PH navigates through global economic headwinds
Recent global headlines have not been for the faint of heart—with news of long-running political instability in a once-peaceful financial hub, corruption investigations against high-ranking officials, the erosion of traditional alliances, and an ongoing trade war between the two largest economies of the world.
One may wonder where a small, developing economy like the Philippines may find itself in the face of what appears to be a time of economic and geopolitical disruption.
The context: Global risk meter has gone up
In 2019, the global economy entered a broad downward cyclical phase, with escalating US-China trade tensions aggravating the downturn. Negative spillover effects have taken a toll on emerging market economies, with mounting external headwinds eroding investment confidence and weakening exports in several parts of Asia. This provides an important backdrop when we consider Philippine growth performance, especially in the recent quarters.
The Philippine GDP (gross domestic product) snapped a seven-year streak of above 6-percent growth, slowing to 5.8 percent for the first nine months of 2019. The slowdown is largely attributed to the delays in government’s infrastructure spending due to a budget impasse and an election spending ban in the first semester. A closer look, however, seems to show that the challenges seen over the past several months are not solely a domestic phenomenon. As stated earlier, there are developments abroad that made hitting above 6-percent growth even more challenging for our economy at large.
The US-China trade tensions and the pervasive slowdown in major economies have started to reflect in both our exports and FDI (foreign direct investment) numbers, and hence limited further our growth potential during the period.
Year-to-date merchandise exports are down by 0.2 percent from a meager growth of 0.6 percent in the same time last year, dragged mainly by the decline in Philippine exports to European and Asean markets. As seen in the following bar graphs, exports to Europe have been declining for about two years now, consistent with the Euro area’s slowing automotive industry, which was attributed to higher environmental standards for vehicles, global trade protectionism and possible disruptions by technology and competition. The European Union’s exports of motor vehicles to China, which is its second largest trading partner and the main target of President Donald Trump’s protectionist measures, has contracted by 5 percent so far this year versus a 13-percent growth in the same period in 2018.
More concerning, however, is our deteriorating exports to the Asean, which ironically is happening less than four years after establishing the Asean economic community. Instead, we saw that the combined effects of slower GDP growth across the Asean economies and the trade-tension-induced supply chain disruption had led to another year of decline in the sale of Philippine products to the region.
The decline in manufactured exports affirms this and the anemic performance of manufacturing in the national income accounts as reported by the statistics authority.
Trade war hardly has impact on PH? Look closer!
Amid the trade conflict escalation between the world’s largest economies, data for the first three quarters of 2019 show that exports of Asean-5 to China saw a drastic slowdown, with some even experiencing a decline. However, negative effects were partly offset by growing exports to the United States due to trade redirection. Higher tariffs have so far cut the US economy’s trade deficit, with China since Mr. Trump started raising them in early 2018, but overall trade balance has been steady as US imports from China have been redirected to other countries, including the Asean. Among the five, Vietnam appears to have benefited the most from the trade and investment diversification. The numbers for Malaysia, Thailand, Indonesia and the Philippines are mixed. Vietnam appears well-positioned to benefit from investment diversification as the country’s overall competitiveness (lower wage and energy costs) in manufacturing appear to have made it even more attractive to foreign investments.
The export performance of Malaysia, Indonesia and the Philippines to both the US and China have been mixed. Fortunately for Malaysia and Indonesia, the fall in exports may be temporary as they have seen sustained net inflows of foreign direct investments so far this year. In contrast, better exports performance of Thailand and the Philippines may slow down as FDIs for the first eight months of 2019 had been shrinking compared to a year ago.
Follow through with reform
Global growth is seen slowing further in early 2020 while tensions between the United States and China are expected to persist. In this kind of an environment, implementation of key structural reforms—not just short-term expansionary macroeconomic policies—have become even more compelling. The combined efforts of the private and public sector to fast-track the execution of development programs and policies have become even more crucial to offset the unintended effects of global headwinds and equip businessmen and the workforce to be better prepared to capitalize on opportunities presented by the rapidly evolving economic landscape.
BANK OF THE PHILIPPINE ISLANDS Lead Economist
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