Current account may revert to surplus on inflows

By Melissa Luz T. Lopez,
Senior Reporter

THE COUNTRY’S current account could revert to a narrow surplus this year amid expectations that more funds will trickle in during the second semester, enough to offset previous outbound flows and relieve some pressure on the peso, ING Bank said.

The Bangko Sentral ng Pilipinas (BSP) reported on Friday a $15-million current account surplus for the second quarter, a turnaround from the $1.256 billion deficit logged during the same period in 2016.

This meant that the Philippines became a net lender to the rest of the world during the three months ended June, which factors in the country’s balance of trade (exports and imports), net income from abroad and net current transfers as more funds entered the Philippines.

For the global lender, the positive external trade figures reported during the second quarter make the case of a recovery of inbound flows this year despite a weak start.

“The Philippine central bank reported a small current account surplus in 2Q17 (second quarter of 2017). This is an upside surprise after two consecutive quarters of deficits. The surplus was achieved despite only modest 4% growth of structural inflows. Outsourcing revenue growth was only 7%,”ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said in a report published on Monday.

“We expect a recovery of structural inflows in 2H 2017. We are cautiously optimistic that the current account for 2017 will be a surplus of around $450 million or 0.2% of GDP (gross domestic product).”

The second quarter surplus was supported by $5.5 billion in revenues from the booming business process outsourcing sector, alongside some $6.86 billion in money sent home by overseas Filipino workers (OFW), according to central bank data. These helped offset a bigger trade in goods deficit, which inched up to $9.7 billion from $9.5 billion previously.

However, the current account remained at a $234-million deficit for the first six months, although narrower than the $424-million gap posted during the same period last year.

The central bank expects the full-year tally to settle at roughly $600-million deficit or 0.2% of GDP — the first time in 15 years — amid heavy importations of raw materials and capital goods as the Philippine government takes on its ambitious infrastructure spending plan. This is a turnaround from last year’s $601-million surplus.

Looking ahead, Mr. Cuyegkeng said money inflows will likely grow larger during the last six months of the year, which would buoy the country’s external position back to a surplus. In particular, the German bank sees remittance growth “will likely be faster” during the third quarter, with July remittances up 7.1% from the previous year at $2.283 billion.

OFW remittances could expand by another 5-6% by August, the bank added.

On the other hand, the improving prospects for the current account is also expected to ease some exchange rate pressures.

“The 2Q Current account report and July remittance growth support our guarded optimism for USD/PHP. Seasonally strong inflows during the Christmas season together with expectations of BSP’s significant market influence underpin our P51 forecast for year-end,” according to the report.

The peso has been tagged as the worst performing currency in Asia so far this year as it defied a regional trend of appreciation versus the dollar. The local unit even touched 11-year-lows in August, and is now trading at the P51 level against the greenback.

Economists previously said that the Philippines’ vanishing current account surplus has significantly weighed on market sentiment towards the peso, adding to external developments and geopolitical tensions that turn investors away from emerging-market currencies.

On the other hand, central bank officials have dismissed concerns over the trade gap, saying that it was natural for a developing economy to spend more in order to “accelerate investment ambitions.”

The BSP expects the currency to average between P48-50 to a dollar this year. However, the running tally showed that the peso has averaged at P50.1324-per-dollar for the first eight months of 2017.