BSP sees higher BOP deficit but lower current account shortfall in 2017

The Bangko Sentral ng Pilipinas (BSP) has revised its balance of payments (BOP) deficit projection this year to $1.4 billion, more than double its previous estimate of $500 million, because of “greater net outflow” as funds are diverted due to rising US rates.

The BSP however expects a narrower current account deficit of $100 million in 2017 compared to what it announced mid-year of $600 million, mainly because of an improving trade numbers.

For 2018, the BSP sees the BOP shortfall decreasing to $1 billion while current account deficit will likely increase to $700 million.

The central bank said it expects only a small net inflow in the financial account. As for the current account, it said the faster rate of growth in imports of goods compared to exports of goods will push the deficit higher “nothwithstanding increases in the services and secondary income account.”

The revisions in the external accounts reflect the BSP’s assessment that exports of goods will recover and grow by 11 percent this year, higher than the five percent projection last June, because of the “firm recovery in the global economy that has led to increased trade momentum since the second half of 2016 carrying on to 2017.” Imported goods are expected to grow by 10 percent.

BSP Deputy Governor Diwa C. Guinigundo has said that the BOP and current account deficits are not signs of eroding competitiveness or even an issue of low savings and investments, but rather are indicators that the Philippine growth path is sustained by higher imports, according to a central bank official.

The shortfalls are mainly because of an increasing import bill to fund a growing economy. “The increase in imports point to the continued expansion in the domestic economy’s capital formation and production (and) one has to spend in order to make money so to speak,” he in a November article.

Guinigundo, who is head of the BSP monetary stability sector, said there is nothing to worry about when looking at these deficit numbers, particularly since they have data and empirical studies that would prove their assessment.

Guinigundo explained that when an economy is expanding, a deficit will occur when viewed in terms of the savings-investment gap. “High growth leads to residents investing abroad and prepaying their external debt,” he stressed.

The BOP and current account balances reverted to deficits after nine years of straight surpluses in the case of the BOP, and 13 years of surpluses for the current account.

Last year, the current account balance registered almost $1-billion deficit, reversing the $7.3-billion surplus in 2015. The overall BOP had a $420million deficit versus the $2.6-billion surplus in 2015.