Philippines’ external position to take the brunt of COVID-19 outbreak — Fitch
MANILA, Philippines — The Philippines’ external position will likely feel the sting of the global coronavirus pandemic this year as the country’s dollar-generating engines take a hit from a tourism meltdown and weak remittance inflows, a Fitch unit said Thursday.
In a report sent to the media, Fitch Solutions said the country's current account gap is expected to widen to 2.2% of the country’s gross domestic product in 2020, larger than their previous forecast of a 1.2% deficit.
If realized, this would be wider than the 0.1% gap posted in 2019 and would breach the estimate of the Bangko Sentral ng Pilipinas, which projected a 2.1% current account deficit this year.
The current account position is an important indicator about the economy’s health. It measures the net transfer of real resources between the domestic economy and the rest of the world.
If the current account balance is in surplus, the country is a “net lender” to the rest of the world. Net lending occurs when the national saving is more than the country’s investment in real assets.
If in deficit, the country is said to be a “user of funds” and thus, is considered as net borrower from abroad in order to fill in the shortage.
In its report, Fitch Solutions said a surge in infrastructure spending this year and the roll out of a massive stimulus package to support the economy amid the virus fallout will “sharply” push up domestic demand for imports. In the face of a collapsing external demand due to the pandemic, such a development could swell the country’s current account deficit as less dollars flow into the economy.
Fitch Solutions said tourism and remittances — both major sources of dollars that add a layer of defense to the economy against external shocks — are expected to feel the pinch of the virus amid a global halt in travel. However, the Fitch unit believes the country’s overall external financing position “remains robust enough” to weather a decline or retreat in capital flows.
“Year-to-date the peso has only depreciated 0.6%, compared to regional peers like Malaysia (6.3%), Thailand (10.0%) and Indonesia (17.8%). This reflects a broadly stable demand and supply for the unit despite the economic and financial market turmoil caused by the coronavirus outbreak,” Fitch Solutions said.
“While, we expect external financing conditions to tighten somewhat for the Philippine economy, a relatively stable peso and strong reserve buffers will ease borrowing conditions, enabling a wider current account deficit,” it added.
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