imports (+29.7%).  The fuel share of imports dropped sharply to 17.1% from 19.3% a month ago. (Figure 4, second to the highest window) 

 

And though capital imports grew by 3.5% YoY, October nominal values fell to February lows.  Its % share of the total inched higher to 26.2%.  (Figure 4, second to the lowest pane) 

 

A credit-financed consumer boom should be happening.  But the growth of consumer goods imports slowed to 22.5%.  In USD, consumer goods imports dropped to a five-month low.  Nonetheless, its share of the total soared to 17.2%. (Figure 4, lowest window) 

 

Yet, here is the puzzle.   

 

Public spending has drifted proximate to its record level in October.  Bank consumer borrowing cruised at an unprecedented level in October. 

 

So, why did imports of capital and consumer goods slow? 

 

By deduction, local producers have taken over the role of imports. 

 

But given the slowing growth momentum in domestic manufacturing, has there been significant overstocking at the producer, wholesaler/distributor, and retailer levels?  

 

Is the Philippine economy experiencing the "bullwhip effect?"  The bullwhip effect represents "end-to-end" supply chain disruptions caused by fluctuations at the retail level. 

 

How are these contradictory signals (slowdown in investments and consumer goods imports) indications of growth? 

 

Figure 5 

 

In the end, the export spike and the slowdown in imports resulted in a 32% MoM, and a 13.5% YoY reduction in the merchandise trade deficit! (Figure 5, topmost window)  

 

III. Jawboning the Financial Markets via the Merchandise Trade Data? 

 

What benefits accrue from the narrowed merchandise deficit? 

 

First, a reduced trade deficit will be reflected in net exports (total exports minus total imports), which helps boost the statistical economy, the GDP. 

 

Second, a decline in the trade deficit helps diminish the balance of payment (BOP) gap through the current account, which should reduce pressures to acquire savings in foreign exchange or the USD for funding.  (Figure 5, middle window) 

 

So there you have it.  The shaving of trade deficits, real or not, is likely to support the GDP and the Philippine peso.   Or, have authorities been using embellished statistics to jawbone or condition the public to influence market prices indirectly? 

 

Or, maybe the October export spike was about one enormous transaction, like a multi-billion special block sale at the PSE. 

 

Yet, the forthcoming public external borrowings may confirm or invalidate this data.  (Figure 5, lowest pane) 

 

But, of course, there can always be off-balance sheet transactions that conceal other liabilities. 

And as noted elsewhere, along with Other Reserve Assets (ORA), external borrowings have played a principal role in the BSP's Gross International Reserves (GIR).   But borrowed reserves signify "USD shorts."   

 

Instead of strength, a substantial drain of USD liquidity globally exposes domestic FX fragilities from "USD shorts," as shown by recent events. 

 

And given the degree of entrenched imbalances, global and domestic financial and economic instabilities won't be going away anytime soon.