Twin deficits may cause drag on Phl recovery

The problem of twin deficits that the Philippines faces is expected to linger and may likely create a drag on the country’s much needed economic recovery.

In its second semester outlook briefing, Manulife Investment Management, the asset management arm of Manulife Financial Corp., said the so-called “twin deficits” are threatening the pace of recovery in the Philippines.

A twin or double deficits happen when a country has both a current account deficit and budget deficit, which means that imports are higher than exports and the government is spending more money than the revenues it is generating.

“The main macroeconomic issue facing the Philippines right now is the rapidly widening twin deficits, and from a currency perspective the peso is still relatively overvalued,” Manulife head of Macro Strategy for Asia Sue Trinh said.

“This twin deficits issue is going to be lingering around and it’s likely to be a real drag on the economy as well as the exchange rate,” she said.

The country’s deficit-to-GDP ratio swelled to a record 8.6 percent last year as the government spent more while failing to collect enough revenues due to the pandemic.

Based on the macroeconomic targets of the Marcos administration, the government aims to bring down the deficit-to-GDP ratio to 7.6 percent this year and further to 6.1 percent in 2023.

By the end of the administration, the deficit-to-GDP ratio is expected to be back at the three percent level.

Latest trade deficit, on the other hand, widened to $5.68 billion as of May due to elevated prices of imported oil and other major global commodities largely brought about by the Russia-Ukraine war.

Imports jumped by 31.4 percent to $11.98 billion while exports grew by only 6.2 percent to $6.31 billion.

“The trade deficit, for instance, reached its widest record levels, and that’s not just because of high oil prices. If you look at the non-oil trade balance, that’s also at all-time highs,” Trinh said.

“As for the central bank, it has turned somewhat less inclined to smooth weakness in the currency, and that may end up being more of a release valve, especially as the BSP had to turn more hawkish given the inflationary pressures, which is clearly counter-cyclical given the growth trends,” she said.

Other experts previously said that having a clear fiscal consolidation path for a twin deficit economy such as the Philippines is important to avoid financial market volatility and possible credit downgrades.

Meanwhile, Manulife maintained that Southeast Asia has emerged as a potential bright spot amid rising stagflationary fears from global investors as several markets have recorded stronger-than-expected GDP growths such as the Philippines in the first quarter.

This is due to pick-up in tourism, reopening of economies, and strong commodity exports. Manulife said continued growth of consumption could potentially outpace inflation.