Claims on artificial strength of current account disputed

Is the strength of the Philippine current account artificial? Economists from foreign bank Deutsche Bank and New York-based think tank Global Source recently traded opposing views on this hot topic.

It all started with a report from Deutsche Bank that said the Philippines’ current account balance “may not be as strong as it seems and that the peso is not as resilient to sudden shifts in investor sentiment as we used to believe.”

The March 6 report titled “Philippines: Artificial strength in the current account?” written by economist Diana Del Rosario cited huge discrepancies in Philippine import figures against counterpart statistics reported by some of the country’s major trading partners and concluded that if growth and external balances were adjusted to fully account for the country’s true import level, the country’s current account would have been in deficit since 2012.

“It appears that the growing divergence is driven more by the discrepancy in the imports data rather than by exports. In 2013, the Philippines’ total merchandise imports from China were 60-percent lower than what Chinese authorities reported as the value of China’s exports to the Philippines,” the report said.

Deutsche Bank’s report analyzed why the peso was underperforming even as remittances were at record highs and the trade deficit had narrowed. In the last quarter of 2013, it cited the peso’s fall of almost 8 percent against the dollar, worse than the ringgit (-7 percent) despite Malaysia’s substantial foreign exposure in the bond market and close to the currencies of India (-11 percent) and Indonesia (-20 percent), where economies were marked by greater external financing needs.

Global Source, in a report dated March 13 titled “Cry Wolf” and written by economists Romeo Bernardo and Marie-Christine Tang, said the conclusion of an artificial strength in the current account would be alarming if true given that the Philippines’ high growth and healthy external position were factors that differentiated the country from other emerging markets and the same factors that were helping to shield it from excessive global financial market volatility.

“To be sure, the country’s imports are underreported, something we have traced in our earlier reports to unchecked smuggling,” the Global Source report said. Citing a report from the International Monetary Fund, which noted over-reporting of the trade balance by about 6.5 percent of gross domestic product (GDP), Global Source said this was a large number indeed. However, Global Source said the IMF still found the current account to be “correctly measured” as remittances recorded in the country’s balance of payments, comprising about 10 percent of GDP, represented only inflows coursed through official channels. Unregistered remittances were estimated about 50 percent higher than the reported level or about 5 percent of GDP.

So even if the current account were inflated, Global Source said the excess estimate would not likely be large and would certainly not reverse the surplus into a deficit. Coupled with the other usual metrics—the Bangko Sentral ng Pilipinas’ high foreign exchange reserves, the growing FCDU (foreign currency deposit unit) assets in local banks and the favorable external debt ratios—the think tank said there was no question that the Philippines was “in a good place” as far as external payments were concerned.

“Even the concern over an overestimated GDP growth cited by the analyst is, we think, misplaced as Philippine GDP is computed from the supply side with the demand side [where the trade accounts are recorded] reflecting a  ‘statistical discrepancy’ line for balancing purposes,” the report said.

But that said, Global Source said the magnitude of smuggling activities inferred from trade statistics was not something to be ignored. “Quite apart from the stain on the administration’s good governance image, the President himself has claimed P200 billion or 1.7 percent of GDP of lost revenues due to smuggling. Collecting even just a third of this for starters would help make government’s 16-percent tax effort target for 2016 a more credible figure,” the report said. Doris C. Dumlao