The country’s balance of payments (BOP) position—or the country’s summary of transactions with the rest of the world—has been dwindling down the deficit territory in the first quarter of the year, but economists are not worried as they forecast a recovery on the country’s external position in the latter part of the year.
Earlier this month the Bangko Sentral ng Pilipinas (BSP) reported that the country’s transactions with the rest of the world continued to bleed dollars at the end of the year’s first quarter, posting nearly a billion dollars in deficit at the end of March.
Data from the Central Bank released on Wednesday showed the country’s BOP hit a total deficit of $994 million in the first three months of 2017.
This commenced as March’s dollar deficit alone hit $550 million, higher than the previous month’s $436 million and reversing the previous year’s $854 million in surplus.
The quarter’s $994-million deficit is worse than the end-year deficit in 2016 of $420 million and the $210-million deficit in the first quarter of 2016.
‘Mild’
For 2017, the government forecasts the BoP to hit $ 1 billion in surplus at the end of the year. This, however, is still subject for deliberation and revision from the country’s economic managers—results of which will be announced in the first half of the year.
Last year’s BOP position was also a disappointment from the $500-million surplus projection of the government at the end of 2016. This projection was already lowered from the earlier estimated $2-billion surplus for the year.
ING Bank Manila economist Joey Cuyegkeng said he sees 2017 to be another year of deficit for the country’s BoP, but the deficit is likely to be “mild”.
Cuyegkeng said this is as exports are expected to continue its recovery, with an average growth of 6 percent to 7 percent, while import growth slows to 8 percent to 10 percent from around 16 percent in 2016.
“Two years of strong growth, especially for capital equipment, would likely see some moderation. The strong domestic demand-driven growth would remain dominant and keep the trade account in deficit. The combination of export rebound and more moderate import growth would likely moderate the deterioration of the trade deficit to below $40 billion,” Cuygekeng told the BusinessMirror in response to a query.
“OFW [overseas Filipino workers] remittances and outsourcing revenues would likely post a cumulative growth of 7 percent to 8 percent, from 2016 estimated growth of 8 percent. These should bring the current account to a mild surplus—near balance—equivalent to 0.2 percent of GDP [gross domestic product],” he added.
Latest data on remittances showed slower growth remittances in February this year, hitting a 3.4-percent growth, from the 8.6-percent growth in the previous month and the 8.4 percent in the previous year.
Total remittances for the month hit $2.2 billion.
Remittances—one of the pillars of the country’s BoP, as well as local domestic consumption—have been a point of concern among experts as of late, due largely to the emerging protectionist policies across the world, especially in immigration rules in the United States.
Counterweight
But BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo said potential losses in demand of Filipino skilled workers will be compensated by demand for jobs elsewhere in the world.
“What we got from the trip of the President in the Middle East is the continuing demand for OFWs there. If ever there’s going to be some negative consequence of more inward-looking policies in the US, the prospects in the Middle East could provide some counterweight and that will provide additional resiliency to OFW remittances, which is one of the pillars of the current account,” Guinigundo said in a recent interview.
Another local analyst said the BoP position will likely recover through push in the country’s financial account.
“Funding for projects are seen to come in for big-ticket items of the government, while portfolio flows may return as the Philippine economy continues to offer a decent investment destination given the solid growth numbers,” the economist said.
Twin deficit
With the decline in the BoP’s position as seen largely its current account—the core component of the BoP—heightened concerns on a potential twin deficit have risen in recent months.
A twin deficit occurs in an economy with both a fiscal deficit and a current-account deficit, usually indicative of the economy’s health.
“A worst-case scenario entails a sustained current-account deficit at a high level or increasing amount coupled with a rising fiscal deficit chronically above 4 percent would raise concerns and even see a credit-rating downgrade initially an outlook downgrade. Absence of corrective measures would result to an outright downgrade. A high twin deficit for a few years and absence of corrective measures is not our base case,” Cuyegkeng added.
“Our base case is a near balance current account, while the fiscal deficit is contained at 3 percent of GDP on average. This combination would unlikely warrant concerns, especially since the current-account stress is due to expansion of absorptive capacity of the economy,” he added.
Another local analyst said although the swing into twin deficit would seem alarming for some, the fact that the deficits are on the back of a stark increase in investments (capital importation that helps bloat the trade deficit) and the pace of national government expenditure on infrastructure will bode well for the economy.
“Ratings agencies have noted that although the deficits would tend to be credit-negative, as long as these dips into the red are manageable and for the purpose of expansion and increased efficiency, the overall effect would be credit-rating neutral. If investors can see through the deficits as a temporary dip to finance projects that boost potential, investor sentiment may actually improve,” the analyst said.
“On the flip side, if the deficits get out of hand and spiral to less desirable levels, higher yields and a weaker peso may be the red flags that can trigger a review of our credit rating,” the analyst added.