Philippine exports plunged 10.2% in June

Facts
Export growth declined -10.2 % y-o-y in June (vs. -3.1% in May) in value terms, much lower than consensus of -5.3% and our forecast of -1.9%. On a seasonally adjusted (sa) basis, exports fell in June by 3.9% m-o-m, following a contraction of 5.8% m-o-m in May.

Electronics exports, which account for more than 50% of total exports, contracted 23.9% y-o-y (vs. -26.2% in May). However, electronic exports increased on a sequential basis by 5.1% m-o-m sa, likely reflecting some easing in the supply-chain disruptions associated with the Japan natural disaster.

By electronics sub-sector, the negative annual growth reading was driven by the all-important electronic components segment. By non-electronics, the main drag on annual export growth came from contractions for ‘coconut oil’ and ‘ignition wiring’ as well as a slowdown in growth for ‘wood crafts & furniture’.

By geography, shipments to the US, Singapore, and Hong Kong declined by -23.1% y-o-y (vs. 1.9% in May), -47.7% y-o-y (vs. -14.9% in May), and -30.3% y-o-y (vs. and -11.6% in May), respectively. In contrast, exports to China and Japan continued to increase by 18.8% y-o-y (vs. 25.9% in May) and 41.1 % y-o-y (vs. 1.2 in May), respectively.

Implications
The softening in global economic activity is clearly being felt by the Philippines export sector. While the sequential growth numbers suggest that the global supply chain disruptions from the Japan natural disaster are dissipating, Philippine exports face new headwinds.

Since June, global economic data has continued to look soft, with sovereign debt issues in Europe and the US also dampening sentiments and the S&P downgrade of the long-term US sovereign debt rating further hurting confidence. These factors are likely to constrain exports in the months ahead. Moreover, the recent weakness of the Philippines’ import numbers (electronics production in the Philippines is highly dependent on imports) confirms this outlook.

While domestic demand conditions remain strong and remittances are also expected to provide a cushion against adverse spillovers through the trade channel, overall economic activity could ease in the months ahead. With the uncertainty about the global economic backdrop also elevated at the moment and risks tilted more to the downside, this could compel the BSP to tread more carefully and scope things out before it decides to tighten again. Of course, if downside risks to global growth were to materialize, it could change the policy outlook.

Bottom line: June exports came in worse than expected led by weaker electronic shipments. We see continued softness in export numbers over the coming months. While strong domestic demand conditions provide a cushion, the central bank may tread more carefully in the months ahead.