Philippines to continue incurring CA deficit, says Fitch Ratings

MANILA, Philippines —  The country may experience wider current account (CA) deficits in the next two years due to strong capital goods imports and a sharp slowdown in exports, according to Fitch Ratings.

The debt watcher said the country’s CA shortfall may hit 1.9 percent of gross domestic product (GDP) in 2019 and 2020, around the same level as the projected two percent of GDP in 2018.

Fitch said the widening CA deficit reflects  the government’s  strong demand for imported capital goods due to its massive infrastructure projects.

However, Fitch said remittances and services exports related to the business process outsourcing and tourism sectors are forecast to remain strong and would keep the deficit from widening sharply.

The CA position measures the net transfer of real resources between the domestic economy and the rest of the world. It consists of transactions in goods, services as well as primary and secondary income.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the country’s CA position incured a deficit of $6.5 billion or 2.7 percent of GDP from January to September, reversing the $968 million surplus or 0.4 percent of GDP in the same period last year.

This shortfall was brought about primarily by the continued widening deficit in the trade-in-goods account that jumped by 33.2 percent to $36.9 billion from January to September, wiping out the higher net receipts posted in  the trade-in-services, primary and secondary income accounts.

Foreign direct investment inflows increased to $8 billion in the first nine months, up 24 percent from the same period last year, suggesting foreign investor sentiment remains positive.

“In addition, the Philippines is less vulnerable to large outflows compared with some of its neighbors in the region, given lower non-resident holdings of domestic debt and equities, although foreign outflows are likely in 2019 as global monetary conditions continue to tighten,” it said.

Fitch said the recent passage of the 11th regular foreign investment negative list could further ease restrictions on foreign investment.

The BSP sees the country’s CA deficit widening to $6.4 billion or 1.9 percent of GDP this year and further to $8.4 billion or 2.3 percent of GDP in 2019. The revised projection is more than double the previous forecast of $3.1 billion or 0.9 percent of GDP announced last May.

This would be the widest shortfall since the CA recorded a deficit of 2.3 percent of GDP in 2001.

“A widening current-account deficit amid tighter global monetary conditions and a stronger dollar drove the peso down by around six percent against the US dollar in the year to date,” Fitch said.