Philippines: Reconciling Short-Circuiting Electronic Exports

The situation for Philippine exports is particularly dire, with the value of exports falling by 20.7% y/y in December 2011 after reaching a two-year low in September amid persistent weakness in external demand for the country’s electronic goods (Figure 1). Export growth contracted for its eight consecutive month, while electronic exports contracted for its eleven consecutive month. Although the U.S. book-to-bill ratio improved to 0.88 in December after bottoming at 0.71 in September, there is no supporting evidence that electronics demand has bottomed out for the Philippines. Furthermore, weak domestic demand for durable equipment coupled with lower automobile imports and lower imports of raw materials for electronic products pulled down electronic component imports in November by 14.9% y/y. This does not bode well for export growth given imported electrical components serve as inputs for the production of semiconductors.

Figure 1: Electronic Exports Have Registered Negative Growth Since February 2011

Source: National Statistics Office, Republic of the Philippines (NSO)

To reconcile short-circuiting electronic exports, the Philippines must diversify its export products and export markets. The Philippines should start by reducing the percentage share of electronic products to total exports, which will alleviate the country’s external demand susceptibility. Promisingly, since reaching a decade high of 67.3% in 2004, the share of electronic products to total exports has fallen to 49.1% in 2011 (Figure 2). While bleak external demand for electronics over the past year is responsible for the decline in the percentage share of electronic exports to total exports, other products have expanded to fill the gap. Agro-based products have doubled from a 3.0% share in 2000 to a 6.6% share in 2011. Likewise, mineral commodity exports look to continue to grow on emerging market appetite, having expanded from a 1.5% share in 2002 to a 5.5% share in 2011.

Meanwhile, the World Bank (WB) expects the country’s major export and investment partners to have slow growth in 2012, expecting Japan to grow 1.9%, the U.S. 2.2%, China 8.4%, and the Eurozone to contract 0.3%. Since the Global Financial Crisis, the Philippines has become increasingly reliant on demand form ASEAN and East Asia in an attempt to decouple from developed markets (DMs) (Figure 3). However, recent trade data points to a slowdown in China, with lower imports indicating clear signs of decelerating domestic demand. As a result of abysmal demand from DMs as well as a slowdown in China, President Aquino has indicated his administration’s efforts to diversify export markets. The government has reengaged talks of an EU-Philippine free trade agreement, is expanding ties with Russia and Indonesia, and has been studying export prospects in South America. Furthermore, President Aquino noted the Board of Investments has been working with the Advanced Research Center for Development and the Congressional Commission on Science and Technology to enhance research and development systems in the Philippines to move the country away from producing semiconductors to producing high-value electronics.

Figure 2: Although High at 50%, Electronic Exports Share of Total Exports is Improving

Source: NSO


Mirroring its export-dependent neighbors, the Philippines’ reliance on external demand, particularly semiconductors, continues to weigh on the country’s growth prospects, exposing its vulnerabilities to the whims of the global economy. The deteriorating global growth environment, dominated by lackluster U.S. growth prospects and Eurozone recession and financial headwinds, not only stresses the need for export diversification away from electronic products, but also highlights the need for new markets to allow the Philippines to weather global downturns. Moreover, as China’s growth outlook decelerates over the next two years, the outlook for Philippine exports will be further exacerbated.

Although the U.S. Federal Reserve’s decision to hold interest rates at historic lows will buttress consumption and may translate into higher demand for Philippine goods, U.S. fiscal drag will continue to weigh on external demand. While the Aquino administration is focusing on improving domestic consumption to offset weak external demand, consumption will not increase sufficiently to replace American buying. Encouragingly, the Aquino administration is aiming to strengthen the electronics industry by increasing the capacity for assembly of electronic parts as well as looking to open and expand export markets. New investments from Canon and Murata Manufacturing totaling US$468 million (PHP20 billion) and US$8.2 million (PHP350 million), respectively, will help improve industry capacity and reduce negative effects of Mother Nature on supply chains.

Figure 3: A Disparaging View of Trading Partner Activity, % Share of Exports by Economic Bloc

Source: NSO

Note: East Asia includes: China, Hong Kong, Japan, Macau, Mongolia, N. Korea, S. Korea, and Taiwan

One Response to "Philippines: Reconciling Short-Circuiting Electronic Exports"

  1. Johann   February 27, 2012 at 2:35 am

    This has been the economic story of the Philippines for the longest time. The dependence on outside markets is subject to the ups and downs of global trade. It cannot be avoided since a large part of the population is poor and local businesses tend to look overseas to sell their products. I completely agree with the need to diversify export markets, aside from the usual trading partners; US, China, Japan and a little from a few European countries. If those economies are in a recession; Philippine exports will slow down thereby hurting the economy. It's great that Canon and Murata are investing but they still are from the same trading partners mentioned. It is high time that the present administration increase exports to their South East Asian neighbors since the region has been growing economically these past few years.