The manufacturing sector is reeling hard from the steep peso depreciation against the US dollar and is rearing for the local currency to get back in shape to a more comfortable P50 level by the first quarter next year.
Perry Ferrer, vice-president for industry of the Philippine Chamber of Commerce and Industry (PCCI), stressed at the press launch for the 48th Philippine Business Conference and Expo at the Manila Hotel, that since the manufacturing sector is very important to the domestic economy, the steep depreciation is “very costly” for the Philippines.
The domestic manufacturing sector expanded by 10.1 percent in the first quarter this year. This sector also contributed 7.0 percent of the total 10.4 percent industry growth.
Thus, it is more difficult if the peso would further depreciate to the P60 level against the greenback, he said. So far, the peso has depreciated by 7.4 percent after breaching the ₱56:$1 mark.
The difficulty faced by manufacturers is largely because domestic manufacturing is heavily import-dependent because the localization program in the country has not really taken off, especially in the electronics and semiconductor sector. Ferrer noted that the localization in the country has not yet reached the “ideal” localization level.
He further said that while the weak peso is good for the overseas Filipino workers (OFWs) as they would earn more peso yield when they convert their dollars, it is not also clear if the OFW remittances would be enough to offset the adverse impact on the manufacturing sector.
As such, Ferrer, who is president and CEO of major electronics firm EMS Components Assembly Inc., said the manufacturing sector would like the peso to go back to its comfortable P50-level. He expressed hope the peso to return to that level as early as the first quarter of next year.
“Peso is a concern,” he said noting that the devaluation just increases their revenue but the Philippines is import dependent so they spend more pesos to purchase their raw materials.
This means that the peso depreciation only increases the cost of domestic manufacturing and less competitive.
But Ferrer emphasized that there is no problem in terms of demand. In fact, he said, the manufacturing sector is ramping up production to meet orders.
In fact, Ferrer said that Philippine exports are seen to sustain growth on a much better position than pre-pandemic levels.
But still, he said, “the net is still increased cost for manufacturers.”
Aside from the weak peso, manufacturers are also hit by higher cost of electricity and fuel. “It is very taxing and challenging,” he said adding “there is no relief in sight yet with the Ukraine-Russia war.” Energy cost would account for as much as 20 percent of manufacturing cost, but the cost could go as high 60 percent for power intensive industries.
PCCI President George Barcelon added that exporters are hit by high freight cost and the lack of space in foreign vessels to carry Philippine exports.
“Freight cost from Manila to the US has gone up 200 percent,” Barcelon pointed out.
Meantime, Ferrer said that exporters are implementing measures to cut cost, but stressed that “refusing orders to cut cost” is not one of them.
“This is where innovation comes in by using technology to augment shortages in workers, reduce high power cost. We are not cutting orders,” he said.
He noted that the Philippines is more on the downstream semiconductor manufacturing and whatever orders they get, local firms just accept and produce these orders. But getting out these orders is also problem because of high logistics cost and space availability in foreign shipping lines.