Narrower current account deficit seen this year

The country’s current account deficit could narrow this year amid lower commodity prices, but weaker exports due to a slower global economy may keep the balance in deficit, analysts said.

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

Both forecasts are more optimistic than the projections of the Bangko Sentral ng Pilipinas (BSP), which sees a $17.1-billion deficit (4% of GDP) for this year and $16.8 billion (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 reported a current account deficit of $17.8 billion in 2022, higher than the $5.9-billion deficit  year earlier, 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 lower 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 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 (PSA) reported that the trade-in-goods balance was in deficit by $4.93 billion in March, expanding from the $3.91-billion deficit in the preceding month 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% growth posted a year earlier, while imports dropped 2.7% year-on-year to $11.46 billion, a turnaround from the 23.4% growth posted 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 in the quarter, wider than the $13.08-billion deficit posted 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. This would allow the Philippines to meet its external debt obligations and provide the BSP with the tools to mitigate excess volatility in the peso.

The BSP reported dollar reserves edging higher to $101.8 billion at the end of April, from $101.5 billion at the end of March.

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 the 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 Philippine exports, risks to the tourism sector and slower growth in cash remittances may negatively affect the current account balance.

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

He said a deterioration in the current account deficit will have various effects on monetary policy.

“Deeper deficit will put downward pressure on the peso, which in turn might constrain the BSP’s move to cut rates, as it will lead to further deprecation of the currency if it results in 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 untouched after nine meetings.

Since it began its monetary tightening cycle in May 2022, the BSP has raised borrowing costs by a total of 425 basis points (bps). The BSP will next discuss policy settings on June 22.

On the other hand, the Federal Reserve 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 the deficit for the period at P298.705 billion.

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

Meanwhile, in its rating action commentary last week, Fitch Ratings said it sees the current account deficit narrowing to 2.3% of GDP in 2024.

“We expect the current account (CA) 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 CA 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 more 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