2018 current account deficit seen widening to $7.7B- $9.8B

The Philippines may incur a shortfall of as much as $9.8 billion in its economic transactions with the rest of the world this year, over three times larger than the level at which the Bangko Sentral ng Pilipinas aims to cap the current account deficit, a top economist from ING Bank said.

This deterioration in the country’s current account position is seen as a big drag on the peso, which is already trading at its 13-year lows against the dollar.

In the first half, the country’s current account position posted a deficit of $3.1 billion, which already equaled the BSP’s full-year cap.

“The outlook is unlikely to show any improvement. We expect this year’s current account deficit to amount to between $7.7 billion and $9.8 billion, or between 2.3 percent and 2.9 percent of GDP (gross domestic product),” ING Philippine economist Joey Cuyegkeng said in a research note on Monday.

The current account, a key component of the balance of payments, records a nation’s transactions with the rest of the world, particularly its net trade in goods and services.

Last year, the country’s current account deficit was at $2.5 billion, doubling the $1.2 billion deficit in the previous year.

As the Philippine economy grew, demand for imported capital and consumer goods also rose.  In the past, the trade deficit had been easily offset by huge overseas remittances flows, allowing the Philippines to become a net lender to the world for 14 years.

The growing imbalance has been increasingly weighing on the peso, the economist said.

A “hawkish” central bank—one that is seen poised to increase key interest rates further—could moderate or offset the weakening bias, he said.

The BSP has so far raised its key interest rates by 100 basis points this year, bringing the overnight borrowing rate to 4 percent.  In August, the BSP jacked up its key interest rates by 50 basis points to curb inflationary pressures and rising inflation expectations.

Cuyegkeng said strong domestic demand had driven the current account imbalance through higher imports. He noted that domestic demand had jumped by 9.2 percent year-on-year in the first half from 6.7 percent in the same period last year.

“We expect domestic demand, on average, to grow by 8.2 percent in 2018 from last year’s 6.9 percent. Strong import growth reflects this with an average increase of 13 percent in the first half,” he said.

Exports, on the other hand, declined by 3.4 percent in the first half. Weak exports and strong imports combined to widen the trade deficit by 61 percent to $19 billion in the first half of the year.

Overseas remittances during this period grew by 2.6 percent year-on-year to $14.2 billion, which was $4.7 billion short of financing the trade gap.

“The shortfall is now the norm and drives the wider current account deficit,” he said.