Credit Suisse Head of Emerging Asia Economics Santitarn Sathirathai says the country’s current account is headed to “overheating territory”.
In a video interview with Bloomberg, he says the move of the Bangko Sentral ng Pilipinas (BSP) to keep the nation’s key rate, or the overnight borrowing rate, at 3 percent—aimed primarily at reining inflation—may not be enough. He explains inflation is influenced by factors beyond the control of the country’s fiscal guardians. These factors are commodity prices, oil and currency: “The Philippines’s current account is headed to overheating territory, as it faces a deficit after 14 years of surplus.”
Current account, which is the difference between the country’s savings and its investment, is a crucial barometer of a nation’s economic well-being. It is the totality of the stability of trade (goods and services exports less imports), net income from abroad and net current transfers.
A positive current-account balance shows that a country is a net lender, while a negative current-account balance means that it is a net borrower from the rest of the world. A current-account surplus ups a nation’s net foreign assets by the amount of the surplus, and a current account deficit cuts it by that amount. The current-account and the capital account are the two main apparatuses of a country’s balance of payments.
In fact, the Philippines already logged a current-account deficit of $197.31 million in December 2016. The last time the country posted a full-year current account deficit was in 2002, when Asia tottered in currency mayhem. That year the deficit hit 0.347 percent of the GDP. In post-Asian crisis, the worst current-account deficit happened in 1999, at 3.46 percent of GDP.
For the last 14 years, we’ve enjoyed the position of being a net lender to the rest of the world. This year we are at risk of nosediving from a current- account surplus status to a deficit.
Aside from other factors, this could be due to the fact that the recent rise in importation of capital goods and raw materials is forecasted to crush inflows from trade and remittances. Add to this the recent Federal Reserve (the Fed) hike of its benchmark interest rate at a quarter point, amid rising confidence in the US that its economy is poised for robust economic growth.
The Philippine stock market and peso-dollar exchange rate are the first to feel the brunt of the Fed hike. Over the past weeks, the Philippine peso hit 50:$1 intraday, and the Philippine Stock Exchange index (PSEi) bellweather hovered in the range of 7,800 and 6,500.
The Fed hike’s long-term effect on the country’s overall economic health remains to be seen. This is now in the hands of the country’s fiscal managers on how they can shield the country to either weather or soften its detrimental effects.
But more worrisome for me is the threat of the European Union (EU) to impose trade sanctions on the Philippines due to President Duterte’s war on drugs, which has pushed the international community to take closer look on how he conducts it.
Just recently, the European Parliament adopted a resolution that urged EU members to encourage the Philippines to stop the extrajudicial killings related to the antidrug campaign. “In the absence of any substantive improvements in the next few months,” the resolution reads, “procedural steps with a view to the possible removal of GSP+ preferences” may be undertaken.
The GSP+, or the Generalized System of Preferences Plus, refers to the complete exclusion of tariffs on two-thirds of all product categories. The EU’s GSP affords developing countries, such as the Philippines, to pay less or no duties at all on their exports to the EU, giving these countries vibrant access to EU markets.
Although the Department of Trade and Industry has issued an assurance that Philippine exports can endure the aftermath of such a possibility, its long-term negative effects should not be ruled out. The danger is in the snowballing of sanctions, which will affect the EU’s direct investments in the Philippines. This is not farfetched, considering how these countries strictly adhere to the rule of law.
The European Parliament is urging the EU to back the establishment of an independent international investigation into unlawful killings and other violations of Duterte’s war on drugs.
I cannot see any leeway for us to avoid such sanctions. For one, Duterte remains undeterred, and his bullheadedness is legendary. Also, his allies have closed ranks to protect at whatever cost Duterte and his governance. Combative against critics of the Duterte antidrug, they often bring the fight straight to the gutter.
Just consider this crass jab thrown by Social Welfare Assistant Secretary Lorraine Marie Badoy at the EU in her Facebook post: “…Those in the EU, engage in online child porn for the meantime. That’s where you’re good at anyway.”
In a civil but succinct reply to Badoy, the EU stressed on Tuesday that child pornography is not a flippant matter. “The issue of child pornography is extremely serious and a grave crime. It should be addressed in a serious and responsible manner,” said the delegation to the EU to the Philippines, without elaborating.
Ultimately, it is Duterte’s foul mouth and his fanatics’ imprudent defense of his myopic view on how the country should be run that is hurting the Philippines’s image abroad, which, in turn, impacts on the nation’s economic growth.
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