First-half current account gap shows more pressure in store for the peso

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By Elijah Joseph C. Tubayan, Reporter

THE COUNTRY’S current account balance reversed to a deficit in the second quarter, largely under the weight of a growing merchandise trade gap, making the first-semester shortfall hit the Bangko Sentral ng Pilipinas’ (BSP) full-year forecast and signalling more pressure ahead on an already beleaguered peso.

The peso — which for much of this year been hitting its weakest value against the dollar in about 12 years, making it one of Asia’s worst-performing currencies — on Friday firmed 0.18% from the preceding day to P53.97 against the greenback, but was still eight percent weaker year-to-date.

The current account deficit stood at $2.9 billion in the second quarter, compared to a $157-million year-ago surplus, a development BSP on Friday attributed to a growing trade-in-goods deficit.

The current account provides a snapshot of the country’s overall economic interaction with the rest of the world covering trade in goods and services; remittances from overseas Filipino workers (OFW); profit from Philippine investments abroad; interest payments to foreign creditors; as well as gifts, grants and donations to and from abroad.

“This development was due to the higher trade-in-goods deficit and the lower net receipts in the primary income account [consisting of OFW remittances and profit from investments abroad], even as the trade-in-services and secondary income [gifts, grants and donations to and from abroad] posted increased net receipts during the quarter,” Redentor Paolo M. Alegre, Jr., head of the BSP Department of Economic Statistics, said in a media briefing at the BSP complex.

The country’s merchandise trade deficit widened 41.76% to $12.9 billion in April-June from $9.1 billion posted in 2017’s counterpart three months, as imports of goods grew 16% while outbound sales fell 1.7% in that period.

Import growth was fuelled by bigger purchases of semi-processed raw materials for electronics as well as manufactured goods like iron, steel and chemicals.

“Demand for imports rose, driven by increasing domestic production and consumption,” said Mr. Alegre.

He said exports declined due to “lower shipments of mineral products, fruits and vegetables, sugar, and coconut products” that more than offset a 2.6% growth in exported manufactured goods.

Trade-in-services meanwhile grew 40% to $2.8 billion in the second quarter from $2 billion a year ago, fueled by “higher net receipts registered in technical, trade-related and other business services, manufacturing services and computer services, which largely came from business process outsourcing (BPO) transactions”.

The primary income account slid 21.9% to $613 million from $864 million over net payments on investments that quarter, more than offsetting the 2.1% rise to $6.5 billion in the secondary income account

This puts the first-half current account deficit to $3.1 billion from $133 million in the same period last year, touching central bank’s forecast for this year, which BSP Managing Director Francisco G. Dakila, Jr. said in the same briefing will now have to be reviewed.

Economists warned that the wider deficit, resulting from bigger infrastructure investments, could weigh further on the weakening peso and, in turn, inflation that has lately been hitting multiyear highs.

“Certainly, the widening of the country’s trade deficit is partly attributed to the government’s ‘Build Build Build’ program. It may be viewed as the cost that we have to pay in order to establish the infrastructure necessary to achieve faster and more sustainable economic growth in future. In this perspective, the increase in the country’s trade gap may be less worrying,” Land Bank of the Philippines market economist Guian Angelo S. Dumalagan said in an e-mail when asked for comment.

“However, there are some challenges associated with a wider trade deficit. Topping the list is the possibility of prolonged elevated inflation due to persistent peso weakness. The rise in trade deficit is one of the major factors behind the peso’s depreciation. If the peso continues to decline, imported goods become more expensive in local currency terms, resulting potentially in higher inflation,” he explained.

“While moderate inflation is good, prolonged elevated inflation may weaken the economy by undermining domestic demand.”