THE current account deficit will likely narrow this year due to declining imports and softer prices, though the shortfall will remain large as global growth slows, BMI Country Risk & Industry Research said.
In a report issued July 4, BMI said it expects the current account deficit as a percentage of gross domestic product (GDP) to narrow to 4% this year from 4.4% in 2022.
The forecast is less optimistic than that issued by the Bangko Sentral ng Pilipinas (BSP), which projects a $15.1-billion deficit equivalent to 3.4% of GDP this year.
“The Philippines’ external sector is likely to stabilize in 2023, but it will remain far from its usual health,” BMI said, adding that the deficit will still be wider than historical norms. The deficit averaged 0.4% of GDP between 2015 and 2019.
The central bank estimates the current account deficit at $4.3 billion (4.3% of GDP) in the first quarter, up from $4 billion a year earlier, as the trade in goods deficit widened.
BMI said demand for Philippine-made goods will remain weak this year and projects that, as a share of GDP, exports will fall to 23.4% this year from 24.3% in 2022.
“This is based on the key assumption that global growth will be lukewarm throughout the remainder of the year,” it said.
BMI expects the global economy to expand by 2.2% in 2023, against the 3.1% growth posted last year.
“More specifically, we expect the US, which is the Philippines’ largest trading partner, to enter a mild recession in late-2023. Mainland China’s reopening has also failed to yield the much-anticipated boost to Philippine trade, especially as the economic recovery has started to show signs of stalling there,” BMI said.
The Philippine Statistics Agency reported a trade deficit of $4.53 billion in April, narrowing from the $5.10-billion deficit a month earlier and the $5.32-billion deficit a year earlier.
Exports declined 20.2% year on year to $4.90 billion in April, more severe than the revised 9.1% decline in March and reversing the 6.2% increase a year earlier.
Merchandise imports fell 17.7% year on year to $9.43 billion in April, accelerating a 1.2% decline in the prior month. This reading also reversed the 29.1% growth posted a year earlier.
“Meanwhile, we think imports will fall this year, which will lead to a narrower current account deficit. As a consequence of aggressive monetary tightening, the outlook for domestic demand remains particularly lackluster,” BMI said.
The BSP was one of the most aggressive central banks in the region, raising benchmark rates by 425 basis points to a multi-year high of 6.25%. It began its hiking cycle in May last year.
The Monetary Board paused its policy tightening in March amid easing inflation. It is widely expected to keep rates on hold at least until the third quarter.
Inflation slowed to 5.4% in June from 6.1% in May, the lowest reading in 14 months, or since the 4.9% posted in April 2022. Year-to-date inflation settled at 7.2%, still above the revised 5.4% forecast by the central bank.
“Despite the central bank leaving rates on hold recently, we do not expect any cuts to materialize in 2023. Tight financing conditions will feed through to the economy and pose a major headwind to domestic activity,” BMI said.
It added that it expects the Philippine economy to grow 5.9% this year, down from 7.6% in 2022. The forecast is lower than the government’s 6-7% target.
“That said, we think that imports will still be kept elevated relative to historical standards. Overall, we forecast imports as a share of GDP to edge down slightly from 37.7% to 35.9%. But it will still be higher than the 2013-2019 average of 32.0% of GDP,” BMI said.
It also sees remittance inflows remaining resilient this year, which will provide support for the current account.
“Historically, remittances have always been a huge contributing factor to the Philippines economy, accounting for an average of nearly 10% of GDP per annum in the last decade,” BMI said.
“Despite the global economic downturn, we are expecting current transfer growth to remain stable at 3% year on year, as remittance inflows tend to be countercyclical,” it added.
The central bank estimates that cash remittances rose 3.7% year on year to $2.48 billion in April.
The BSP expects remittances to grow 3% this year. — Keisha B. Ta-asan