Even as a surge in imports further widened the Philippines’ current account deficit and puts pressure on the peso, the Washington-based Institute of International Finance (IIF) expects these mostly infrastructure-related investments to sustain robust economic growth.
“External imbalances are the main headwinds facing the fast-growing economies of Indonesia and the Philippines.
The current account positions of these countries are among the weakest in the region,” IIF head of Asean and India research Reza Siregar and associate economist Yuanliu Hu said in a May 15 report titled “Asean Economic Views: Investment-Driven Current Account Deficits.”
The IIF noted that the Philippines’ current account deficit last year was the biggest in history—a record $7.9 billion, equivalent to 2.4 percent of gross domestic product (GDP).
To blame was the yawning trade-in-goods deficit—21-percent bigger year-on-year at $8.1 billion during the first quarter, which had resulted in a ballooning current account deficit as more dollars were being spent for importation.
The wider current account deficit, in turn, had been putting pressure on the peso, which fell to almost 13-year lows last year.
But economic managers had said that with the Duterte administration’s ambitious “Build, Build, Build” infrastructure program in full swing, demand for imports of mostly capital goods would remain strong in the near term.
“The current account deficit can be a source of structural risks to the growth and stability of the local currency. We, however, hold a more constructive view of the current account deficits in Indonesia and the Philippines,” the IIF said.
In the case of the Philippines, the IIF said Build, Build, Build already jacked up gross national investment growth to double-digit levels during the past few years.
This reversed what used to be among the lowest public investment in the region, which had been less than 4 percent of GDP, it said.
“The private investment surges in the primary infrastructure sectors received a healthy boost from nonresident FDI [foreign direct investment] flows into these two major Asean economies. The nonresident FDI has been relatively stable,” it said.
“For the Philippines, the role of nonresident FDI flows for the current account deficit, financing and the balance of payment is vital,” it added.
Alongside these new FDI flows came investment-related imports, which the IIF said “sustained burgeoning trade imbalance in the Philippines since 2016.”
The IIF nonetheless said that “the pick-up in the approved investment in 2018 signaled buoyant investment outlooks in the Philippines.”
“Given the robust investment momentum in these countries, we forecast the current account deficit to persist above the official forecast of 2.5 percent of GDP in Indonesia and to widen in the Philippines in 2019 and 2020,” it said.