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PH seen posting current account deficit

/ 12:22 AM September 22, 2016

After 14 years of being a net lender to the rest of the world, the Philippines is at risk of swinging from a current account surplus position to a deficit this year as the recent rise in importation of capital goods and raw materials is seen overwhelming inflows from trade and remittances.

But this is no cause for alarm as the growth in importation of capital goods and raw materials is a reflection of a strong investment-driven growth. This, according to Citigroup Philippines economist Jun Trinidad, suggests production capacity build-up and upgrading, and restocking by businesses.

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A research noted showed that Citi had revised its current account forecast this year to a marginal deficit of 0.1 percent of gross domestic product (GDP) from previous projection of a surplus of 0.3 percent of GDP.

The current account position deficit is seen to persist up to next year, likely to account for 0.6 percent of 2017 GDP, Citi said.

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The last time the Philippines posted a full-year current account deficit was in 2002, when the region was reeling from the Asian currency turmoil.  The deficit that year hit 0.347 percent of GDP. Post-Asian crisis, the worst current account deficit was seen in 1999 at 3.46 percent of GDP.

Even senior government officials, the economist said, appeared unfazed by the likelihood of a receding current account surplus or shift to a deficit—if this was the price to pay for having a strong investment setting.

In the second quarter, the country’s current account surplus of $65 million or 0.1 percent GDP was  nearly decimated by strong imports but this was “not a complete surprise” as trade imports stacked up against lackluster overseas remittances, Trinidad noted. For the first semester, the current account retained a surplus of $778 million or 0.5 percent GDP.

Current account covers trade in goods, services, primary income, and secondary income. Technical, trade-related and other business services form part of the country’s exports of services. Other service transactions with the rest of the world are transport, travel, telecommunication services, construction, insurance and pension, financial, charges for the use of intellectual property, other business, personal, cultural and recreational and government services. Also included are overseas workers’ earnings and profits on Philippine investments overseas.

Current account in a surplus position means the country is a “net lender” to the rest of the world. Net lending occurs when the national saving is more than the country’s investment in real assets. A current account deficit means country is a “user of funds” and is, thus, considered a net borrower from overseas. In this case, the country invested more than what its national saving could finance.

Lacking an export recovery in the second half but with a decelerating post-election import cycle, Citi expects the country’s trade deficit to swell further to $9 billion per quarter. Other than base effects, tech export demand weakness is likely to persist despite a firm US semi-conductor book-to-bill ratio, the economist said.

Citi expects the country’s full-year trade deficit to hit $34.3 billion or 11.1 percent of GDP this year from 8 percent of GDP in 2015.

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In the meantime, net non-merchandise trade receipts including remittances may fall to the $7 billion to $8 billion range, he said.

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TAGS: Account Deficit, Account Surplus Position, Asian currency turmoil, capital, Citigroup Philippines, Gross Domestic Product, Jun Trinidad, Remittances, Trade
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