Full impact seen partially offset by rising foreign investment
The Philippines faces a weakening current account and a widening trade deficit over the next two years as exports wane amid a slow global market recovery, the London-based HSBC forecast.
The full impact of such external headwinds may be mitigated only partially by a rising inflow of foreign direct investment, it warned.
The global bank lowered its expectation for the country’s economic growth this year to 6.5 percent from its estimate of 6.8 percent for 2016.
In a report released Thursday, HSBC said the Philippines will continue to see significant changes to the balance of payments (BOP) dynamics, pointing out that the economy is facing the risk of a narrowing current account surplus this year as Asia continues to face stiff headwinds.
“Despite better headline readings of late, it appears unlikely that exports [in Asia]will make a sustained recovery this year,” it said in the report.
One of the main components of the BOP, the current account consists of transactions in goods, services, primary income and secondary income, and measures the net transfer of real resources between the domestic economy and the rest of the world.
Current account, trade gap forecasts
“We forecast the [Philippine] current account continuing to moderate through 2018, but a pick-up in capital inflows following potential FDI reform could partly offset the weaker current account,” the bank said.
In 2017, the current account balance will ease to $2.9 billion (0.9 percent of gross domestic product [GDP]) from an estimated $3.8 billion (1.3 percent of GDP) in 2016, and will continue to moderate to $1.7 billion (1.5 percent of GDP) in 2018, according to HSBC ’s projections.
For 2016, it sees the current account surplus narrowing to $3.8 billion from $7.7 billion in 2015.
The latest government official data showed that as of the end of the first nine months of 2016, the country’s current account stood at a surplus of US$1.6 billion (0.7 percent of GDP), lower than the $6.2 billion (2.9 percent of GDP) posted in the corresponding period a year earlier, resulting primarily from a wider deficit in the trade-in-goods.
Supporting its current account forecasts, HSBC said manufacturing exports do not look too bright outside electronics, which might lead to a continuation of trade deficits in the Philippines.
This year, HSBC sees the trade deficit possibly widening to $38.3 billion from an estimated gap of $33.2 billion in 2016.
Despite this, the bank said while the Philippines “is not completely spared from various headwinds on the horizon for the regional economy, it remains relatively insulated.”
“There are fears that investment from the US, which is the largest contributor of FDI in the Philippines, might fall under new US economic policies. However, China has made investment commitments (hard and soft) of $24 billion recently, which could partly offset the potential decline in FDI from the US,” it said.
Net FDI is expected to surge to $2.1 billion this year from an estimated net inflow of $100 million in 2016.
This year, the Philippine growth story will continue, HSBC said, seeing gross domestic product (GDP) growing 6.5 percent on the back of extra fiscal spending, especially on infrastructure.
That may be far more robust than other economies in Asia Pacific would fare this year, but such pace stays at the bottom of the 6.5 percent to 7.5 percent official target range of the government.
The bank’s 2017 forecast also reflects an easing from its 6.8 percent estimate for last year’s GDP.
Its scenario for investment is more positive, showing a robust pace of growth at 12.4 percent this year. The government will allow a wider deficit in the 2017 budget equivalent to 3 percent of GDP, to accommodate infrastructure investment equivalent to more than 5 percent of GDP.
“The government plans to continue increasing infrastructure spending to 7 percent by the end of its term—significantly boosting the overall contribution of investment the structure of growth in the Philippines,” it said.
Fortunately, fiscal consolidation in recent years allows the government to pursue fiscal expansion, and low debt levels suggest it is sustainable for now, HSBC said.
“Moreover, the government is hoping to accelerate PPP [public-private partnership] projects to co-opt more financing from the private sector,” it added.
“Elsewhere, the Philippines remains highly vulnerable to weather trends. Fortunately, risk stemming from the onset of La Niña after El Niño are relatively contained, thanks to government efforts which are likely to ramp up rice imports in 2017.”
Lastly, HSBC stressed that a number of reforms, including the tax reforms and other constitutional reforms, are likely to be undertaken in 2017 and that although President Rodrigo Duterte remains popular among the people, this may depend on how the reforms are ultimately implemented.