Current account deficit could narrow on cheaper PHL imports

THE current account deficit has a chance of narrowing this year as commodity prices fall, but weaker exports as the global economy slows could ultimately keep the indicator in the negative, analysts said. 

Makoto Tsuchiya, assistant economist from Oxford Economics Japan, said the firm expects the current account deficit as percentage of gross domestic product (GDP) to settle at 2.7% this year and 3.3% in 2024.

Both forecasts are more positive than the projections of the Bangko Sentral ng Pilipinas (BSP), which sees a $17.1-billion deficit (4% of GDP) for this year and a $16.8-billion deficit (3.4% of GDP) for 2024.

“The forecast represents an improvement from last year given lower commodity prices, but the balance will remain in deficit given slowing goods exports on the back of weaker global economic outlook and the lower demand for electronics, particularly semiconductors, amid an IT cycle downturn,” he said.

The BSP put the current account deficit at $17.8 billion in 2022, widening from the $5.9-billion deficit in 2021, as the trade in goods deficit widened.

China Banking Corp. Chief Economist Domini S. Velasquez said the current account deficit may narrow over the coming months due to a declining trade deficit.  

“Merchandise exports likely bottomed out in the first quarter and will improve moving forward. Recent trade data showed Chinese export demand picking up which will likely continue through the rest of the year,” she said in a Viber message.

The country’s trade-in-goods deficit in March widened to its highest level in two months as exports and imports continued to fall.

The Philippine Statistics Agency reported that the trade-in-goods balance was in deficit by $4.93 billion in March, widening from the $3.91-billion deficit a month earlier and the $4.59-billion deficit a year earlier.

Goods exports declined 9.1% year on year to $6.53 billion in March, reversing the 6% year-earlier rise, while imports dropped 2.7% year on year to $11.46 billion, turning around from the 23.4% growth in March 2022. 

For the first quarter, exports declined 13.2% to $16.86 billion, while imports slipped 3.3% to $31.44 billion. This brought the trade deficit to $14.58 billion during the quarter, wider than the $13.08-billion deficit from a year earlier.

“In lieu of the weak merchandise exports this year, we expect the trade deficit to receive support from improving services exports led by BPOs (business process outsourcing companies) and tourism. Also, imports will be softer this year, as oil prices settle lower,” Ms. Velasquez said.

She added that dollar reserves are above $100 billion, allowing the Philippines to meet its external debt obligations and provide the BSP with the resources to mitigate excessive peso volatility.

The BSP said reserves edged higher to $101.8 billion at the end of April from $101.5 billion a month earlier.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the recent decline in prices of key global commodities which the Philippines imports could lead to a narrower current account deficit this year.

These commodities include crude oil, other energy items and industrial metals.

“At the same time, the continued growth in structural dollar inflows… would also help narrow the current account deficit going forward,” he said.

Mr. Tsuchiya said a weaker-than-expected global economy, weak exports, risks to tourism and slower growth in cash remittances may negatively affect the current account balance.

“If the global economy slows further than we expect, and consequently Philippines goods exports are weaker than expected, then this will bring down the current account balance deeper into deficit,” Mr. Tsuchiya said.

He also said that a deterioration in the current account deficit will raise the pressure on monetary authorities to cut rates.

“A deeper deficit will put downward pressure on the peso, which in turn might (compel) the BSP’s move to cut rates, (which will) lead to further depreciation of the currency if it results in a narrower interest rate differential with the Fed,” he said.

The Monetary Board kept its benchmark interest rate unchanged at 6.25% on May 18. This is the first time it has left rates steady after nine meetings.

Since it began its tightening cycle in May 2022, the BSP has raised borrowing costs by a total of 425 basis points (bps). The BSP’s next policy meeting is June 22.  

The Federal Reserve has raised borrowing costs by 500 bps since March 2022, bringing the Fed funds rate to 5-5.25%. The Fed is set to meet on June 13-14.

“Fiscal implications are also important, as the Philippines already suffers from its status as a twin deficit economy. Although Fitch Ratings recently upgraded the outlook for the Philippines to stable from negative, a wider current account deficit will increase pressure on the government to compress its fiscal debt,” Mr. Tsuchiya added.

The Bureau of the Treasury reported that the fiscal deficit narrowed 14.51% year on year to P270.9 billion in the three months to March.

The government had projected a deficit for the period of P298.705 billion.

This year, the government has set a budget deficit ceiling of P1.499 trillion, equivalent to 6.1% of GDP.

In its rating action commentary last week, Fitch Ratings said it expects the Philippine current account deficit to narrow to 2.3% of GDP in 2024.

“We expect the current account deficit to narrow to 2.3% of GDP (about $11 billion) by 2024, from an estimated 4.4% of GDP (nearly $18 billion) in 2022, reflecting mainly a falling hydrocarbon import bill, which accounted for the spike in the deficit in 2022,” it said.

However, the current account deficit will persist amid robust domestic demand and the government’s infrastructure push.

A significant deterioration in gross international reserves and net external creditor position due to a persistent current account deficit may lead to a rating downgrade, Fitch Ratings said.

Last week, the credit rater kept the Philippines’ long-term foreign currency issuer default rating at “BBB” and upgraded its outlook to stable from negative. — Keisha B. Ta-asan