THE Philippine current account balance is on track to register a shortfall this year and next, as a burgeoning domestic demand continues to widen the trade deficit, Singapore-based DBS Bank noted in a report.
“Expect the current account balance to slip into a deficit this year, at circa -0.3 percent of GDP, as opposed to a projected surplus of 0.7 percent last year,” DBS said.
The current account is the difference between a nation’s savings and its investment.
By 2018, the bank said the current account deficit is likely to widen to 1 percent of gross domestic product (GDP). “This is quite a turnaround, considering that the current account surplus was strong at 4 percent of GDP just a few years back in 2014.”
“The current account is an important indicator of an economy’s health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.
“A nation’s current account balance is influenced by numerous factors–its trade policies, exchange rate, competitiveness, forex reserves and inflation rate among other indicators,” said the online financial content provider wholly owned by IAC.
For the first nine months of 2016, the Philippines posted a current account surplus of $1.6 billion or 0.7 percent of GDP, compared with $6.2 billion or 2.9 percent of GDP a year earlier, the latest government data showed.
The trade deficit is the main culprit, reaching a record $25 billion in 2016 as imports rose by 14 percent while exports dropped 4.7 percent, DBS noted.
“Given that strong domestic demand remains prevalent, the trade deficit may continue to widen, at least until 2018,” the bank said.
Weak peso, investor sentiment
The other components of the current account remains strong, DBS said. It cited remittances from overseas Filipinos as pretty stable, rising 5 percent to a record $26.9 billion last year.
However, the bank red-flagged the pace of remittances growth, given the risks from likely changes in immigration policies in key markets like the US and Saudi Arabia.
Nevertheless, total remittances are likely to remain within the $25-billion to $28-billion range in the next two years, it said.
“Not that we are overly concerned about the current account deficit for now. External financing risks remain manageable,” the bank said.
DBS noted that international reserves continue to provide more than five times coverage of short-term external debt, among the highest ratios in the region.
In February, the country’s gross international reserves (GIR) stood at $81.13 billion, enough to cover 9.2 months of imports.
“How sustainable is the current account deficit going forward will depend largely on net foreign direct investment (FDI) flows,” the bank said, noting that approved FDI actually fell by 18.6 percent year-on-year in the second half of 2016.
“Foreign investors might have maintained a cautious stance, given the controversies surrounding President Duterte,” it added.
The relatively weak peso could have been another factor at play – now trading above the psychologically important level of P50:$1 it hit for the first time this year on February 18.
“Whether sentiment will turn this year remains to be seen,” the bank said.