Current account deficit seen widening to 2.6% of GDP as exports weaken — Fitch Solutions

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THE CURRENT account deficit is expected to expand this year to about 2.6% of Gross Domestic Product (GDP) due to weak external demand during the coronavirus disease 2019 (COVID-19) epidemic, according to Fitch Solutions Macro Research.

The current account was in deficit by $464 million in 2019, narrowing from the $8.773 billion deficit in 2018, according to the central bank.

The 2019 deficit was equivalent to 0.1% of GDP, against 2.4% of GDP in 2018.

Fitch Solutions said it is revising its current account balance forecast to a deficit equivalent to 2.6% of GDP in 2020, from the previous outlook of 1.2%.

“The Philippines economy will be hit by the duel shock of a sharp drop off in global demand and a concurrent tightening of global financing conditions,” Fitch Solutions said in a note issued Thursday.

In its report, the Fitch unit noted that the lockdown restricted activity in Luzon, which is the “most important economically.”

Fitch Solutions said the Philippines is likely to experience a pickup in domestic activity that is stronger than the external demand recovery when the outbreak is contained.

“We expect a strong fiscal response in the Philippines focused on infrastructure investment and boasting consumption, which will mean a stronger recovery in import demand relative to exports, as tourism and travel have a delayed recovery,” Fitch Solutions said.

“However, this view is contingent on how long domestic lockdowns last and whether they are indeed expanded to the entire country, instead of just the main island (Luzon),” it added.

Fitch Solutions said that the tourism industry is likely to bear the brunt of the virus which will weigh on service exports. It noted that transport and travel account for around 30% of service export receipts.

“We also do not expect travel restrictions to be lifted quickly, given government’s desire to limit imported cases, distrust of reporting standards abroad and a reluctance to allow capital outflows amid strains on external financing conditions,” Fitch Solutions said.

Before the outbreak, the Bangko Sentral ng Pilipinas (BSP) estimated in November that travel receipts will grow 12% this year.

Fitch Solutions also expects weaker remittance inflows from Overseas Filipino Workers (OFWs) all over the world given the “synchronized slowing global growth.. It expects remittances from the US to grow 1%, the slowest rate since the 2008 financial crisis, with unemployment there expected to rise.

“This will weigh on remittance flows from the US and globally, given the importance of the US as a global source of demand. In addition, a slump in cruise travel will hurt sea-based remittances, which are around 21.7% of the total,” Fitch Solutions said.

Fitch Solutions downgraded its 2020 GDP forecast for the Philippines to 4% from 6% estimated in early March when the lockdown was yet to be imposed and the country had only a few cases. The Philippine economy grew 5.9% in 2019. — Luz Wendy T. Noble

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