Weak demand means PH economy will spend less dollars than forecast in 2020-21

Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)

MANILA, Philippines — The Philippine economy will earn more dollars than it spends for this year and next — and consequently see an increase in the country’s foreign currency reserves — on the back of lower imports due to weaker domestic demand.

Thus said the Bangko Sentral ng Pilipinas (BSP) which announced on Wednesday sharp upward revisions to its balance of payments and gross international reserve forecasts for 2020 and 2021 which were recently approved by the Monetary Board.

“Against a backdrop of a global economy showing signs of recovery but remaining susceptible to setbacks and a domestic economy slowly lifting its way out of containment measures, the BSP sees the overall balance of payments position to post a surplus of $8.1 billion, equivalent to 2.2 percent of gross domestic product in 2020,” it said in a statement.

This represents an upward adjustment relative to the earlier projected $600 million balance of payments surplus for the year, equivalent to 0.2 percent of GDP.

The balance of payments account represents the net tally of dollars that flow into or out of the economy due to trade and flows of long- or short-term investments. A surplus means the economy is earning more dollars than it is spending, while a deficit means the opposite.

According to the central bank, the higher projected surplus in the balance of payments stems from the reversal in the projected current account balance from a deficit of $1.9 billion, or -0.5 percent of GDP, to a surplus of $6 billion, representing 1.6 percent of GDP.

“The significant upward revision in the current account is attributed mainly to the expected narrower trade-in-goods deficit driven by the foreseen broad-based contraction in both goods exports of -16 percent and goods imports of -20 percent, with the latter declining at a faster rate due to weaker domestic demand,” the BSP said.

The current account surplus is also supported by the lower expected contraction in remittances of expatriate Filipinos of 2 percent from 5 percent following the strong rebound in June and July 2020 as host economies started to reopen.

Meanwhile, export revenues from the business process outsourcing industry are seen to grow by 2 percent, unchanged from previous forecast, as the sector managed to overcome logistical bottlenecks and operational adjustments.

The end-2020 dollar reserve level is expected to reach $100 billion, taking into account the increased foreign borrowings by the national government as well as the revaluation adjustments arising from the accounting treatment of the BSP’s gold holdings.

For 2021, the balance of payments position is projected to remain in surplus but at a lower level of $3.4 billion or 0.9 percent of GDP. Next year’s dollar reserve level is also seen to reach $102 billion in anticipation of continued national government foreign currency deposits as well as positive revaluation adjustments in gold holdings as gold prices could remain elevated in 2021 due to safe-haven investor demand.

JPV