By Melissa Luz T. Lopez,
Senior Reporter

Remittances expected to bring rough balance to current account

Posted on July 19, 2017

THE sustained strength in monthly remittances will keep the current account in a modest deficit this year, as the money inflows help offset the wider trade gap as the Philippines adopts more aggressive spending plans.

BSP Governor Nestor A. Espenilla, Jr. has said that the external position remains “very manageable” despite being in deficit. AFP
DBS Bank and ING Bank N.V. Manila said in separate market commentaries that the remittance inflows will help shore up the Philippine economy against expectations of a wider trade deficit this year, and allow the economy to keep the current account close to balance.

Cash remittances from Overseas Filipino Workers (OFWs) hit $2.31 billion in May, up 5.5% from a year earlier and reversing a 5.9% decline in April, latest data from the Bangko Sentral ng Pilipinas (BSP) showed.

Money sent home by OFWs also grew by 4.5% to $11.346 billion in the five months to May, remaining on track to hit the central bank’s forecast of a fresh high of $28 billion for 2017.

Remittances totaled a record $26.9 billion in 2016, up 5%.

The current account measures money flows derived from trade in goods and services. A deficit meant more goods and services entered against outflows.

The Philippine Statistics Authority reported that the trade deficit widened to $2.753 billion in May, from $2.24 billion a year earlier, as imports grew 16.6% to outpace the 13.7% increase in exports.

BSP Governor Nestor A. Espenilla, Jr. has said that the external position remains “very manageable” despite being in deficit, with robust remittance inflows helping fuel further economic growth to support strong domestic consumption.

“Indeed, while foreign remittances are still trending at circa $2.3 billion per month, the trade deficit has moderated to a monthly pace of about $2 billion,” DBS Bank said in a report published yesterday.

“This is important not only for the positive impact it has on personal consumption growth, but also as a counter to the widening trade deficit.”

The BSP expects the Philippines to incur a $600 million current account deficit this year or 0.2% of gross domestic product (GDP), which if realized would reverse a $601-million surplus posted in 2016.

The central bank’s latest estimate factors in the uneven global growth prospects, which would weigh on trade and capital flows. In announcing the fresh estimates last month, BSP Deputy Governor Diwa C. Guinigundo cited developments in the United States -- particularly the pace of the Federal Reserve’s interest rate hikes and protectionist policies from President Donald J. Trump -- as key risks that could affect the Philippine economy.

The current account was in deficit by $318 million in the first quarter, equivalent to 0.4% of GDP. The analysts expect this trend to be sustained, as the government’s infrastructure spending push would require more capital goods imports.

With the steady stream of remittances, DBS Bank expects the current account balance to post a deficit equal to 0.3% of GDP this year.

For his part, ING Bank senior economist Jose Mario I. Cuyegkeng said OFW remittances and receipts from the business process outsourcing (BPO) industry will likewise cushion the sustained double-digit growth of imports of goods.

“Structural inflows (which have OFW remittances as one of two components) had allowed the economy to post years of current account surpluses and escape from an economic structure of twin deficits,” Mr. Cuyegkeng said yesterday.

ING sees a 4% annualized growth in remittances -- matching the BSP’s forecast -- alongside a 10% rise in BPO revenue.

“We expect this combination to allow the economy to post a more balanced current account to around 0.2% of GDP,” Mr. Cuyegkeng added.

Inflows from the BPO sector hit $5.5 billion during the first quarter, up 9.9% from a year earlier, according to latest central bank data.