First current acct deficit in 14 years looms

Investment banking giant Credit Suisse said the Philippines would book its first current account (CA) deficit in 14 years this year amid weak exports and a slowdown in remittances from overseas Filipinos.

Michael Wan, economist at Credit Suisse, said in the company’s Emerging Markets Quarterly Q2 2017 report the Philippines would register a CA shortfall of $1.8 billion or -0.6 percent of gross domestic product (GDP) this year, a complete reversal of the $601 million surplus or 0.2 percent of GDP recorded last year.

The CA is the sum of the balance of trade, net income from abroad and net current transfers. A deficit indicates the Philippines is a net borrower to the rest of the world while a surplus indicates the country is a net lender.

“If right, this would be the Philippines’ first annual CA deficit print since 2002,” he said.

The Philippines has booked a CA surplus for the past 14 consecutive years. The country’s surplus plunged 92 percent to $601 million or 0.2 percent of GDP last year from the $7.3 billion or 2.5 percent of GDP recorded in 2015.

This was lower than the projected CA surplus of $2.5 billion or 0.8 percent of GDP for 2016.

The Bangko Sentral ng Pilipinas traced the decline in the CA surplus to the 46.2 percent increase in the trade-in-goods deficit to $34.1 billion last year from $23.3 billion in 2015. Exports grew marginally by 0.6 percent last year while imports increased 16.6 percent.

The net receipts in the trade-in services account rose 30.6 percent to $7.1 billion from $5.5 billion amid higher receipts in computer, technical, trade-related and other business services.

Export earnings in the business process outsourcing (BPO) sector grew 12.8 percent to $20.2 billion last year from $17.9 billion in 2015. The primary income account surged 39.7 percent to $2.6 billion while the net receipts in the secondary income rose 7.3 percent to $25 billion.

The cumulative net receipts in the capital account rose 21.4 percent to $102 million while the net outflows of the financial account fell 58.8 percent to $949 million.

For this year, Wan said merchandise exports should be dragged down by the recent mining production ban, partly offsetting the stronger global growth outlook.

He added remittance growth would also ease to four percent this year from five percent last year, reflecting recent tightening in US immigration policies under the leadership of US President Donald Trump.

Furthermore, the economist said there are some potential downside risks to BPO services exports as US investments in the sector are currently on hold due to the policies of the Trump administration.