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Philippines: Current account deficit may rise above 2% of GDP
MANILA, Philippines — The Philippines’ current account deficit may swell to above two percent of gross domestic product (GDP) this year due to the widening trade deficit as well as rising global oil prices, especially after Russia started the invasion of Ukraine, according to Moody’s Investors Service and Japanese investment bank Nomura.
Moody’s said in its latest credit opinion that the Philippines’ current account deficit may swell to 2.3 percent of GDP this year.
The current account consists of transactions in goods, services, primary income and secondary income. This account measures the net transfer of real resources between the domestic economy and the rest of the world.
A current account deficit occurs when a country spends more on imports than it receives on exports.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the Philippines reported a current account shortfall of $2.6 billion or 0.9 percent of GDP in end-September last year due to higher trade deficit as the economy started to recover from the pandemic-induced recession.
The BSP sees the current account position reverting to a surplus of $4 billion or one percent of GDP in 2021 and further to $9.9 billion or 2.3 percent of GDP in 2023 from a surplus of $11.1 billion or 3.1 percent of GDP in 2020.
Moody’s said the mild current account deficit since 2016 and the persistence of the negative net international investment position renders the Philippines somewhat more susceptible to external shocks compared with its peers.
The credit rating agency said wider trade deficits in recent years were only partly offset by stable flows of remittances, business process outsourcing (BPO) receipts and foreign direct investments (FDI).
“In the first year of the pandemic, however, weaker economic growth eased pressure on trade deficits, leading to a reversion of the current account to a surplus. While the growth recovery in 2021 did not restore economic activity to pre-pandemic levels, it contributed to a wider trade deficit – driven in part by higher global prices for the country’s energy imports – and a return of the current account to a mild deficit,” Moody’s said.
At $108.5 billion as of end-January, Moody’s said the country’s gross international reserves continue to provide ample coverage of projected external payments, even as higher global oil prices and a pick-up in domestic demand have led to widening trade deficits and the reversion of the current account to a deficit in 2021.
It added the widening of the current account deficit would be contained by stable remittances from overseas foreign workers and a rebound in services receipts as cross-border travel restrictions are eased.
On the other hand, Nomura sees the current account deficit of the Philippines widening to 2.1 percent of GDP this year from the projected 1.5 percent of GDP last year.
“Given the weak recovery from the pandemic, the impact of rising oil prices on the current account deficit has fallen, but remains significant at a time when the deficit is already on a widening path,” Nomura said.
The Japanese investment bank estimates that a 10 percent rise in oil prices would likely add 0.3 percent of GDP to the current account deficit.
“In addition, with no fiscal subsidies, the pass-through to headline inflation is also quick and sizeable, which we estimate to be about 0.4 percentage points, which would also pose significant upside risks to our 2022 inflation forecast of 2.9 percent,” Nomura said.
Nomura said the Philippines is one of the most vulnerable economies to higher energy and food prices.
“We believe that this, combined with a widening trade deficit from higher energy and capital spending ahead of the elections, will be a significant drag on Philippine performance. Indeed, the presidential election could evoke investor concerns and lead to capital outflows,” it warned.
Nomura believes the Philippines, India, and Thailand are the biggest losers from the Russia-Ukraine war due to likely spillovers of higher global oil and food prices.
Source: https://www.philstar.com/business/2022/02/28/2163778/current-account-deficit-may-rise-above-2-gdp