Trade deficit not at all bad, but…

The Philippines’ trade deficit — a situation in which imports exceed exports — swelled to a record $4.2 billion for the month of October, eliciting some concerns on its potential impact on the economy as a whole and on the peso’s value against the dollar.

According to data from the Philippine Statistics Authority (PSA), imported goods that entered the country in October surged 21.4 percent to $10.3 billion from $8.5 billion in the same month last year.

This followed the government’s easing of importation procedures especially for agricultural products to address rising inflation caused by supply tightness.

Merchandise exports, on the other hand, also grew in October but by a slower 3.3 percent to $6.1 billion from $5.9 billion last year.

For the period January to October, imports totaled $90.9 billion, up 16.8 percent from $77.9 billion a year ago.

However, exports contracted by 1.2 percent to $57.1 billion, bringing the end-October trade-in-goods deficit to $33.9 billion, wider than the previous year’s $20.1 billion.

This is not at all bad. It would be alarming if the bulk of imports continued to be consumer goods, which would indicate that the country is importing finished products such as appliances or gadgets for use by its consumers.

However, economists have noticed a shift in the country’s import profile. Imports of capital goods and raw materials now account for a bigger share of shipments to the Philippines from abroad.

These are used by industries to manufacture products either for the local market or for exports. There is, in short, value added to the items being imported.

These also include equipment and other technology for the construction of bridges and other infrastructure projects.

Thus the healthy growth in the importation of materials and equipment relating to construction being triggered by the government’s ambitious infrastructure program dubbed “Build, build, build.”

As one private economist described it, the robust import growth is yet another sign that the Philippines has moved into a new chapter in its growth story, unlike in the past when import growth was driven largely by fuel and consumer goods with irregular flows of capital goods and raw materials outside those used for electronic exports.

In short, imports of capital goods, raw materials and intermediate goods are positive indicators as these relate directly to production and investments, as opposed to outright consumption.

But while the trade deficit is not at all bad, neither is it sustainable. There should come a time when exports step up and move closer to the level of imports.

Weak exports, in fact, have become a much bigger concern in current discussions on foreign trade. The government has to think of other ways to boost exports especially from outside electronics.

Early this year, Socioeconomic Planning Secretary Ernesto Pernia indicated that the government was targeting an 8-percent growth in merchandise exports for 2018, supported by a revival of the agribusiness sector.

To achieve this, he explained, the Philippines needed to build up integrated industries that would generate higher value added, especially for key products such as bananas, cacao, coffee, mangoes and rubber, as well as for other emerging high-value crops.

But the year is about to end and nothing much has happened on the agribusiness front.

This is disappointing considering that economists do not see any rebound in the traditional export sector happening anytime soon.

This outlook, combined with surging imports to fuel a manufacturing revival and the ambitious infrastructure program of the Duterte administration, can put heavy pressure on the peso to weaken.

Economists expect the local currency to average P54-55 to $1 in 2019 due mainly to a chronic burgeoning trade deficit.

Other sectors — agriculture and tourism, for example — must start doing their part to generate more dollars to help close the gap with the huge amount that the country spends for imports.