By Elijah Joseph C. Tubayan
THE PHILIPPINES stayed second in terms of manufacturing performance in the Association of Southeast Asian Nations (ASEAN) in May, despite logging its best Purchasing Managers’ Index (PMI) reading so far for the year.
The latest ASEAN monthly survey conducted by IHS Markit for Nikkei, Inc. showed the Philippines’ 53.7 reading for May just 0.2 of a point shy of topnotcher Vietnam and besting ASEAN’s 51.5.
The latest report said ASEAN marked the fifth consecutive month of improvement in headline PMI, with May data showing six of the seven countries covered by the survey — with the exception of Malaysia which scored 47.6 — showing improvement in manufacturing conditions. It was the first time since December last year that only one ASEAN economy reflected worse factory activity, reflecting “broad-based expansion.”
The manufacturing PMI consists five subindices, with new orders having the largest weight at 30%, followed by output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%). A PMI reading above 50 indicates an improvement in business conditions compared to the previous month, while a score below signals deterioration.
The report said that the Philippines had the steepest climb in factory input costs among ASEAN member economies covered. “The Philippines continued to report the steepest rate of cost inflation. Consequently, average selling prices rose further, with the Philippines once again recording the largest increase in factory gate prices,” the report read.
In the country-specific report released on Friday last week, IHS Markit noted that demand remained strong despite headline inflation rate averaging 4.1% in the four months to April, already past the central bank’s 2-4% target for full-year 2018.
Sought for comment, IHS Markit Principal Economist Bernard Aw said in an e-mail on Monday that the Philippines’ manufacturing conditions are “not improving as fast as that seen in 2016,” but noted that the latest figure was in line with the 2017 average, “suggesting the sector is enjoying solid recovery from the negative effects of the tax reforms.”
Republic Act No, 10963, or the Tax Reform for Acceleration and Inclusion law, slashed personal income tax rates in hopes of spurring household spending that contributes nearly 70% to gross domestic product. The same law sought to offset resulting foregone revenues by increasing excise tax rates for fuel, automobiles, tobacco, minerals, coal, and imposed new levies on sugar-sweetened beverages, stripped some value-added tax exemptions while reducing personal income, donors, and estate tax rates, among other measures.
But even with elevated inflation widely expected in May — estimated at a fresh five-year-high 4.9% by the Finance department that was also the median of BusinessWorld’s poll of 10 economists late last week — Mr. Aw noted that “[t]here was no clear evidence higher inflation has affected demand.”
“However, what has been partially weighing on output growth was supply shortages of raw materials, which not only disrupted production schedule to some extent but also led to suppliers hiking prices,” he said.
“We have observed such shortages across the region.”
At the same time, Mr. Aw noted that “the weaker peso aggravated manufacturing cost pressures, especially the price of imported inputs.” In the report, he noted that “[i]n some cases — in particular the Philippines and Indonesia — a weaker exchange rate aggravated import inflation”.
Mr. Aw also said that the ASEAN’s manufacturing sector was lifted by “strengthening demand conditions” across the region.
He added in the report that “[i]t’s becoming increasingly apparent that underlying growth momentum has picked up in recent months, especially in terms of new business.”
“While demand is improving, it remained fairly modest, which meant companies faced constraints with regard to the extent that they could pass on these increased costs to customers,” Mr. Aw said.
“As a result, profit margins remained under pressure.”