Clearing port backlog after the lifting of the truck ban in Manila remains a big challenge to the Philippine government and a risk that may hinder growth through the second half of this year, an economist from JP Morgan Chase said.
The improvement in the July import figures, however, raised hopes for the resolution of port-related bottlenecks, JP Morgan’s chief Southeast Asian economist Sin Beng Ong said in a research note dated Sept. 26.
Seasonally-adjusted Philippine imports rose by 5.9 percent month-on-month in July. Although imports were down by 1.5 percent quarter on quarter, Ong said the July figure marked a material improvement from the 28-percent contraction in April. “In level terms, the latest import data suggest an inflection in imports following the material softness earlier during the year,” Ong said.
Ong said this improvement boosted hopes that port-related bottlenecks could be easing. He noted that seasonally adjusted imports of capital goods actually surged by 29.8 percent month-on-month in July, offseting the weakness seen in the first quarter which had likely affected the capital expenditure (capex) data.
“If this improvement continues into the third quarter 2014, the hope is that capex will rebound in the third quarter following the softness in the second quarter of 2014,” he said.
Setting some context to the data, Ong said the recent high frequency data in the Philippines depicted a mixed picture of economic activity.
“Motor vehicle sales continue growing at a rapid clip; loan growth, too, continues to rise smartly. Thus, with this recent strength and still buoyant business sentiment, the slowing in fixed investment in second quarter 2014 comes as a surprise. Moreover, sentiment surveys suggest that order books remain healthy and imply that supply, rather than demand, has been the main impediment to domestic activity,” he said.
Ong said that anecdotally, logistical bottlenecks increased earlier this year at the ports around Manila—which account for 65-70 percent of the republic’s total cargo throughput—“exacerbated by travel restrictions placed on heavy vehicles on the major thoroughfares around Manila.”
Although the travel restrictions on trucks were lifted in mid-September, Ong said clearing the backlog remained a challenge while noting that the improvement in the July trade data provided “room for some optimism.”
The economist said he would henceforth be watching capital flows and the Bangko Sentral ng Pilipinas’ (BSP) tone.
“While the central bank has an inflation-targeting framework, it also oversees financial stability. While the recent outflows are not destabilizing, a faster-than-expected rise in US rates or the US dollar could lead to a potentially destabilizing shift into foreign currency by domestic savers. This shift is captured in the foreign currency deposit data, which suggests a material rise in foreign currency deposits starting in second half of 2013,” Ong said.
Beyond expectations around the currency, Ong cited low interest rate differentials between onshore US dollar and peso deposits, which have fallen to less than 50 basis points from an average of around 1.6 percent.
“The opportunity cost of switching from peso assets remains relatively low. Thus, we have penciled in a preemptive move by the BSP against such a shift into foreign currency assets,” he said.
That said, Ong said the structure of debt had shifted materially in the last decade from external to domestic debt.
“Thus, absent a need to preempt deposit substitution and stall a weakening in the currency, the economic impact of a weaker currency raising debt service costs may be quite modest now, while a hike in domestic rates could be more keenly felt,” he said.
How the BSP will balance the trade-offs remains to be seen and can affect its reaction function, especially if stronger US dollar and soft Chinese demand lead to ongoing disinflation in commodity prices and tempers inflation risks next year.
“If there is a shift in the BSP’s tone, this raises the risk that JP Morgan’s forecast of three rate hikes between now and end-2015 may have to be stepped down,” he said.