The Philippine peso’s failure to strengthen in the face of data showing a widening current-account surplus and an upgraded credit rating has stoked concern that imports are being underreported due to smuggling.
Philippine import data may have been understated since as early as 2007, partly because of smuggling, undermining the strength of the nation’s current-account surplus and the peso, Deutsche Bank AG and Credit Suisse Group AG said in recent reports. There are sizable differences between official import figures reported by the Philippines and exports recorded by some of its trading partners including Japan, South Korea and Taiwan, according to Credit Suisse.
“I wouldn’t be surprised if the current account could fall into a deficit in two to three years if the trajectory of trade gaps continues,” said Michael Wan, a Singapore-based economist at Credit Suisse. “That could be a potential trigger, and the peso would be less resilient to risks like portfolio outflows.”
The discrepancies underscore doubts with the trade and current-account data and highlights challenges facing President Benigno Aquino, who has criticized the Bureau of Customs for revenue lost to smuggling and unveiled measures to limit corruption within the agency.
In the past 12 months, the peso has dropped 9.3 percent against the dollar, compared with a 9.6 percent decline for the Indian rupee. India had a record $88 billion deficit in the fiscal year through March 2013, compared with a reported $9.4 billion surplus for the Philippines last year.
Sacred Cows
Philippine import data are sourced from the customs bureau, National Economic Planning Secretary Arsenio Balisacan said yesterday. In response to a question about discrepancies in the figures, Customs Commissioner Sunny Sevilla told Bloomberg yesterday: “We are committed to eradicating smuggling and corruption. There are no friends nor sacred cows. Everyone will be held accountable.”
While trade-data differences occur in other nations, the gaps in the Philippine numbers are sizable compared to countries such as Thailand, and have been widening since 2007 for some of its trading partners including Japan, Wan said in a report this month. The divergence is more pronounced in imports than exports, according to Credit Suisse and Deutsche Bank.
Deutsche Bank estimates the Philippines has posted a current-account deficit since 2012, contrary to the surpluses officially reported for at least eight years.
“Our findings suggest that the Philippines’ current-account balance may not be as strong as it seems and that the peso is not as resilient to sudden shifts in investor sentiment as we used to believe,” Diana del Rosario, a Singapore-based economist at Deutsche Bank, said in the report.
Under Pressure
The “peso underperformed most of its current-account surplus peers last year and behaved more in line with those in deficit,” del Rosario said, adding that the currency may remain under pressure as capital flows out of emerging markets to developed economies.
The Philippine central bank, in a response to the Deutsche Bank report, was cited by Deutsche Bank as saying that “the current account is expected to continue to post an appreciable surplus and the recent volatility in the country’s exchange rate has been mainly due to negative market sentiment.”
The central bank, which releases current-account data, didn’t reply to Bloomberg e-mails and text messages seeking comment, ahead of a monetary policy meeting today. Bangko Sentral ng Pilipinas today raised the reserve ratio requirement for some banks to 19 percent from 18 percent while holding its benchmark interest rate at a record-low 3.5 percent.
As the prospect of reduced U.S. monetary stimulus spurred outflows from emerging markets, Indonesia’s rupiah lost 21 percent last year to become Asia’s worst-performing currency after the nation’s current-account deficit widened to a record.
Similar Threat
A similar threat hangs over the Philippines as the U.S. Federal Reserve tapers this year, even with the BSP forecasting a $10.4 billion current-account surplus this year. Peso forwards will probably weaken to 45.2 per dollar in the fourth quarter from 44.8 now, according to Bloomberg surveys.
The current account, which measures trade and financial flows including interest and dividend payments, is used by investors to gauge a nation’s resilience to a crisis. Japan’s currency typically strengthens during times of stress, given the nation’s persistent current-account surplus.
Philippine imports rose 21.8 percent in January from a year earlier, data showed this week, the fastest pace in three years. Foreign-exchange reserves climbed to $80.5 billion in February from $79.4 billion the previous month.
Foregone Revenue
President Aquino in July 2013 criticized customs officials for “heedlessly permitting” smuggling that leads to more than 200 billion pesos ($4.4 billion) in foregone revenue annually. The Philippine government has lost at least $19.3 billion since 1990 in tax revenue due to evasion of customs duties through under-invoicing of imports, Washington-based Global Financial Integrity said in a February report.
Unreported exports also don’t show up in official data, “and this is why discrepancies in our imports will always be larger than the discrepancies in exports,” said Nicky Franco, head of research at Abacus Securities Corp. in Manila. Along with underreported remittances, “the discrepancies for each component of the current account probably even out,” he said.
While the official current-account surplus data may be inflated, the overestimation won’t be large and wouldn’t reverse the surplus into a deficit, New York-based GlobalSource Partners said in a report this month, citing an IMF staff estimate last year that said unregistered remittances are about half of officially recorded transfers.
Goals Missed
The customs bureau, which collects about 20 percent of government revenue, has missed its annual goal since at least 2010. Smuggling of some agricultural commodities including rice and sugar totaled $2.5 billion from 1986 to 2009, the Southeast Asian Regional Center for Graduate Study and Research in Agriculture said in a report this year.
Since taking office in December, Sevilla has suspended permits of 70 companies and 45 brokers for violating rules on providing detailed information of goods they imported. The bureau also investigated 65 of its employees for their alleged involvement in rice smuggling.
“Curbing smuggling will be one of Aquino’s difficult challenges,” said Credit Suisse’s Wan. “Given recent moves by the government against smuggling I am more confident, but it’s not something that can be changed overnight.”
The Philippine economy grew 7.2 percent last year and 6.8 percent in 2012. The nation last year received investment-grade scores for the first time from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.
The country’s current-account surplus this year may be 3.25 percent of its gross domestic product, the International Monetary Fund said yesterday. Fitch said this week external finances remain a key rating strength for the Philippines.
“Investors recognize a limited upside for the peso,” said Alan Cayetano, head of foreign-exchange trading at Bank of the Philippine Islands in Manila. The smuggling and lack of infrastructure improvements aren’t helping, he said, and “questions raised recently on the accuracy of trade data and current-account surplus are adding to the negative tone.”
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