Nomura sees oil prices pressuring trade, current account deficits

A SUSTAINED pickup in world crude prices will likely trigger a wider current account deficit for the Philippines and put additional pressure on domestic prices, Nomura Global Research said.

Analysts from the Japanese bank said rising oil prices would have a substantial impact on the Philippine economy, and the Bangko Sentral ng Pilipinas (BSP) may need to tighten policy to cushion the blow.

With the Philippines importing almost all of its oil needs, “we estimate a $10/ barrel increase in oil prices could increase the trade deficit by 0.5% of GDP ( gross domestic product), which would significantly pressure a current account deficit that already reached 0.8% of GDP in 2017 due to strong import demand,” Nomura said in a recent report.

World crude prices hit threeyear highs in April amid renewed tensions in the Middle East, which pushed retail pump prices here. The central bank cited this as an inflation driver for April and issued an estimate of 3.9-4.7% for the month.

The balance of payments registered $2.518-billion deficit last year, double the $ 1.199 billion posted in 2016, according to central bank data. This accounted for 0.8% of GDP, wider than the 0.4% share a year earlier.

The BSP estimated in December that the current account deficit will settle at 0.7% of GDP in 2018 — which it called a “manageable” level.

Economists and traders have said that the current account balance’s turn into a deficit has been the main reason for the persistent weakness of the peso, which has been reported as the worst-performing currency in the region.

The peso has been trading weaker than P52 against the dollar in recent weeks.

Central bank officials, however, have said that the current account deficit simply reflects the increased importation of capital goods and raw materials needed to support more sustained domestic economic activity, particularly the push to build infrastructure.

The government intends to spend P1.068 trillion on public infrastructure this year, as part of an P8.44-trillion “Build, Build, Build” initiative running to 2022. Supported by the infrastructure program, economic growth is expected to come in at 7-8% between 2018 and 2022.

Higher oil prices will be reflected in rising inflation, which has been at three-year highs in 2018. Nomura estimated the impact of oil prices at an additional 0.2 percentage points of inflation, which would drive the indicator beyond the 2-4% target band set by the central bank.

Inflation spilling out of the target range would push the BSP to raise rates thrice this year starting with this month’s review, Nomura said.

“[T]here are risks of more rate hikes should oil price increases persist and second- round effects rise more quickly given the strength of domestic demand,” Nomura said.

BSP officials have flagged a tightening bias once inflation becomes broad- based, or when prices of more basic goods and services rise in the coming months. The central bank expects 2018 inflation to come in at 3.9% using the 2012 base year, or just inside its target range.