Imports down, growth is up, so says NEDA and BSP

Cebu, PHILIPPINES, March 26, 2015 – Li & Hungerford welcomes you to its belated first update for 2015. While the global economy looks to sustain the level of uncertainty exhibited in the last half of 2014, the Philippine economy is trending positively on a bounce back fourth quarter boom.

NEDA released the January trade figures yesterday. The biggest figure to note was the accelerating decline of imports, down 14.2% following the drop of 10.6% in the previous month. However, we see this as no reason to temper the outlook on the Philippine economy, as the drop can almost entirely be attributed to the sustained depression in the price of oil (WTI crude oil has been trading between $42 and $52 per barrel for the last month, a sharp decline from more than $100 per barrel this time last year) with the importation of raw materials, intermediate goods, capital goods and consumer goods up, and consumer sentiment remaining robust according to the ADB.

As a net importer of oil this has been and continues to be a boon reflected by the strong fourth quarter growth for 2014 of 6.9%, coupled with slowing inflation (3.57% for the quarter, just below the 5 year mean), and is also reflected in the composition of this growth (following figures are for the 4Q 2014) which has been mainly driven by a growing manufacturing sector (10.7%) and expanding exports (15.5% – expect a jump in exports for 2016 as major port projects to expand capacity come online), a resumption in government expenditure (9.8% expansion, following a 3Q decline of 2.6%), and strong construction growth (25%) (incidentally the mining sector shrank by 3.2%, in line with expectation).

However, we do worry about the statements of Economic Planning Secretary Arsenio M. Balisacan who suggested, in order to offset reduced government revenue from customs, an increase on the excise tax on petroleum products was recommended. In our opinion this would be an unnecessary dampener, and a gross overcompensation on what is both a temporary problem (we expect the oil price to normalize as the producers of non-conventional oil with higher cost bases are squeezed out (concentrated in the US and Canada) and growth flattens, although, predictions have, so far, been contradictory, however, prices north of $100 per barrel may be a thing of the past), with the net gain from the overall buoyant economy likely to overshadow the drop in customs revenue.

Speaking of which, on Tuesday at the Euromoney Investment Forum, BSP governor Amando M. Tetangco Jr. expressed a bullish outlook on the Philippine economy stating that the government target of 7% to 8% “is attainable as domestic demand conditions remain firm, supported by improving production efficiency and robust labor market dynamics.”

While inflation in January experienced a slight uptick from the previous month to 2.5%, it is still well within a healthy range, and the BSP expects this to continue throughout 2015. It is comforting to note that Tetangco is also aware of the move towards normalization by the US Federal Reserve, although history tells us that the Philippines has been particularly resilient to the effects of capital outflows due to the buttressing provided by the phenomena of high levels of OFW remittances (8% of GDP), which has averaged 7.08% growth year on year since 2010. However, it is important to note that, with the fall in commodity prices, oil producing nations,  where many Philippine OFWs are employed, can only last so long (many of the Middle Eastern economies require an oil price of at least $70 a barrel to sustain fiscal commitments, and the recovery of the US economy could sputter should its newly emergent oil producers begin to fold en masse due to the un-sustainability of producing oil for such a low price) in this price war (which it is), before it begins to negatively impact the economy, and, hence, negatively impact the value of OFW remittances from that region. Luckily, there is minimal exposure to Russia where this is already occurring.

As an investor in the Philippines, although the economy continues to exhibit strong fundamentals, it is important to remain vigilant in monitoring the interplay between the global and domestic economy. We at Li & Hungerford believe that the BSP’s target of 7-8% growth for 2015 may be a little optimistic, although that is typical of government targets, however, we feel our previously stated target of 6.8%-7% is still likely. The ADB has maintained its growth forecast of 6.4% in 2015.

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