A historical analysis of Philippines' Trade and Finance: A Term Paper in Developmental Economics
Cyl Bryan A. Bagadiong, Developmental Economics,
The Philippines’ 1983 to 2006 Balance of Payment, a systematic summary of its economic transactions to the rest of the world, reflects the country’s ever changing economic policy experimentations and inconsistencies. It also reflects how various internal and external factors affect its economy, thus reflecting a “boom and bust” trend as shown in Chart A below. Also, it explains the country’s quality, or lack thereof, of economic development.
The overall Balance of Payment (BoP) does not show any trend to derive a sound projection as shown by the blue bar in the below-mentioned chart, albeit, it can be seen that there were more blue bar that can be counted above the zero line. This means more incidences of surplus, as compared to incidence of deficit and balance. From 1983 to 1989, the BoP showed a picture registering
either a surplus or a balance amidst a turbulent political crisis and hostile business environment in the country highlighted by assassination of Senator Benigno Aquino – a known political opposition – which was blamed to the government in 1983; citizens unrest; and peaceful yet mass upheaval which later to be known as People Power Revolution in 1986. There are several factors that contributed to this picture of BoP.
From 1987 to present, BoP was marked by a “boom and bust” pattern of inflows and outflows. Notable on this pattern is the huge deficit in year 1997. This is attributable to the Asian Financial Crisis that greatly affected the Philippines. BoP showed a surplus on the next two years only to demonstrate again a deficit on the next two following years. Even the latest data from 2003 to present cannot establish a permanent trend. This see saw trend in the BoP suggested that the macro-economic fundamentals, especially monetary policies, of the country were weak that its overall BoP position can be easily affected by various and constant, sometimes very fluid and volatile, changes of diverse internal and external economic and political developments.
The current account, represented in Chart A in red line, also showed how it changed overtime and influenced the trade transactions of the country to the rest of the world. As we can see, from 1998 -2002, the current account exhibited a constant deficit, except in 1998, whereas the Capital Account, represented in the chart in green line, showed the reverse of the former by exhibiting a constant surplus almost mimicking the reverse of the Current Account. Many explanations can be attributed to this trend but generally, it shows that the Philippines’ excess of payments for its imported items are usually compensated by a surplus of the country’s receipt of foreign loans, both private and public, and investments after deducting the amount they pay for interest and repayment of capital of former loans and investments. This is also the era of “Taiwan’s money” in form of portfolio investments flooding the country’s market every now and then to take advantage of the country’s high exchange rate and interest rates.
In short, the Philippines resort, almost always, to borrowings to offset the deficiency of its income from its exports after deducting the expenses it incurred from its import. Abetting this surplus in Capital Account, or helping the Capital account to offset the deficiency of the country’s inflows is its foreign reserves as showed by the violet line which shows the changes in the Cash Balance of the country. Exports gives the Philippines dollars while imports uses up the country’s dollar reserves, and whatever is left after importing goes to the foreign reserves. This is because BoP transactions in the Philippines are denominated and/or financed in dollars. This will explain the almost parallel movement of the violet line (Changes in Foreign Reserves) and the red line (current account). This abatement happened in such a way that due to the chronic deficit of the country’s current account, it has to use it foreign reserves to pay off its debt and offset the current account deficit. As we can see, the BoP is computed in two ways, either by the so-called above-the-line items which refers to the sum of the balances of the capital, current and financial accounts; or by the so-called below-the-line-items which refers to the change of the country’s foreign reserves as a result of those transactions as mentioned earlier. Ideally, both ways shall yield the same result but due to the limitations of the data for the above-the-line items, the overall BoP position is determined using the below-the-line items and discrepancies therein falls under the category of “Net Unclassified Items”.
From 1998 to 1999, however, capital account balance started to become nil and started to decrease. This is so because capital transfers are already virtually non-existent. The country is generating so much bad news in terms of investment favorability under the Estrada Administration and impending civil and political unrest exacerbated this situation. Investor confidence is at its lowest at this time. Government debt already reached staggering heights, thus, the government started effecting a forced debt management. This forced debt management, according to the Bureau of Treasury of the Philippines, enabled the Philippines to stopped borrowing from World Bank on commercial terms, re-structure its old loans and rely heavily on Official Development Assistance from various Foreign Government and Institution which offers a lower interest rates and longer terms.
To further examine the changes that affected this BoP over time, Chart B explains the changes in the current account of the country. As we can see, from 1983, the country’s balance on goods (blue line) continues to increase in the negative side of the scale until 1997. This paints a clear picture of the growing deficit of the country from its exports and imports. Factors contributing to this increasing deficit are not mainly attributable to the local political turmoil that the country was in, but also its trade driven economic growth which became a victim of the globalization of tariffs and trade agreements. The country cannot simply compete with other countries in an unlevel playing field. While the importation trade is so alive, the exportation sector is suffering from the protectionist policy of the US such as the exportation ban of shrimps in US simply because the Filipino Fisherman is using a net that also able to catch a species of fish that is considered as endangered in America. Added to this is the continuous depreciation of peso to the dollar thus making importation so costly yet exports income cannot tide over the import expenditures.
In 1999, after the Asian Financial Crisis, the World Bank forced the government of the Philippines to adopt fiscal and austerity measures resulting to the sudden reversal of the Balance on Goods. However, the World Bank intervention made even the country’s current account look worse. Prior to the World Bank Intervention, the previous Balance on Other Goods, Services and Income (red line) which traversed the positive side of the scale now finds itself on the deficit side while the sudden reversal on the Balance on Goods return to its previous decreasing state (or increasing deficit). The Unrequited Goods, the account that refers to the transfer of assets from one country to another without expecting for recompense such as foreign aid grants, became increasingly bigger and bigger from its previous minimal state. This signals the increasing dependency of the country to Foreign Grants.
To further understand the increase of deficit on the Balance of Goods, Chart C will provide us the clear picture of trends from 1993 to present. It would seems that the Balance on Goods only appear from 1989 and became persistent to 1997. This period signals the transition of the country’s economic structure to exportation of primary products to manufacturing sector of which materials are also imported primarily from other countries, such as Japan. This is also the period where the country was plagued by several coup de ‘etat and was suffering from power shortage in form of long power black-outs. The export income or output cannot overtake the import inputs. It took the Ramos Administration then three years to reverse the trend that had been crowned in the Balance of Goods complete disappearance in 1998. This year was also marked by massive infrastructure projects and wide-ranging economic reforms. However in 1999, when the then President Estrada took over, whose administration was characterized by mismanagement and corruption, the health of export and import industry again suffered resulting to the increasing gap of imports and exports, thus, affecting the balance sheet of the country in terms of its trade balance. Only in 2006 that the government was able to seem to decrease the said gap.
Also contributing to this change of Balance of Payment is the very fluid and volatile movement of the Portfolio Investment (red line) and Other Investments (green line) as shown in Chart D which comprises the Capital or Financial Account side of the BoP. These however, as had already mentioned in the early paragraphs, are not only attributable to the internal turbulent atmosphere of the country due to its political instability. Also playing a big role in the decision of the investor to give its confidence to the country are some external factors such as interest rates which is affected by the law of supply and demand, low value of the local currency against the dollar, low real value of the local currency as compared against a basket of currency based on the Asian 4 (Malaysia, Thailand, Indonesia and Philippines) currencies, credit ratings issued by foreign Credit Rating Agencies (CRA) such as Moody’s, Standards and Poors, Fitch, among others. Contributing also on these which also affects the volatility of these investments are the also volatile exchange risk rate, interest rate risk, equity and commodity price risk, etc which are part and parcel of unregulated stock market in the Philippines and liberalized stock trading market in the world due to the globalization and liberalization of the said market. In this arrangement, almost always, Developing Countries, such as the Philippines is on the losing end.
In summary, the Philippines BoP changes over time can be attributed and linked to several factors. Definitely, it’s Economic Policy which focuses more on economics of quantity rather than economics of quality and its failure to utilize fully its comparative advantage played a vital role in advancing its dream of a balance BoP or a Surplus at the least. Political Instability is a key player in affecting changes in its economic account with the world. Sound macro and micro economic fundamentals also influenced movement in the BoP of one’s country, thus, the Philippines has a need for this. In the era of globalization, the soundness and strength of the country’s economic fundamentals must be ensured in order for it to be isolated, or be mitigated, from the sudden changes of the global economic developments such as the recent US debt crunch. Although from 1983 to 2000, it exhibited a dismal performance, recent data shows an improvement in the overall picture. Economic Reforms and Policy Changes has been taking place since 2003 in the Philippines such as diversification of its foreign reserves in its effort to detached its economy from the US dollar currency; its slow decoupling from US and Latin America and diversifying its trade relations with Japan and China; practicing debt management and debt risk monitoring; increased in exports and diversifying its exports to service sector while maintaining its lead in electronics; maintaining its competitive and liberal labor supply to further engage the manufacturing sector of automobile and ship building; etc. What is needed now is to maintain this trend in its recent BoP data to finally advance its dream of economic recovery and progress.
2. Trade Balance and GDE
(Insert Tables for Trade Balance and GDE, Compute Trade Balance over GDE (Xt-Mt)/Yt)
As shown in the scattered diagram above tabbed as GROWTH INDEX OF (Xt + Mt) AND GDE, it demonstrates that the growth pattern of Gross Domestic Expenditures always far outrace the growth pattern of the sum of export and import except that of the year 2002 to 2003. In general though, the two maintain the same separate growth trend wherein both have maintained an almost the same growth rate but on a different parallel path – the gross domestic expenditure above the sum of (Xt + Mt). This would seems to show that the Growth Domestic Expenditures is always more than the sum of the Exports and Imports of the Philippines, thus, almost always, will generate a deficit result there being the expenditures is always more than the net income it can acquire from its trade transactions of goods and services. Year 2002 to 2004 growth rate seems to accelerate and caught up with the GDE. But this is not the case. Marked by so much political bickering and a government operating in re-enacted budget of previous years, it was the GDE that had slowed down on these years. Contributing to this is the sudden restraint of domestic spending in anticipation of the difficult years ahead resulting to low interest rates and sluggard domestic trading affecting the GDP growth.
After getting the sum of the Exports and Imports and dividing the same by the Gross Domestic Expenditures, a new index had been generated. I plotted the new index in a scattered diagram (shown in a blue line in NEW INDEX (INDEX OF TRADE DEPENDENCY) chart as shown above) after deriving the values to observe the pattern. It would give the impression that the trade dependency index mimics the pattern of the sum of (Xt + Mt). As had been noted, whenever the new index decline, there is also a decline in the sum of (Xt + Mt). This growth trend of the new index exhibits the clear indication that the economy of the Philippines relies heavily on its export industries imitating the Japan’s example of relying heavily on “processing trade” or “trade as engine of growth” wherein the country export manufactured or semi-manufactured goods from imported materials. I think several factors led the country to pursue this trade dependence as an engine of its growth and take the example set forth by Japan. These factors are the relative small market of the Philippines as compared to other countries, the relative underdeveloped endowments of the country and the constitutional prohibition to further exploit them, and the abundance of cheap but otherwise semi-skilled labor supply. The slight decline of the new index in 2005 and 2006 does not mean that export and import sector became sluggish on these years. In fact there is a noticeable increase on export and imports in the years mentioned. It should be attributed however to the sudden increase of share to the GDP of massive inflows of Overseas Filipino Workers’ dollar income remittances affecting the trade dependency ratio as it also affects the GDE/GDP variable.
3. EXPORT/IMPORT DEPENDENCY Xt /Yt and Mt/Yt over time
(Insert Chart of Export Dependency over Time, GDP versus Export, GDP Growth Rate and Export Growth Rate, Import Dependency overtime, GDP and Import, )
Playing a major role in the export industry of the Philippines, from 1983 to 2002, is the Unclassified Goods where the Electronic and semi-conductors belong. Electronic and semi-conductor are sub-components of various electronic goods such as TV, Radios, Camera, CD and DVD players, Computers, Medical equipments, etc. Electronic Parts ranges from a simple casing to a complete circuit boards or case-less cell phone assembly. The movement of this primary export items is seen on the chart at right labeled as EXPORT CHART.
This Unclassified Goods, shown in purple line, dominated the export growth of the country. The aggressiveness of the Unclassified Goods showed the shift of the country primary export focus from agriculture to manufacturing industry. Not until 2002 that the Unclassified Goods continuously became the top grosser in the export growth only to be overtaken by the Machines and Transport Equipments until the present.
Albeit, Unclassified Goods, where the electronic and semi-conductors belongs, continues to comprise the large share of exports with only a little difference with that to Machines and Transport Equipments. The latter, which is also a part of the manufacturing sector, boosted the very major role of the said sector in revitalizing the export industry of the Philippines. The sluggish growth of the Unclassified Goods from 2002 onwards and the slight decline from 2005 to 2006 is attributable to the option exercised by Japan and Korea to make their industry expansion not in the Philippines but in China and India due to cheap labor cost the latter offers. The two countries however maintained its industry in the country due to the belief that the competitiveness of Philippine’s labor and liberalized trade policy tends to favor the industry in the long run.
On the other hand, the agriculture industry, which basically where the Food and Animal group belongs, continued its slow growth. The industry, notwithstanding playing a role in the growth of the country’s export, exhibited a lethargic growth as we can see at the trend showed by the blue line. This is attributable to the perception of the country of its disadvantage position relative to its Terms of Trade if it continues to pursue the primary product export orientation. Tariff policies implemented in the country, which I will try to discuss later, also contributed to the minor role that the agriculture sector had played over the years. On top of this and relative to the minor growth the agriculture sector exhibited in the export side, the country had found itself powerless against the protectionist policy of its competitors and some Developing Countries in terms of their agricultural outputs.
In the import side, as shown in the IMPORT CHART below, beginning 1991, Capital Goods, where Machines and Transport Equipment belongs, dominated the growth as shown by the blue line. Foreign Machines and Equipments dominated the transport, construction, service, manufacturing, medicine, IT and agriculture sector of the Philippines. Brands such as Yanmar, Mitsubishi, Kubota, Iseki, Caterpillars, Hyundai, Nissan, Toyota, General Motors, Konika, Fuji, etc flooded the country.
The Unclassified Goods (purple line in the IMPORT CHART), comprising primarily of electronic parts, overtook the growth of Chemicals and Basic Manufactures (shown in green line). The aggressive growth of the Unclassified Goods continue its expanding drift, only experiencing a slight dip in 1998, but strongly bouncing back in 2002 until the present. The slight dips in 1998 to 1999 and 2000 to 2003 are attributable to the Asian Financial Crisis after shocks and the 2002 Oil Crisis respectively. The latter was the effect of the US invasion of Iraq coupled with the continuous low performance of the Peso to the US dollars, where the importation transaction is denominated. The sudden sharp increase in importation in Crude Materials and Minerals, Fuels, etc., from 1999 to 2000 can be credited, among others, to the sharp increase of crude oil demands to supply the power requirements of the country, and also the increasing price of crude oil per barrel in the international market due to effect of the law of supply and demand; and some argued, to the unregulated monopoly of the four primary oil producing countries.
Japan had played a vital role on these changes that had taken place in the export and import growth of the Philippines. As we had seen in both charts, Machines and Transport Equipments, categorized as Capital Goods in the Philippines trade account, had dominated the Philippines export and import health. This role of Japan in the Philippines, and the rest of Asia’s, Export and Import vitality had been explicitly describe by Ms. Candy Chiu of the Philippines’ University of Sto. Tomas in her paper entitled “An Exploratory Investigation of Philippine-Japan Trade Relations in the Automotive Industry” which she elucidated that:
“Japan, the prime mover in the automotive business has been able to rise to the challenges of the times as the crisis served as a wake-up call for its vulnerability. The prospect of raising consumption, production, sales and trade is very significant for alleviating Asia’s recession, as well as addressing weaknesses that have been overlooked. Japan’s importance in the development of the Asian region reshapes the path to recovery where Japanese production activities in Asia are broadly defined through trade and investments and where the automotive industry is Japan’s most internationally competitive manufacturing sector. The signs of economic recovery in each Asian country encourage the entire region, because Asia’s health is vital to the prosperity of the world economy and the expansion of trade.”
“This is because the multilateral trading system that Japan employs with its trading partners, such as the Philippines, is characterized by strong network and deep concern for developing and lesser-developed countries. This trade attitude of Japan has been a major factor contributing to the improved economic outlook for Japan. Primarily because it has kept foreign markets open to Japan’s world of business and trading. Adding to this outlook is the personal relationship of Japan and Philippines which is based on friendship. This friendship, in turn, is based on appreciation, respect, and understanding that had strengthened the relations and economic ties of Asian countries, especially those of the Philippines and Japan over the last fifty years. The Philippines-Japan relations have been vibrant and mutually beneficial for the governments and people of both countries. The Philippines and Japan have made great efforts to show solidarity, and their will to cooperate demonstrates that each country accepts the other as an indispensable partner for continued economic improvement.”
With regards to the Trade policy of the Philippines that greatly affected the growth movements of these goods as had mentioned earlier, the first major trade policy reform in the Philippines was implemented in 1981 as part of the conditions associated with a series of World Bank structural adjustment loans. It consisted of a two-pronged trade reform program, which combined tariff reform and import liberalization, but without an accompanying exchange rate policy. The program was implemented over a five-year period beginning 1980. There were plans to reduce the range of nominal tariffs from zero to 100% to a range of between 10 and 50% under the trade reform program. However, the program was suspended in 1983 due to the economic crisis that plunged the country into severe balance of payments problems. Deregulated items were put back in the regulated list, and eventually, a strict foreign exchange system was adopted.
The second reform, which covered the years 1991 to 1995, was legislated during the Aquino administration through Executive Order (EO) 470 signed in July 1991. This narrowed the tariff range to within a 3 to 30% by the year 1995. The third most important tariff reform was pursued during the Ramos administration. EO 264 issued in August 1995 further reduced the tariff range, mostly to 3% and 10% levels and decreased the ceiling rate on manufactured goods to 30% while the floor remained at 3%. The goal was to create a four-tier tariff schedule: 3% for raw materials and capital equipment which were not locally available, 10% for raw materials and capital equipment which were locally available, 20% for intermediate goods, and 30% for finished goods.
In the paper “Trade Liberalization and Pollution: Evidence from the Philippines” (Aldaba and Cororaton, 2002), it has been observed that the trade reforms did not only narrow the tariff range but also eliminated import restrictions, which were mainly in the form of import licenses and outright import bans. Between 1986 and 1989, import restrictions on 1,471 Philippine Standard Commodity Classification (PSCC) lines were lifted. This represented a decline in the number of regulated items as a percentage of the total number of PSCC lines from around 32% in 1985 to only 8% in 1989. Subsequent years witnessed the liberalization of a few more items, which brought down the percentage of regulated items to about 4% in 1995. The number of import restrictions fell to only about 3% of the total number of PSCC lines in 1996.
The ‘tariffication’ of quantitative restrictions began in 1992 with the legislation of EO 8 covering 153 commodities whose quantitative restrictions were converted into tariff equivalent rates. EO 8 increased the tariff rates of relevant commodities by 100% of their old levels. With the country’s accession to the World Trade Organization in the GATT-Uruguay Round, EO 313 and Republic Act (RA) 8178 (1996) were issued. EO 313 increased the tariff rates on sensitive agricultural products while RA 8178 lifted the quantitative restrictions on these products. The government has expressed its intention to adopt a uniform 5% tariff by the year 2004. This is also in line with the country’s commitments to the ASEAN Free Trade Area-Common Effective Preferential Tariff (AFTA-CEPT) agreement where the tariffs on most products are expected to be reduced to a range of between zero and 5% by 2002.
TABLE OF TARRIFS as shown in the right presents estimates of implicit tariff rates using price comparison (ratio of domestic prices to border prices) for the period 1990 to 2000. Average implicit tariffs are expected to decline from 28.6% in 1990 to 16.8% in 2000 (Manasan and Querubin 1997). It is evident from the table that beginning 1995, the average implicit tariff rates for all major sectors would decline. Palay and corn would fall from 0.66 in 1995 to 0.43 in 2000. Fishing would decline from 0.14 to 0.06 between 1995 and 2000 while forestry would decrease from 0.11 to 0.03 during the same years. Under manufacturing, beverage and tobacco would fall from 0.38 to 0.15, chemical manufacturing will decline from 0.18 to 0.10, and petroleum refining would decrease from 0.11 to 0.02 while non-metal manufacturing would decline from 0.19 to 0.08. An increase in implicit tariffs is evident for some sectors like other agriculture and electrical equipment manufacturing. This resulted to the sudden and stiff climb on the import, affecting too the export of the Unclassified Goods and the Machineries and Transport Equipments as shown already in EXPORT CHART and IMPORT CHART.
With the introduction of trade reforms, profound changes were seen in the industry’s structure involving both substantial shifts of resources between economic sectors and restructuring within industries. Trade liberalization is expected to drive the process of restructuring and reallocation of resources within and across sectors of the economy such that unprofitable activities contract while profitable ones expand.
As we can see, as highlighted in the TABLE OF TARRIFS, the Electrical Equipment Manufacturing, which belongs to the category of Unclassified Goods, and the Transport and Other Machinery, which belongs to Machines and Transport Equipments, was given preferred tariffs getting lowest implicit tariff rates, among others, of 0.03 percent and 0.09 percent in the year 2000. This low tariff rates, therefore, encouraged and catalyzed the rapid growth of this sectors both in the import and export areas.
Table of Distribution and Structure of Manufacturing Value ADDED as shown on the right side presents the distribution of manufacturing value added for the years 1990, 1994, 1996 and 1997. In 1990, consumer goods comprised the bulk of manufacturing value added with a share of 45%, although this dropped to 39% in 1994. As the share of consumer goods continued to drop, a shift towards intermediate goods became evident. In 1996, intermediate goods accounted for the largest share of 38%, but slightly declined to 36% in 1997. Capital goods also registered an increasing share from 19% in 1990 to almost 30% in 1997.
In 1997, food processing/manufacturing and beverages were the most important sub-sectors under consumer goods, as they comprised 24% of the total manufacturing value added. In the intermediate goods sector, other chemicals and petroleum refineries represented 20% of the total manufacturing value added while in the capital goods sector, electrical machinery together with professional and scientific equipment were the top sub-sectors with their combined shares of about 22% of the total manufacturing value added.
Therefore, being that the Intermediate Goods having the largest percent of manufacturing value added (36.23%) - in short the most profitable, the Philippines had concentrated more on this sector thus playing major role in the growth of export and import, followed by Consumption Goods (32.86%) and Capital Goods (29.9%).
This in sum, explained the movements of growth of various sector in the export and imports of the Philippines as influenced by various factors, both external and internal, but most notably of the Philippines Trade Policies itself.
 The Philippine Standard Commodity Classification is a classification scheme used in the distribution of various commodities that enter foreign and domestic trade and is patterned after the UN Standard International Trade Classification (SITC).
United States and Japan is the two major and most important trading partners of the Philippines when it comes to its exports and imports. On the export side, United States is the prime destination of the Philippine Products. From 1996 to 1998, the CHART OF EXPORT DIRECTIONS shows the steep climb of the Philippine exports to the US exhibiting an almost three fold increase. This is attributable to the precipitous increase of demand of Philippines consumer manufactures particularly garments, fashion accessories and shoes. Data from the Department of Trade and Industry shows that from a meager share of 15% in 1996, the said export products suddenly shares 25.58% of the total export to the United States. In 2003, the Consumption Goods export suddenly suffered a slight decrease to 23.99% of the export share but rebound back in 2003 to 30.45% and continues its increase in 2006 to 31.39%. This would explain the sudden dip of the blue line in CHART OF EXPORTS DIRECTIONS in year 2003 as shown above. Bulk of the exports of the Philippines to the United States comes from the Industrial Sector which was very healthy in 1998 comprising 64.24% of the total exports of the Philippines to the United States. Of this 64.24%, 55.34% of the total exports are electronics and semi-conductors. In 2000, a significant increase was noted when the export share of this product rose to 67.56% amounting to 11.5 billion US dollars. In 2002, a decrease had been noted until in 2005 its total amount only reached 7 billion US dollars.
It would have been the same story with Japan except for the period in 2004 when it exceeded the United States as the primary destination of the Philippines exports. Thanks to the Industrial Manufactures Goods particularly the electronics and semi-conductors. Japan becomes an important destination of the country’s electronics and semi-conductors when it compete with the United States in 1998 pegging 5.5 Billion US dollars income for the Philippines for the said products. Electronics and semi-conductors became a prime commodity of the Philippines to Japan comprising 71.77% of the total Philippines export to the country. From that year onward, Japan continues to expand its demand of electronics and semi-conductors from the Philippines to 73% of the Japan total imports from the Philippines to 84% in 2004 amounting to almost 8 billion US dollars. This explains why in the year 2004, the red line in the CHART OF EXPORTS DIRECTION superseded the blue line. This however can also be attributed to the continuous sluggish economic growth of the United States, thus resulting to the waning of domestic demand for electronics and semi-conductors in that country. Added to this is that the Philippines suddenly have a big competitor, China in this case, in the US market. Going back to Japan importing trend from the Philippines, the export data shows that from 2005 until 2006, exports of electronics to Japan reversed its trend earning only 7.2 Billion US dollars but had been increased to 7.9 Billion US dollars in 2006 equivalent to 73% share of the export goods. This explains the relations of the major exporting goods to the significant changes in the trade direction of the Philippines.
Also noteworthy is the sudden swell of the Philippines share of export to China. From 663 million US dollars export earnings in 2000, Philippines earned 1.3 Billion US dollars in 2002 from China doubling the amount and volume as compared with that from 2000 and 2001. In 2003 and 2004, China again doubled its imports from the Philippines to 2.1 billion US dollars and 2.6 Billion US dollars respectively. Again in 2005, the Philippines export to China was doubled amounting to 4.07 billion US dollars and 4.06 Billion US dollars in 2006. Of these figures, 75% of these imports in 2000 falls under the Industrial Manufactures specifically electronics and semi-conductors. In 2003 onwards, the electronic and semi-conductors share increased from 78% in 2003, 81% in 2004, and 88% in 2005.
On the importation side, Japan and the United States are on a neck to neck race as the Philippines prime country of imports source. Traditionally, Japan has always been the consistent first placer in this race. As can be seen in CHART OF IMPORT DIRECTION as illustrated above, there is no significant change of importation trend between the two countries except that of in 2003 to 2005. Both the red line (Japan) and the blue line (US) have an identical growth trend. While Japan continued to its consistent upward growth trend, the US in 2005 experienced an upsurge in 2003 yet also declined from 2005 to present. In 1997, data from the Philippines Department of Trade and Industry shows that, Philippines imported 5.7 billion US dollars worth of “other Industrial manufactures” from US and continued the consistent growth rate until the value of the said imported product reached 8.4 billion in 2006. The sudden growth surge in 2003 as can be seen in the CHART OF IMPORT DIRECTION where the blue line became suddenly visible above the red line, is that not that there is a sudden domestic demand in the Philippines of the said “other industrial manufactures” but instead attributable to upsurge of “Food and Food Preparations”, such as Processed Foods, which accounts to 26% of the imports.
Japan, as major imports source of the Philippines, continuously to be the prime source of Electronics and Semi-conductors; Machineries, automobiles, equipments and parts; and “other industrial manufactures” that the Philippines needed to produce its primary export products and sustain the health of its exporting sector. Interestingly, Japan had shifted its exports product priorities to the Philippines from “Electronics and semi-conductors” to “Machineries, automobiles, equipments and parts” and “other industrial manufactures”. This can be gleaned from the data from the Bureau of Trade and Export Promotions of the Philippines where in 1997, Electronics and semi-conductors composes 90.35% of the Philippines total imports from Japan and became 89.79% in 1998. This trend is further established when in 2003; it only amounted to 43.65% and continues its decline to 36.99% in 2006. However, while the total imports from Japan increases and the Electronic and semi-conductors share in this total imports decreases, the share of the Machineries, automobiles, equipment and parts from the total imports from Japan increases from 1997 to 2006. From 23.81% share in 2000, the country import share of this product doubled to 43.65% in 2004. Also, other industrial manufactures from Japan is competing with US in the Philippines market share. From 26.28% country import share in 2000, it became 33.78% in 2005. This other industrial manufactures include various products ranging from aerials and aerial reflectors, paint and latex primary chemical components, copolymers and polymers, computer magnetic tapes, electrical grade insulating papers, among others.
Thus, the US Trade direction, in the viewpoint of the Philippines, is primarily influenced by the domestic demands of both Intermediate goods and consumption goods. While both contribute to the upward trends, sudden surge and/or decline of consumption goods demand bring a noticeable change in the Philippines import direction, whereas Japan import direction is primarily influenced by the shifting of Philippines Industries’ demand of intermediate goods and capital goods. While on the export sector, US trade relations with the Philippines is influenced not primarily of the goods, as the consistency of product kind had been noted, but by the health of its overall economy which is reflective of its domestic market demand for Philippines products. Philippines export to Japan, on the other hand, is consistent on its growth rate being the secondary consumer of the Philippines intermediate goods particularly electronics and semi-conductors.
Herein, as shown, is the ILLUSTRATIVE DIAGRAM OF TRADE BALANCE OF TWO MAJOR TRADE PARTNERS OF THE PHILIPPINES OVER TIME from 1983 to 2006 – namely Japan and the United States. As we can see, at least evidently since 1985, the Philippines had always been in a trade surplus position with its trade transaction with the United States of America. This had been a consistent position having its peak on 2000 until in 2004-2005 where evident factors are in intervention, which will be discussed later, but was back in track in 2006. The same pattern is also true with Japan, however, on the reverse track. Instead of posting a trade surplus, trade relation with Japan remains a consistent trade deficit with a brief interlude in 2004 to 2005 but was again back on track in 2006.
For this to make sense, it must be understood that since the Philippines shifted from being a primary product export dependent after realizing the decreasing trend for prices of primary products, the country had focused on the diversification of its export outputs from manufacturing export dependence to later, in 2005, service exportation. This trade structural shift produces this trend with major trading partner as shown in the illustrative diagram.
United States continues to be the major destination of Philippines major export industries particularly the electronics and semi-conductor products as had been shown by the data and discussed in item number 8 and number 10 of this term paper. On the other hand, Japan continues to be the primary importation source of electronics and semi-conductor products, and later, Machines and Transport Equipments. This is actually a symbiotic relationship among the three countries creating balance among their trade relations. The Philippines exports it Electronics and semi-conductors to US which is not a producing country of these materials. However, for the Philippines to be able to do that and sustain the growth of its Electronics and semi-conductors export to the US, it has to have enough basic parts and raw materials to be able to manufacture its various electronics and semi-conductor products for exports. The Philippines does not have the technology to produce this parts and basic materials, thus, it has to import the same from Japan. This explains the massive importation from Japan to the Philippines of Electronics and semi-conductors.
Having a trade surplus means that the product inflow is lesser than the product outflow, corollary to this is the situation of the Philippines-US trade relations. Simply put in terms of trade, the demand of the Philippines products in the US is greater than the demand of US products in the Philippines. In this situation, the Philippines is in the gaining scale, thus, can be construed to have a healthy export in the United States. This interpretation should not be however applied to Japan. This is because the economy of US, unlike Japan, is domestic demand driven while that of Japan is trade driven, which the Philippines is trying to emulate. Thus, this does not mean that the export products of the Philippines are not in demand in Japan. It should be construed in such a way that the demand of Japan electronics and semi-conductors is just so big that it exceeds the major product exports of the Philippines to Japan. This is so because the Philippines generally rely to Japan to provide the intermediate goods and capital goods to energize and sustain its exports to the United States. More imports to Japan means more exports to the United States. This generally is good for the Philippines provided that its import demands should not exceed its export demands, otherwise, it will need again to utilized its foreign reserves or resort to loans and indebtedness to sustain its industrial growth.
For the preceding condition to have a positive impact to the Philippines’ Current Account balance, we have to take into consideration some additional structural issues. The Philippines’ export dependency plays between 0.45 and 0.50 and the total export income remains more than 1/3 of the GDP while its import dependency remains higher between 0.45 and 0.53. Additionally, the total imports share to GDE is almost 1/3, thus resulting to almost always a deficit in the balance of payment as had been shown in the course of discussion in item number 2 of this term paper. This is because the Philippines is dependent to its imports to sustain its exports and the domestic demands. This chronic deficit almost all the time is being remedied by using the foreign reserves or resorting to loan. Only recently in early 2000 that this structural policy defect had been corrected through implementation of some trade guidance by creating a both inward looking and outward looking economic policies. Take for example the high tariff rates imposed to vital agricultural and industrial products under the country’s commodity classification. By imposing this high tariff, a sort of protection had been created for these products by means of a tariff barrier. This also enables the country’s industry to promote import substitution. However, for those goods that are earning well for the country in the export sector, tariffs had been lowered to almost zero level, such as semi-conductors, to facilitate the easy access and amplify the flow of imports of intermediate goods and capital goods needed by this export manufacturing sector. Adding to this adoption of both inward looking and outward looking trade policies is the diversification of trade commodities through strengthening of dollar earning manufacturing commodity, protection of agricultural commodities and promotion and encouragement of investments to service commodities. These structural changes are presently happening in the Philippines and will greatly shape its economic position in the world in the near future.
There is a clear correlation with the Philippines Terms of Trade (ToT) and with that of the change and movements of the Philippines Export and Import Items as shown in the CHART OF TERMS OF TRADE OVER TIME; CHART OF EXPORT ITEMS-BY GROUPS; AND CHART OF IMPORT ITEMS-BY GROUPS shown above. The Philippines, in early 1980s up to 1984, rely mostly to the textile industry and primary products as the country’s prime export product while it maintain a high rate of importation of crude material, usually bunker crudes, to support its energy requirement due to the domestic demand attributable to the slow shifting to industrialization of its economy. However, from 1980 to 1984, Terms of Trade also showed a steady decline. This means that the country is being paid cheaply for its textile and agricultural products exports and buying expensively raw materials (Chemicals and Basic Manufactures) for its textile industry at an expensive price, thus, using more resources to secure its imports than the rate it receives from its exports. As a result of this, its economic position slowly worsens overtime.
Having observed this, an economic structural change occurred as expressed by the shifting of its export focus from Textiles and Food and Animal to Electronics and Semi-conductors which commands a better price in the market. Because of this, 1985 to 1999 was marked by the steep climb of the purple line in CHART OF EXPORT ITEMS which represents the Unclassified Good where the Electronics and Semi-conductors are categorized. On the import side, the same is true with the purple line having consistently exhibiting a steep climb over the CHART OF IMPORT ITEMS.
But in 1988, ToT is again slowly declining from the high of 131.2 to a low of 96.3 in 1994. But this time, the country is ready for the structural shift as it easily moved from the electronics and semi-conductors under the “Unclassified Goods” to “Machines and Transport Equipments” as can be seen by the consistent and sharp climb of the blue line in the CHART OF EXPORTS ITEMS. As it is noted, this sharp growth trend occurs even prior to the worsening of ToT in 1999. This responsiveness is evidenced by the unswerving and vertical climb of the blue line in the CHART OF IMPORT ITEMS which begins in 1990 to present. This means that this responsive shift had been costly and slow on the part of the Philippines but the shift, which can be characterized as striking, seems to be bringing rewards today to the Philippines Economy.
The challenge ahead is again the noted deterioration of Philippine’s ToT which began in 2000 from a high of 127.2 in 1999 to a low of 110.4. But trade and economic reforms is currently undergoing in the Philippines such as further trade diversification to Service Goods; tariff liberalization for selected import items especially in Electronics and Transport and Heavy Equipments; protection for imports substitute items especially in clothing, shoes, fashion accessories, and selected agricultural products; diversification of export directions to other countries such as China and the Europe; liberalization of the Mining Sector and development of Minerals; promotion of production of both Metallic and Non-Metallic mining products; diversification of the currency of its Foreign Reserves; and further investment to Human Capital just to name a few. With this economic reforms, the Philippines expects that in the year 2007 and beyond, Terms of Trade will again surpass the 1988 level which in turn will lower the prevailing real or social opportunity cost in the Philippines.
As had been shown by the CHART OF EXCHANGE RATE OVER TIME, the Peso has the general trend of depreciation against the US dollars from 1983 to present. I also plotted against time the Philippine’s Trade Balance to get the general trend as shown in the second chart below labeled CHART OF TRADE BALANCE OVER TIME. Plotting a linear trend over the trade balance, it would show a general trend of increasing trade deficit from 1983 to the present. Combining the two to get the relations, it seems that the inevitable conclusion is that the Peso’s value depreciation against the US dollars is inversely proportional to the growth of the country’s Trade Deficit. In short, the more the peso’s value depreciates against the US dollar, the greater the trade deficit of the country will be. This is true especially that the country is adopting a floating currency rate system and its economic transactions is denominated in US dollars but its domestic transaction is denominated in Peso.
To further scrutinize the relationship of the Peso-Dollar Exchange Rates and the Trade Balance, in 1991-1992 period, when the Peso appreciated against the Dollar as can be noticed in the CHART OF EXCHANGE RATE OVER TIME, the trade deficit also decreased on the same period as shown in the CHART OF TRADE BALANCE OVER TIME. Again in 1997-1998 periods, when the peso appreciated sharply against the dollar, the trade deficit also increased steeply on the same periods. But in 1999, when the peso’s value dropped suddenly, the trade deficit was also brought suddenly to the surplus side. But when the peso return to depreciating trend, the trade deficit also returns to increasing trend, thus, the current account deficit is again on the rise. This relationship can also be observed in 2004, 2005 and 2006 when the value of peso against the US dollars appreciated, the current account deficit had also been reduced.
With these data and its evident relationship, one reason that can be reasonably cited is the principle of price elasticity, or the inelasticity thereof, of the major export and import items of which the Philippines is involved in. Considering the premises as above cited, ideally, when the value of the Peso appreciates against the US dollars, the price of exports will also increase, thus, in turn, the demand for the exported product will also decrease. On the other hand, this will also result to the decrease on the prices of imported products, and the demand for those products will also increase, thus, resulting to less export and more import. Therefore, this will lead us to the inevitable conclusion of less trade inflows and more outflows resulting to trade deficit. Conversely, when the value of the Peso depreciates against the US dollar, the price of export will decrease resulting to the increase in demand of these products but on the other hand; it will also increase the price of imported products and will consequently result to the decrease of its demand. With more trade outflows than trade inflows, this will result to trade surplus.
In the case of the Philippines, as the value of peso against the dollar weakened, this creates an atmosphere supposed to be favorable to exporters. Philippine exporters’ income is valued in dollars. That means, not only that the demand of their product will increase due to its relatively cheap price in dollars, the income that they received will be converted to equivalent peso which has more value as to 1 dollar. Since cost of labor production is in pesos, this also means a lower cost of labor production. In short, they get more value in pesos for every dollar they earn as a result of their export. Corollary to this, having a peso position which is weak against the dollar, an unfavorable atmosphere is supposed to be created for the importers in a sense that, not only the demand for the imported product will decrease due to its expensive price, they have to use more pesos to buy their imports which price is pegged at the dollar. With more exports income but with also more imports expenditures, a weak peso against the dollar generates commodity trade deficit. Inversely, when the position of peso against the dollar is strong, this will create an unfavorable environment to exporters since exports price will increase and their demand will decrease. Added to this, their income, which is valued in dollar, will have a less equivalent peso and they have to use more pesos for their production. However, this situation is favorable to the importers. With a strong peso, imports prices will decrease, thus demand will also increase. That means that with cheaper cost of imports and high demand and also low expenditures income, there will be a commodity trade surplus.
This principle of price elasticity works true to the Philippines because to maintain the export demand, the Philippines is forced to import in an unfavorable condition, thus, resulting to a greater trade deficit. The import demand will not decrease as the majority of the Philippine exports are manufactured goods which are also dependent upon the intermediate goods it imports as components of its manufactured exports. In this case the conditions set by the price elasticity principle for it to have a positive impact on the country’s Current Account balance, are not meet as the total export revenue cannot surpass the total export expenditures With the rise of the total import demand, so is the rise of import expenditures. Major import items proved to be elastic if computed against the Gross Domestic Expenditures and will give you value which is greater than 1.Added to this, the Peso had been devaluated in 1997 which worsen the trade balance. This therefore explains the inverse proportionality of the relationship of the exchange rate and trade position of the Philippines as shown by the linear line on the CHART OF EXCHANGE RATE OVER TIME and CHART OF TRADE BALANCE OVER TIME as drawn above. Therefore, high Exchange Rate makes the Trade Deficit grows.
This can be said to be true in the reverse side of the equation. With high exports revenue than import expenditures (trade surplus), the country’s market will be flooded by dollars because its’ trade is transacted in dollars. This will result to the appreciation of the value of peso against the dollar due to high inflow and availability of the said foreign currency. With an appreciated peso’s value against the dollar, export revenue will decrease because of the decrease of its demand due to increase of export price but the import price will decrease resulting to a less import expenditure bringing a trade surplus. What the country needs therefore is to provide an atmosphere of an almost stable exchange rate.
One of the reforms that the country is looking at, to at least mitigate the effects of this phenomenon, is its’ operationalization of the bilateral agreement it signed with the ASEAN 4 (Malaysia, Thailand, Indonesia and Philippines) as part of the Chang Mai Initiative which they had signed in May 2000. This bilateral agreement entered separately by each of the countries involved allows the trading to be paid on the local currency of the country of destination of the goods. For example, if the Philippines is to export to Malaysia, the exports will be paid in Ringgit while if the Philippines has to import from Thailand, the Philippines has to pay in Pesos. In this arrangement, the ASEAN 4 will be able to decouple itself to the volatility of the Dollar exchange rate as they will be basing their trade currency rate on the real value of their selected basket of currency. In this, still as part of the Chang Mai Initiative, the agreed monetary close surveillance and capital inflow monitoring will play a vital role to control the effect of the exchange rate to each country’s trade balance. Moreover, the Philippines is maintaining its foreign reserve no longer solely in dollar but also with other denomination such as Yen, Yuan, Euro, Singapore dollars, among others.
1. IIF THE TRADE BALANCE HAS BEEN DEFICIT, HOW HAS IT BEEN FINANCED? WHAT HAS BEEN THE ROLE OF ODA, PRIVATE DIRECT INVESTMENT AS WELL AS PORTFOLIO INVESTMENT IN THE DEVELOPMENT OF YOUR COUNTRY?
It is already a cognizant fact that, for the past few years, my country, has a long history of indebtedness and as had been discussed earlier by this term paper, the chronic deficit of its BoP, especially on the Current Account, is one of the major reasons. In order for it to finance the rigorous demand of its economy, it has to borrow money both domestically and internationally. Almost always, the country finances its trade deficit in three ways. One, by contracting loans, two, by using its foreign currency reserves, and three, by monetizing its gold reserves. Only until recently, in late 1990s and early 2000, that it generates funds from other alternative sources such as privatization or the selling of its properties, mostly government owned corporation and the tapping of Official Development Assistance which offers a lower interest rates as compared to commercial loans. Setting aside the relationship of the trade deficit and its role on the depletion of the Philippines foreign currency reserves, the country borrows and taps foreign funding to fulfill its requirement of foreign fund inflows to tide the fund outflows.
Government negotiators dealt mainly with three groups of creditors in their efforts to reduce the burden of debt servicing. The first was the IMF because its imprimatur was considered necessary to conclude arrangements with other creditors. The second was the Paris Club, an informal organization of official creditors. The third group was the commercial bank creditors, numbering 330 as of 1990. Bank negotiations generally were with the twelve-member bank advisory committee, chaired by Manufacturers Hanover Trust.
The Philippines has a long history of debt. Every time the Philippines contract debt with the IMF, the Philippines has to consent to certain conditionalities for it to obtain additional funding. This conditionalities usually includes devaluation of the peso, liberalization of import restraints, and tightening of domestic credit (limiting the growth of the money supply and raising interest rates). In the December 1984, the adjustment measures stipulated by the IMF were harsh, and the economy reacted severely. Because of its financial straits, however, the government saw no option but to comply. Balance of payments targets were met for the following year, and the current account turned positive in 1986, the first time in more than a decade. But there was a cost; interest rates rose to as high as 40 percent, and real GNP declined 11 percent over 1984 and 1985.
Efforts to reduce the external debt included encouraging direct investment in the economy. In August 1986, the Philippines initiated a debt-equity conversion program, which allowed potential investors who could acquire Philippine debt instruments to convert them into Philippine pesos for the purpose of investing in the Philippine economy. Because the value of the debt in the secondary market was substantially less than its face value (about half, at the time), the swap arrangement allowed investors to acquire pesos at a discount rate.
Central Bank of the Philippines data indicates that most of the swapped debt was held by the Central Bank itself, which could provide the peso proceeds to retire the liability only through issuing new money, with palpable inflationary consequences. Because of this, the program was suspended in April 1988. At that time, US$917 million in debt reduction had already taken place. Other issues were hoisted about both the benefits to the Philippines and the fairness of the conversion program. Debt-equity swaps amounted to a considerable gain to investors, costing much less in dollars than was received in pesos. If an investment had taken place without the swap, a very large subsidy would not have been involved. Secondly, a considerable portion of the conversions appeared to have been by Filipinos themselves bringing their wealth back into the country. Critics questioned whether those who engaged in capital flight should be awarded a premium for returning their wealth to the Philippines. There also was the question of the arbitrage possibilities of “round tripping,” whereby investors with pesos engaged in capital flight to obtain foreign currency, which was used through the swap to achieve a much larger amount of pesos. Alternatively, an individual with dollars could engage in a swap and then convert pesos back into dollars through the exchange market. Although the government had some regulations concerning length of investment, the process was ripe for abuse. Nevertheless, the government resumed the program in December 1990 with an auction of US$7 million in debt paper. The new program was reported to have been altered to reduce inflationary pressures.
The Aquino administration spent an enormous amount of time and effort negotiating with various creditor groups to lower interest rates, reschedule the country’s debt, and reduce the magnitude of the debt. A number of innovative schemes were undertaken and discussed. However, it was a process that essentially meant running fast to stay in place, so to speak. The size of the country’s external debt in June 1990 already reached US$26.97 billion as can be seen in the DEBT DATA CHART as shown here. It was about the same as the US$26.92 billion the country owed at the end of 1985, shortly before Aquino took office. Debt-service payments also changed very little: US$2.57 billion in 1985 as opposed to US$2.35 billion in 1990. The balance of payments pressures remained.
The growth of the Philippine economy, however, caused the ratio of the country’s debt to GNP to decline from 83.5 in 1985 to 65.2 in 1989, whereas that of debt service to exports fell from 32.0 to 26.3 over the same period. Projected debt servicing in September 1990 for the 1990s showed a rise from US$2.35 billion in 1990 to US$3.25 billion in 1995, falling off to US$2.08 billion in 1999.
However, due to various reforms initiated by the government, the Philippines “graduated”, at last, from the IMF control in 2001. Nevertheless, a standby agreement was forged with the IMF that should the country will need assistance in the future; the IMF will again be available to give assistance. The difference this time is that both the country and the IMF will now be on an equal level playing field and both are free to impose their own conditions with the option to accept being left at the hands of the Philippines.
Official Development Assistance (ODA) to the Philippines from various Foreign Government and Private Institutions (NGOs) plays a key role in the development, or maldevelopment depending on how people looked at this, of the Philippines economy. These ODA usually takes the form of grants or concessional loans. Concessional in a sense that it has lower interest rates compared to commercial loans and are usually spread over short and medium terms. However, along with these “friendly” terms, the country has to offer also concessional terms to the donors usually in forms of trade leverages such as lifting of tariffs for the donor country’s products or procurement of capital goods from the donor country. But it is indisputable that this ODA had always been the Philippines economic saving grace whenever it is in dire needs of financial inflows to energized and drive its economic performance. Albeit, ODA had been tied more to economic and political reasons rather than sheer performance dynamics, the Philippines accepts ODA on a positive light than the IMF restrictive terms. Nevertheless the country’s ODA dependency ratio had shown a decreasing trend. ODA Aid as percentage of the Gross National Product had been decreased from 1.6 in 1994 to 0.7 in 2002. Foreign Aid as percentage of Gross Capital Formation was 6.9 percent in 1994 and 3.7 percent in 2002 whereas from 3.8 percent in 1994, the Foreign Aid percentage to imports of Goods and Services dropped to 1.3 percent in 2002.
United States of America continues to be the top donor of ODA to the Philippines while Japan ranking second. There seems to be a symbiotic relationship among these three countries due to its long history of trade, security and friendship as both an indispensable partner and allies. In 2001, President Gloria Macapagal Arroyo was in Japan for a state visit upon invitation of then Prime Minister Junichiro Koizumi. During her initial meeting with Prime Minister Junichiro Koizumi, the latter said that Japan will cut its overall foreign aid by 10 percent starting April 2002 to rein in its deficit and restructure the economy, and that the Philippines would be affected as a result. Ms. Macapagal however stressed that under her administration, the Philippines had utilized 94 percent of the ODA. During the Estrada administration, Japan and other donor countries had expressed concern about delays in the implementation of ODA-funded projects, mostly because of bureaucratic red tape and a lack of counterpart funding from the Philippines.
In an apparent recognition of the Philippines’ prudent use of ODA, Koizumi pledged to continue economic aid to the country, starting with a $352 million loan agreement for the Subic-Clark-Tarlac Expressway project, financed mainly by Japan through the Obuchi fund. Koizumi assured her that even though Tokyo was cutting the level of its foreign assistance worldwide, aid to the Philippines would not be affected. The Philippines is the third largest recipient of Japan’s ODA, next only to China and Indonesia. In 1999 alone, Japan’s ODA to the country amounted to $412.98 million. But not all ODA comes from government to government transactions. Some ODA, especially those that deals with human capital formation and other special interest trade sectors, are directly engaged with by each countries’ business counterpart through the tacit approval of both the donor’s and recipient’s countries. Take for example the Philippines and Japan, recent development reveals that several developmental dealing, taking form of the ODA not of a Private Direct Investment, showed that quite a few undertaking had taken place among the Philippines private organizations and Japanese organizations, to wit:
Between Pacific Consultants and the Subic Bay Metropolitan Authority Pacific for a $215 million port project;
Between the Trade Union Congress of the Philippines (TUCP) and the Saga Prefectural Federation of Agricultural Cooperative of Japan to promote employment and human resource development;
Between the TUCP and the Kyushu Bussan Shoji Co. Ltd. of Japan to promote labor cooperation in high-quality marine resources;
Between Asia Solutions Philippines Inc. and Seiko Electric Co. Ltd. for an information technology training and learning program in the country for two years;
Between Information Technology Foundation of the Philippines and the Japan Information Technology Examination Center to promote cooperation in information technology testing and certification;
Private Direct Investment or PDI also played a major role in the Philippines economic development. Encouragement of PDI inflows is actually one of the main thrust of the Government of the Philippines for the last Five (5) years for unlike Portfolio Investments; they are not volatile but have a sense of permanency due to huge and massive capital outlay that it required. Not only that PDI in the Philippines contribute to the generation of labor demands but also it helps to fill in some deficiencies of the Philippines and its economy. Usually, PDI in the Philippines is encouraged to some trade areas where the country thinks they have a trade optimal advantage but does not have the necessary money and technology to invest to develop that specific trade industry. Examples of these key industries are mining, electronics and Shipping Manufacturing Industry, among others. Japan companies remains as the top Direct Investor of the Philippines albeit, Korea and China is slowly catching up with Japan.
Some recent development in this area is the continuous showing of confidence by Japanese companies in the Philippines according to the information gathered from the Department of Trade and Industry. Notable among these are the investment of some $150 million for a nickel processing plant in Rio Tuba, Palawan from the Sumitomo Metal Mining Corp., which is expected to generate some 1,000 new jobs during its three-year construction period plus another 1,000 new jobs when it starts to operate; a $200 million investment from Sankyo Seiki President Yuzo Oguchi for a manufacturing plant at the Subic Free Port in Zambales for the production of fluid dynamic bearings for hard disks and the introduction of robotic equipment; and a $5 million investment from Tsuneishi Shipping for its expansion program; among others.
PDI also help the country to balance its trade deficit in a sense that entry of PDI means inflow of money, thus, the needed financial resources inflow to close the deficit in the BoP are partly filled in by the PDI in the Philippines. This works also true to the Philippines budget deficit. With PDI presence in the country, taxes are generated thus, budget deficit are in turn partially resolved by this PDI. Most importantly however is the role that this PDI plays in the transfer of technology, upgrading of labor skills, labor generation, and development of human capital in the Philippines. Along with the entry of companies involved in the PDI are their experience, technology and knowledge that in consequence of their operation in the Philippines, they transferred it to their Philippine workers. It is said that the concept of Quality Control and the “Kaizen” practice that are now pervasive in Philippine’s factories and Industries are influenced by Japanese companies that had established their factories and businesses in the Philippines. This concept had fostered, not only the quality of products in the Philippine manufacturing sectors, but also the process and the skills that the workers had acquired as a result of their experience in a Japanese factory.
Added to this, PDIs construct massive factories and office buildings which require better communication and access infrastructures such as roads and bridges which they themselves build as part of their factories and buildings. Along with this is the accidental value added infrastructure such as canal and water sanitations. The standards set by these infrastructures aided the Philippines to upgrade the quality of its infrastructures and urban planning skills.
However, there are also some downsides that the PDI brought to the economy of the Philippines. Aside from the fact that they help to fill in the country’s current account deficit by injecting financial inflows, thus, in away contributing to the betterment of the BoP balance, in the long run however, these PDIs import their equipments and raw materials from outside of the country, thus, massive importation usually follows these PDI once it operates. Because of capital and intermediate goods importation brought about by these PDI, massive financial outflow can be noted in the trade transaction, thus contributing more to the trade deficit of the Philippines. Another downside is that there are some foreign companies that were given some leeway by the government to conduct their trade transactions in order for them to be encouraged to invest. Usually these lee ways are in the form of low importation tariff rates to the detriment of the import substitute sectors.
Portfolio investments (PI) in the country are dominated by the US investment companies who take advantage of the high interest rates and high exchange rate of the peso to the dollar. The Philippines, since the liberalization of its stock exchange and the adoption of floating currency exchange rate system experienced flooding of this Portfolio Investments (PI). At first, the Philippines attitude towards PI had been very warm only to be frustrated when the Asian Financial Crisis hit the economy. Although it is a welcome factor in the development of the Philippines economy, the country had learned its lesson not to rely its boom on this very volatile form of investment. From then on, the country had never put much trust, and even learned to be wary, of PI in the Philippines. Sudden inflows of PI put the country in surplus and, without a blink of an eye, the PI, due to speculations, just suddenly rush towards the doors, and put again the country in an economic mesh of deficit.
The volatile nature of PI had contributed to the “boom and bust” pattern of the Philippines in the late 1980 until late 1990s. After the Asian Financial Crisis, the Philippines experienced massive capital inflows along with the rest of Asian Countries. Net Portfolio Investment is on a rising trend until 1996. According to the Central Bank of the Philippines, from 1985 to 1996 the Philippines is on a financial account surplus, except in 1990. This financial inflows comes from Taiwan, whose account financial surplus, instead of adding it to its reserve, invested it abroad especially to its neighboring Asian countries and the Philippines is one of the favorite destination of that Taiwan money.
The Philippines, having learned its lesson over the Asian Financial Crisis and the impact it brought to the country’s economy, grows wary of this precipitous trend of PI, thus in response, implemented a four-pronged monetary policy strategy by controlling them; encourage capital outflows and increasing the imports of goods and services; reduce the impact on the money supply and exchange rate; and implemented tight fiscal policy. All these strategies have the aim in view to maintain the money supply in the Philippines and maintain a fixed desired level of exchange rates. This was done by the Central Bank of the Philippines by contracting the domestic source of the monetary base such as increasing the required monetary reserve in the central bank of domestic banks. At the same time, the Central Bank also intervened by buying the dollar inflows in the open market and expanding its reserves. This intervention is known in the Philippines as sterilization.
As had been noted by the country, Capital flows, especially Portfolio Investments, are very sensitive to economic and political developments in the Philippines and abroad. A slight change in the foreign financial market conditions may suddenly reverse the country’s capital inflows, thus, affecting its financial position and balance of payment. A sudden capital outflow will surely affect the Philippines severely and may put its economy in turmoil as it had learned in the past when it is so dependent on short term external liabilities such as PI. Because of these, the Philippines maintains the capital flow effects and shocks in the country’s economy at the minimum level by conducting sporadic sterilization and a policy of stable exchange rates. On the other hand, due to this policy allowing the country to maintain a stable exchange rate and minimum fluctuation, it resulted to an atmosphere conducive for a more speculative PI in the country which is more volatile and dangerous for long term as it would increase the frequency of sterilization that the Central Bank must conduct. In this sense, strategies are again being developed in the country to stabilize the effects of these highly speculative investments in the economy.
The PI, being considered as necessary evil, the Philippines signed with gusto the Chang Mai Initiative with the ASEAN plus 3 (Japan, Korea, and China) to conduct regular and periodic monitoring of capital inflows and outflows. Habitual and cyclic exchange of data through surveillance had been regularly practiced so that anticipatory actions can be made to preempt any bad effects of a sudden PI outflow. The Asian Development Bank also help the Philippines keep watch over these PI. The Philippines subscribes regularly to the services of ADB’s Regional Economic Surveillance and Monitoring Unit to provide timely and related information and analysis on the condition of the market in the country and abroad.