Fraught with potential global shocks and volatile investor sentiment, the Philippine external sector is looking to face its worst performance in years this year, as analysts are almost certain of the deterioration of the economy’s current-account position and the further depreciation of the local currency’s value.
But, unlike textbook cases, experts also said the sinking numbers in the Philippines’s external position are not all that bad and are like growing pains that the country has to go through in the midst of strong economic expansion in recent years.
Depleted current account
The current account—or the component of the balance of payments (BOP) position—has been in surplus position since 2003, providing cushion to the Philippines in times of external stress, such as bouts with economic shocks in the global economy that usually affect those economies with weaker current-account surpluses.
This means the Philippines is looking to break some 13 consecutive years of its external position sitting comfortably in the positive territory should the current account of the Philippines cross into the deficit territory this year.
And it will, actually, swing into the deficit this year, experts said. Since 2016, analysts have been saying Central Bank Governor Amando M. Tetangco Jr. will leave the Bangko Sentral ng Pilipinas (BSP) office upon the end of his term with a current account in a deficit territory, noting the declining trend of its surplus in recent months.
One of the most recent private-bank analyses on the Philippines that forecast a current-account deficit in 2017 came from German financial institution Deutsche Bank, with the shortfall likely to come this year, as oil prices rise and domestic demand continues to be strong.
Other economists, including Moody’s Analytics and global bank HSBC, also blamed the expected poor performance of the trade sector, as well as heavy importation ahead of a projected heavy infrastructure buildup in the country behind their lackluster view of the Philippines’s current-account position for 2017.
Earlier, the Central Bank also conceded to a deterioration in the current-account position of the country, but maintained that the component of the BOP will still post a surplus for 2017, albeit at a meager volume of $800 million, compared to the $2.5-billion surplus earlier expected.
Latest data from the central bank showed that the country’s current account as of end-September 2016 remains in the positive territory, despite two months of dips to the deficit zone for the first nine months of the year.
However, the total $1.6-billion current-account surplus accumulated in the January-to-September period is a 74-percent decline from the $6.2-billion surplus on hand in the same nine-month period in 2015.
Weakening peso
The deterioration of the current account is also seen to spill over the performance of the already regional laggard local currency for the year, economists warned.
Analysts at the HSBC earlier said the weakening current account may pave the way for a weaker currency against the dollar, giving little wiggle room for the peso to regain strength of investor sentiment despite its positive growth trend.
“A peso strongly under pressure arising from a potential twin deficit in the current account and fiscal balances could prompt a rate hike by the BSP, especially against the backdrop of elevated inflation and robust domestic demand,” German financial institution Deutsche Bank also said.
“The deterioration of the current account, which we forecast to turn into deficit in 2017 as oil prices rise and domestic demand remains buoyant, could prompt the BSP to tolerate a weaker peso, as, of course, dictated by the market,” it added.
At the beginning of the year, international and local economists expressed their views that the peso is set to perform worse than the government’s projection for the year, as international volatilities combined with the political concerns of investors in the country are seen to hound sentiment toward the Philippines.
In particular, as the economic managers of the government revised their projection of the peso for this year and 2018 to 48 to 50 against the US dollar, private economists see the peso performing worse, with forecasts for the year hitting above the 50-to-a-dollar ceiling set by the government.
Not all that bad
While concerns have been raised on the impending fall of Tetangco’s current-account fortress, International Monetary Fund (IMF) Resident Representative to the Philippines Shanaka Jayanath Peiris told the BusinessMirror it is not all that bad for the local economy.
“We consider a moderating current-account surplus a healthy development and part of the natural development process of the Philippines if it continues to be related to a widening trade deficit linked to capital-goods imports and higher investment,” Peiris said.
“Overall, the external position of the Philippines is strong with high international reserves and relatively moderate foreign exposures and US dollar-denominated debt in comparison to other emerging markets. These factors should make the Philippines relatively resilient to external shocks, although policy-makers will remain vigilant,” he added.
The IMF resident representative also said the country is “well equipped” to respond as needed with suitable policies should any risk materialize, particularly given the strong fundamentals and ample policy space.
Central Bank Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo told the BusinessMirror they expect minimal impact of exchange-rate fluctuations on both output and prices for the year.
“The exchange rate’s impact on real GDP growth and inflation has substantially gone down over the years. Strong domestic consumption and investment growth provide buffers against the adverse impact of external developments,” he said.
“As experienced during the global financial crisis in 2008, domestic demand has always served as a reliable source of economic resilience and 71 quarters of uninterrupted growth. This limited impact on the price level gives flexibility for monetary policy to refrain from reacting aggressively on such movements of the peso,” Guinigundo added.
The deputy governor, however, admitted that 2017 will be a “more challenging year for the peso” due to the prolonged uncertainties on the timing, magnitude and pace of the US Fed’s rate normalization, as well as the election of Donald J. Trump as US president, which puts into fore the conservative agenda on immigration, outsourcing and trade.
Guinigundo also said the on-going rebalancing of the Chinese economy could also impact on the country’s external sector, given its increasing bilateral relations with the Philippines in recent years.
“These are short-term shocks with short-term impact. Short-term volatility in foreign-exchange markets arose from perceived policy uncertainties. However, the long-term effects will depend on the interplay among trade, monetary and fiscal policies in the US, and in the country’s trading partners,” he said.
“It is emphasized that a weaker peso against the US dollar should benefit dollar earners, such as exporters, business-process outsourcing [BPO] firms and families of overseas Filipinos, thereby supporting increased private consumption,” Guinigundo added.
Remittances and BPO revenues are large parts of the country’s current-account position.