Wider current account deficit seen amid strong $ outflow

MANILA, Philippines — The Philippines may incur a wider current account (CA) deficit this year on the back of stronger outflows to support the massive infrastructure program of the Duterte administration, according to economists.

Euben Paracuelles, economist at Nomura Securities Ltd, said the country is likely to incur a current account shortfall equivalent to 3.1 percent of gross domestic product (GDP) this year from the projected 1.8 percent in 2019.

“The upshot is that the current account deficit should widen significantly. For 2020, we forecast a further widening to 3.1 percent, still led by higher investment spending and infrastructure implementation,” he said.

The current account 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.

A deficit means, the Philippines spends more foreign exchange than what comes in as foreign direct investments, foreign portfolio investments, remittances, among others.

He said public sector capital expenditures have been a key driver of import demand in the last few years.

Nomura sees remittances from overseas Filipinos increasing by around 3.5 percent, while tourism receipts would remain relatively small.

The IT & Business Process Association, the largest industry grouping in the country, has made a sharp downward revision in its outlook for revenue growth for the business process outsourcing sector (BPO) to a range of 3.5 to 7.5 percent from the original target of nine percent over 2019 to 2022.

Paracuelles said foreign direct investments (FDIs) would recover this year after falling to $6.8 billion in 2019 from $9.8 billion in 2018 due to the mid-term elections.

“That said, we think a pickup in FDI inflows, which may also be constrained by slower growth in China and uncertain external conditions, is likely to be unable to keep up with the sharp widening in the current account deficit that we expect, suggesting the basic balance is unlikely to improve,” he said.

Paracuelles said the Bangko Sentral ng Pilipinas (BSP) would continue to allow the peso to adjust accordingly by not implementing counter measures.

“But because the current account deficit widening is investment-led, we think the authorities are unlikely to be worried,” Paracuelles said.

Vaninder Singh, economist at Deutsche Bank, said the current account deficit of the Philippines would further widen to about 3.2 percent of GDP in 2020 and three percent of GDP In 2021 from about 1.9 percent of GDP in 2019.

“We expect the full-year current account deficit to widen past three percent of GDP from around two percent in 2019. Given the FDI flow dynamics, we expect a basic balance of payments deficit to open up in H2 2020, with attendant peso weakness,” Singh said.

He said infrastructure spending programmed for 2020 would increase to about 4.9 percent of GDP from 4.3 percent in 2019.

The BSP expects the country to book a wider current account deficit of 2.1 percent of GDP this year from about 1.5 percent of GDP in 2019.

The central bank sees imports growth rebounding to eight percent this year after slowing to two percent last year, while exports growth is expected to pick up to four percent from one percent.

On the other hand, the increase in the earnings of the business process outsourcing (BPO) sector is expected to remain steady at five percent, tourism receipts at 12 percent, and cash remittances at three percent in 2020.