Risk remains despite limited current account gap growth
THE PHILIPPINES is unlikely to see a “significant widening” of its current account deficit, even as a bigger gap exposes the country more to “sudden capital outflows,” S&P Global Ratings said in a regional note on Thursday.
The global debt watcher expects Philippine gross domestic product (GDP) to expand by 6.5% this year, slower than the 6.7% clocked in 2017 and below the government’s 7-8% growth goal for 2018.
“We expect a return of traditional GDP growth drivers — consumption and investment — as the leaders of a decent 6.5% growth,” S&P said in the Asia-Pacific Economic Snapshots report it released yesterday.
“As the Q4 figures show, the resurgence of private household spending came just in time, as electronics exports were no longer able to prevent the usual negative contribution of net exports to growth.”
ANZ Research has warned that private spending could ease as a result of higher prices of goods and services, largely due to the implementation of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN). TRAIN, which took effect Jan. 1, introduced higher or additional taxes on fuel, cars, coal, sugar- sweetened drinks and a host of other items. These are expected to shore up an additional P82.3 billion revenues this year, despite a reduction in personal income taxes.
ANZ analysts said that historical data showed that every one percent increase in headline prices caused a corresponding 0.3% decline in private consumption.
BMI Research, however, said rising incomes and sustained remittance inflows should keep consumer activity upbeat.
At the same time, however, S&P said it will “continue to watch the current account, given slower remittance inflows, higher energy prices, and rising imports.”
“Although we do not expect a significant widening of the
deficit under our baseline, such a scenario would increase the Philippines’ exposure to potential sudden capital outflows in times of market panic,” the credit rater said.
The current account measures fund flows from goods and services trading, which determines the country’s external payments position.
As of December, the Bangko Sentral ng Pilipinas (BSP) expected the current account to settle at a $100-million deficit in 2017, a retreat from the $28-million surplus logged as of end- September.
For this year, the central bank sees the current account at a $700-million deficit, equivalent to 0.2% of gross domestic product (GDP).
BSP Managing Director Francisco G. Dakila, Jr. last week said a current account gap driven by an increase in investments and imports of capital goods is to be expected in order to prevent the economy from overheating, as such expenditures will help accelerate overall economic growth.
The country’s external trade deficit logged a new all-time-high $4.017 billion in December, taking the full-year gap to $29.786 billion, also the highest on record.
Last year saw merchandise imports surging by 10.2% and exports growing 9.5%, beating the government forecasts of nine percent and eight percent respectively, according to the National Economic and Development Authority.
Increased imports of raw materials like artificial resin, iron and steel are expected to support the “Build, Build, Build” agenda of the current administration, which plans to spend over P8 trillion for big-ticket infrastructure projects until 2022, when President Rodrigo R. Duterte ends his six-year term.
The increased infrastructure spending is expected to boost annual GDP growth to as fast as 7-8% up to 2022 from last year’s 6.7%, 2016’s 6.9% and a 6.2% average in 2010-2015.