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FINANCE SECRETARY Ralph G. Recto is eyeing a free trade agreement (FTA) with the United States after meeting with US officials on Monday to discuss efforts to boost ties, according to his office.

They discussed efforts to “boost economic and investment cooperation between the Philippines and the US,” the agency said in a statement. “He also broached the potential of having an FTA with the US and further enhancing security and military ties between the two nations.”

The government of President Ferdinand R. Marcos, Jr. would seek to address investor concerns by improving the ease of doing business, Mr. Recto said in the statement, citing a push for lower corporate income tax under changes to the Corporate Recovery and Tax Incentives for Enterprises Act.

A House of Representatives committee last week endorsed to members the substitute bill that will also streamline the tax refund system for corporations.

“In response, US officials welcomed these developments and expressed optimism about further deepening partnership with the Philippines, pointing out that the country’s young, English-speaking population and strong macroeconomic fundamentals underscore its attractiveness as a viable investment destination,” the Finance department said.

“The US likewise expressed interest in helping the Philippines establish an investment mechanism to help the country screen foreign direct investments (FDI) for national security purposes,” it added.

Meanwhile, Trade Undersecretary Allan B. Gepty said negotiations for a free trade deal are welcome.

“The Philippines has been advocating an FTA with the US, which is one of our major trading and investment partners,” he said in a Viber message. “However, the US is not yet keen or open to the arrangement. We welcome any move that will lead to an eventual FTA.”

In April, US Trade Representative Katherine Tai said the US is not seeking any free trade agreements with the Philippines or any of its trading partners.

The Philippines has been pushing readmission into the US Generalized System of Preference program, which expired in 2020. Participation in the trade program requires the approval of the US Congress.

Calixto V. Chikiamco, Foundation for Economic Freedom president, said Mr. Recto’s proposal is a positive development but is not realistic.

“The US has been moving away from free trade agreements due to political pressure from US labor,” he said in a Viber message. “In fact, even the limited agreements under the Indo-Pacific Economic Cooperation haven’t gotten approval from the US Senate.”

“It would be better if the Philippines joined the Comprehensive and Progressive Agreement for Transpacific Partnership led by Japan,” he added.

Signed in 2018, the free trade deal includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The Philippines should also forge free trade agreements with the EU and Canada, Mr. Chikiamco said. “The Philippines, however, should also develop its defense industries to take advantage of the increased defense spending of allies like the US, Japan, Australia and the EU.”

The Finance department said the US officials present at the meeting included Robert Kaproth, Treasury Department deputy assistant secretary for Asia; Treasury Financial Attaché to Southeast Asia Daniel Hall; and US Embassy Chargé d’affaires and Deputy Chief of Mission Robert Ewing.

It said a “high-level delegation” from the US would visit the Philippines in March to strengthen bilateral ties. – Luisa Maria Jacinta C. Jocson, Reporter

THE SHIFT to artificial intelligence (AI) technologies could increase labor productivity in the Philippine service sector, the International Monetary Fund (IMF) said. 

“Because of the Philippine economy’s early structural transformation to a service-based economy, raising the level of service sector labor productivity through digital skills and portability will be essential,” IMF Resident Representative to the Philippines Ragnar Gudmundsson said in an e-mail. 

“This will require upskilling of the labor force to leverage artificial intelligence tools and continue to move up value chains, as well as efforts to develop the country’s digital infrastructure especially outside urban centers,” he added.

Mr. Gudmundsson said the IMF is working on a study on how AI technologies could affect the Philippines.

Last week, the IMF said AI could affect nearly 40% of global employment. While it is seen to complement human work, it might replace other jobs and would likely worsen economic inequality. 

It said about 60% of jobs in advanced economies are exposed to AI. About half of these jobs will benefit from AI integration by boosting labor productivity.

But the other half showed that AI could perform tasks done by humans, effectively lowering labor demand and leading to lower wages and reduced hiring, the IMF said.

In emerging markets and low-income countries, AI exposure is expected at 4% and 26%, respectively.

“These findings suggest emerging market and developing economies face fewer immediate disruptions from AI,” IMF Managing Director Kristalina Georgieva earlier said.

“At the same time, many of these countries don’t have the infrastructure or skilled workforces to harness the benefits of AI, raising the risk that over time the technology could worsen inequality among nations,” she added. 

Senti AI Founder and Chief Executive Officer Ralph Vincent J. Regalado cited risks in jobs that can be automated with technology.

“Given the rise of generative AI technologies, we’ve seen that adoption has increased and most observed that it aids productivity,” he said in an e-mail. “It’s important that we invest in the education of our people, teaching them how to use these technologies to boost their work and be competitive in the job market.”

Mr. Regalado noted that companies and organizations should support affected employees by helping them acquire new skills.

AI would likely affect several industries including the technology, banking, and the pharmaceutical and medical product sector, he said.

STATE SUPPORT

“The sectors identified by the IMF in high-income countries would also be the same here in the Philippines,” he said. “Mid- and high-level positions can definitely increase their productivity by using AI tools to offload some of their tasks.”

AI can enhance public services, modernize finance, and boost the agriculture and healthcare sectors, according to the IMF report.

Regardless of the industry, any job that requires menial, low-level tasks that can be digitalized will be affected the most by AI, Mr. Regalado said. These include sales, customer service, and data encoding jobs.

“This is not to say that all workers in these lines of work will be removed,” he said. “Companies that use conversational AI to handle inbound calls or customer chats may employ fewer workers to just monitor the logs and intervene if the customer requests a human agent.”

“Finance and accounting departments can spend less on staff manually encoding paperwork and just have them double-check the accuracy of data extracted through Document AI,” he added.

However, the Philippines is behind advanced economies due to the lack of infrastructure and manpower, Mr. Regalado said.

Businesses might also find it more expensive to invest in a new system versus relying on human labor, he added.

The Philippines fell 11 places to 65^th out of 193 countries in the 2023 Government AI Readiness Index by Oxford Insights. It scored 51.98 out of 100, higher than the 44.94 global average.

Mr. Regalado said the government should lead in advocating AI adoption.

“Investing more in AI companies and research is one way,” he said. “The public sector shouldn’t shy away from collaborating with the private sector to look into ways the Philippines can benefit from increased AI adoption.”

The government should improve infrastructure to accommodate AI, including stable energy and internet connections.

“Mandating and even providing incentives to encourage businesses and government agencies to adopt and use tools that can improve productivity is another good idea,” Mr. Regalado said. – Keisha B. Ta-asan, Reporter

Supply shocks that could arise from the El Niño weather event may derail efforts to bring inflation back to the 2-4% target range, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said.   

“Supply shocks may derail (our) forecast including what’s going on with rice, the imports of rice. El Niño is a factor. So, it depends on those risks,” he told reporters during a Media Information Session on Saturday.

The Bangko Sentral ng Pilipinas (BSP) sees inflation easing to 3.7% this year and to 3.2% in 2025. Full-year inflation averaged 6% in 2023, marking the second straight year that average inflation breached the 2-4% target band.

The central bank earlier said that inflation will likely settle within the 2-4% range in the first quarter but could potentially accelerate to above target from April to July due to the El Niño, the lag impact of wage adjustments in 2023, and positive base effects.

“We began to realize the supply shocks are very important for the inflation outlook, not because of the shocks themselves, we expect them to dissipate, but because of the second-round effects from those shocks,” Mr. Remolona said.

“They affect expectations, and those expectations affect second-round effects which we see in prices of services for example, in wages, transport fares. So, we’re not out of the woods,” he added.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration  projects that El Niño will likely persist until May this year.

Earlier estimates by the BSP also showed that the dry weather event could impact inflation by 0.02 percentage point.

National Economic and Development Authority Secretary Arsenio M. Balisacan has also flagged the risk of elevated inflation due to the onset of the El Niño, which could impact the agriculture sector and stoke food prices.

‘Not likely’
Meanwhile, Mr. Remolona said it is unlikely that the BSP will begin easing policy rates within the first half of the year.

“It depends on the data as we always say, but it’s looking good. We like the trend so far. I would say it’s possible but maybe not likely,” he said.

To tame inflation, the Monetary Board hiked borrowing costs by 450 basis points (bps) from May 2022 to October 2023, bringing the key interest rate to a 16-year high of 6.5%.

The BSP chief earlier said that it may need to keep policy settings tighter for longer until inflation settles more firmly within target.

Mr. Remolona also said that the BSP will be keeping an eye on policy moves by the US Federal Reserve.

“As you know, we’ve been watching what the other central banks have been doing, especially what the Fed has been doing, how the markets have been reacting to statements by the Federal Open Market Committee,” he added.

From March 2022 to July 2023, the Fed has raised rates by 525 bps to 5.25-5.5%.

The BSP will have its first policy meeting for this year on Feb. 15. — Luisa Maria Jacinta C. Jocson and Keisha B. Ta-asan

The ongoing crisis in the Red Sea is disrupting the movement of goods, which is resulting in delays in shipments and higher costs for Philippine businesses.

Ayala Corp. Chairman Jaime Augusto Zobel de Ayala said ongoing geopolitical tensions such as the disruptions in the Red Sea could have cost implications for Philippine businesses.

“I do believe that there will be disruptions. I believe that there will be cost implications. I believe that in the current environment, there will be difficulties that we all face,” Mr. Zobel told reporters on Thursday. “I think right now (the movement of goods and services) is a little bit under fire particularly in the Middle East.”

Tensions in the Red Sea, a major shipping route, have remained elevated as Houthi rebels continue to attack cargo ships and tankers. About 12% of global trade or 30% of overall global container traffic goes through its northern part — the Suez Canal — which brings goods to and from Asia and Europe.

“We can expect delays particularly on our ecozone shipments going to and coming from Europe particularly those countries located in the Mediterranean region given the resulting port congestions with the longer dwell time for containerized cargoes,” Philippine Economic Zone Authority (PEZA) Director-General Tereso O. Panga said in a Viber message to BusinessWorld last week.

The Red Sea crisis may also drive shipping rates higher as vessels use alternative routes between Europe and Asia, Mr. Panga said.

“Shipping lines are rerouting their cargo away from the Suez Canal following militant attacks on vessels in the Red Sea. As an alternative, vessels are doing a detour via Cape of Good Hope in Africa, but this is more expensive for shipments,” he said.

Rerouting ships around the Red Sea could bring costs of up to $1 million for additional fuel per trip between Asia and Northern Europe, Mr. Panga said.

Bianca Pearl R. Sykimte, director of the Department of Trade and Industry Export Marketing Bureau, said the Red Sea crisis has a global impact and the Philippines will not be spared.

“The impact of the issue is global in scale, and we will not be immune to it. About one-third of global container cargo passes through the area and alternative routes are expected to add weeks of additional shipping time and cost,” she said in a Viber message.

Sea-Intelligence, a provider of research and data analysis focusing on shipping and supply chain, said in a press release that the Red Sea crisis will likely result in “uncertainty” on the services from Asia to Europe.

Alan Murphy, chief executive officer of Sea-Intelligence, noted the Red Sea crisis is now considered as “the largest single event” to result in the largest vessel capacity decline in recent years, even surpassing pandemic level.

Data provided by Sea-Intelligence showed that vessel capacity dropped by 60% due to the Red Sea crisis compared to the pandemic levels where it declined by 20-40%.

“The Philippines is not feeling it yet but definitely we have to brace up for its impact,” PEZA’s Mr. Panga said.

He said PEZA is coordinating with affected locators to look for alternative routes and suppliers of imported goods as part of efforts “to de-risk the global supply chain.”

“For the Philippines, initially, the impact will be more muted since it will largely affect trade in and out of Europe. In contrast, trade with the US and Asia especially agriculture products such as rice are likely not yet directly affected,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message on Sunday.

She noted shipping costs are expected to increase eventually as the Red Sea crisis continues.

“This could lead to some pickup in overall international shipping costs, some shipping disruptions especially the Asia-Europe trade (exports and imports) could also have some indirect impact on some global supply chains, thereby could lead to some pickup in prices and overall inflation,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message. — By Ashley Erika O. Jose, with input from Revin Mikhael D. Ochave

Tensions between the Philippines and China may lead to trade disruptions that could escalate across the Asia-Pacific region, according to Moody’s Investors Service.   

“While not our baseline, an escalation of tensions in the South China Sea could lead to disruptions in trade, not just between China and the Philippines, but also for the region at large given that the South China Sea is a critical trade route that delivers goods between Northeast Asia and Southeast Asia,” Moody’s Investors Service Senior Vice-President and Manager Christian de Guzman told BusinessWorld in an e-mail interview.

He said these disruptions may weigh on growth prospects in the region due to Asia-Pacific’s overall reliance on trade.

“In turn, this could accelerate the trend of gradual trade and investment diversion that has been prompted by separate geopolitical considerations, namely US-China strategic rivalry,” Mr. De Guzman said.   

“Moreover, rising geopolitical risks will constrain the ability of governments to more aggressively pursue fiscal consolidation as defense budgets remain elevated, even as other expenditures are curtailed in the aftermath of the pandemic,” he added.

Relations between the Philippines and China have soured as confrontations in the South China Sea between their coast guards have become more frequent.

The Philippines has cited incursions by Chinese vessels around South China Sea features closest to the Southeast Asian nation.

The situation has worsened after the Chinese Coast Guard in December fired water cannons to block Manila’s attempt to deliver food and other supplies to troops stationed at BRP Sierra Madre, a World War II-era warship intentionally grounded to stake the Philippines’ claim on the waterway.

A United Nations-backed tribunal in 2016 said China’s claim to nearly the entire South China Sea has no legal basis, but Beijing has largely ignored the ruling and continued its island-building activities.

Asked if the tensions between the country and China would affect the Philippines’ sovereign rating, Mr. De Guzman said Moody’s has not observed any material impact of the sea dispute.

“We consider political risk — which encompasses both domestic and geopolitical risk —under our assessment of a sovereign’s susceptibility to event risk; as such, our concern is the degree to which associated developments will affect economic, institutional and fiscal fundamentals,” he said.

“In this context, we have not yet seen a material impact from the shift in the Philippines’ foreign policy stance with regards to the South China Sea under President [Ferdinand R. Marcos, Jr.].”

In September 2022, the credit rater affirmed the country’s long-term local and foreign currency issuer and senior unsecured ratings at “Baa2.” Moody’s has kept its “Baa2” rating for the Philippines since December 2014. 

Despite the tensions, Mr. De Guzman said bilateral trade between the Philippines and China continues to be driven by supply and demand rather than the overarching political considerations.

“More broadly, we assess a low probability of an emergence of political stress that could have a moderate impact on the Philippines’ rating,” he said.   

China is the Philippines’ top trading partner. Bilateral trade in 2022 grew by 7.1% year on year to USD 87.7 billion, according to China Customs data.

Bilateral trade between the Philippines fell by 16% from a year earlier to USD 54.1 billion in January to September. China imported USD 14.36 billion worth of Philippine goods in the first nine months of this year, down by 19%.

Don McLain Gill, a geopolitical analyst and international studies lecturer at De La Salle University, said the conflict in the Indo-Pacific has not critically affected trade between the Philippines and China, Vietnam and China, or India and China.   

“Hence, Manila’s desire to stand up for its sovereignty and sovereign rights should not be simplified as directly proportional to its trade relations, especially when China has given so little in terms of ODI (outward direct investment) whereas it is gaining more than us in terms of our asymmetric trade,” he said.   

Based on central bank data, foreign direct investment inflows from China fell by 19.1% to USD 12.53 million as of October 2023 from USD 15.49 million a year ago.   

Hansley A. Juliano, a political economy researcher studying at Nagoya University’s Graduate School of International Development in Japan, said Southeast Asian economies are dependent on East Asia.

“The most direct risk of any possible economic boycotts between the Philippines and China, be it both sides or one way, is whether China would then favor one of our neighbors and relocate supply chains there instead,” Mr. Juliano said.   

This can destabilize economic community agreements in the Association of Southeast Asian Nations.   

“While China is our biggest individual trading partner, it’s not the majority. There’s either the strategy of releveraging or re-establishing our supply chains with other countries too, especially since Chinese trade with us ultimately serves transnational corporations and brands,” he added. — By Keisha B. Ta-asan, Reporter

The Philippines’ net external liability position expanded in the second quarter of 2023 from the prior quarter due to nonfinancial corporations and the government, preliminary data from the central bank showed.

The country’s net financial liability position widened by 4.8% quarter on quarter to PHP 2.4 trillion at end-June 2023 from PHP 2.3 trillion, the Bangko Sentral ng Pilipinas (BSP) said on Friday.

The BSP said this was “due to the higher net external liability positions of the nonfinancial corporations and the general government.”

“However, this was partly offset by the lower net external liability position of the other financial corporations,” it said.

Year on year, the country’s net external liability position widened by 79.5% from PHP 1.3 trillion.

The nonfinancial corporations sector was the largest net debtor, with its net financial liability position widening by 3.8% to P8.8 trillion from PHP 8.5 trillion in the previous quarter.

“This resulted from the increase in the other financial corporations’ holdings of equity and investment fund shares and debt securities issued by the nonfinancial corporations. Further, loans from nonresidents and other depository corporations increased,” the central bank said.

Year on year, nonfinancial corporations’ net financial liability position widened by 10.2% from P8 trillion.

The general government’s net external liability position expanded by 2.7% quarter on quarter to PHP 8.7 trillion from PHP 8.5 trillion amid lower deposits with other depository corporations and higher holdings of government securities of the other depository corporations and other financial corporations.

Year on year, the sector’s net financial liability position widened by 19.7% from PHP 7.3 trillion.

Meanwhile, households’ net financial asset position rose by 1.2% to PHP 12.4 trillion in the second quarter of 2023 from PHP 12.2 trillion in the prior three-month period amid increased holdings of equity and investment fund shares issued by other financial corporations.

“Consistent with the quarterly development, the households’ net creditor position increased year on year due primarily to the increase in the sector’s holdings of other financial corporations-issued equity and investment fund shares,” the BSP said.

“Likewise, the sector’s net creditor position to the other depository corporations grew as the households’ deposits increased. Despite the increase in its financial liabilities, the households’ stock of financial assets was three times more than the amount of its financial obligations,” it added.

The net financial asset position of other depository corporations likewise widened by 7.3% to P1.9 trillion at end-June 2023 from P1.7 trillion as of March amid lower government deposits, as well as and higher holdings of government securities and bank loans to nonfinancial enterprises.

However, year on year, the net creditor position of other depository corporations declined by 9.2% from PHP 2 trillion.

Lastly, the central bank’s net financial asset position increased by 5.9% to PHP 836.5 billion at end-June 2023 from PHP 789.7 billion in the previous quarter amid lower deposits from other depository corporations.

The central bank’s net creditor position rose by 5.4% year on year from PHP 793.4 billion. — AMCS