Fitch unit expects Philippines external position to worsen

MANILA, Philippines — The country’s external position would feel the pinch of the coronavirus disease 2019 (COVID-19) via a wider current account (CA) deficit, Fitch Solutions Country Risk & Industry Research said.

In its latest commentary, the research arm of the Fitch Group said the Philippines is likely to book a wider CA deficit of 2.2 percent of gross domestic product (GDP) instead of 1.2 percent of GDP this year, wider than the 0.1 percent of GDP recorded last year.

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

A CA deficit occurs when a country spends more on imports than it receives on exports.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the country’s CA shortfall narrowed by 95 percent to $464 million or 0.1 percent of GDP last year from $8.77 billion or 2.6 percent of GDP in 2018 as the economy grew slower at 5.9 percent from 6.2 percent.

Fitch Solutions said the Philippine economy would be hit by the dual shock of a sharp drop in global demand and a concurrent tightening of global financing conditions.

 “The coronavirus pandemic has resulted in partial to full lockdowns of key export markets for the Philippines, including the US, China and Japan, and a risk aversion move within global financial markets. Domestically, the Philippines too has had to impose lockdowns of Manila and the largest and most important economically island of Luzon,” it added.

According to Fitch Solutions, a strong fiscal response in the Philippines focused on infrastructure investment and boasting consumption would translate to a stronger recovery in import demand relative to exports, as tourism and travel have a delayed recovery.

 “The Philippine government’s push for infrastructure investment and likely ramp-up in stimulus to support the economy over the coming quarters will result in domestic import demand rebounding sharply. However, this view is contingent on how long domestic lockdowns last and whether they are indeed expanded to the entire country, instead of just the main island,” it said.

On the contrary, Fitch Solutions pointed out the tourism sector would suffer amid a global halt in travel and would weigh on service exports as the travel restrictions are not expected to be lifted quickly.

Likewise, the research arm also sees remittances from overseas Filipino workers (OFWs) weakening as global growth remains weak across the board.

 “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 CA deficit,” Fitch Solutions said.

Fitch Solutions sees the peso depreciating against the US dollar to an average of 51.70 this year and 52.80 next year with the expected wider CA and fiscal deficits to cushion the impact of the COVID-19 pandemic.

The country’s gross international reserves stood at $87.61 billion in February, enough to cover 7.7 months’ worth of imports of goods and payments of services and primary income.