CA deficit not alarming if credit used to boost growth – UBS

MANILA, Philippines - The Philippines is among Southeast Asian economies at risk of developing current account deficits over the next two years, something an investment bank said should not worry policymakers if “rapid” credit growth is used to boost economic growth.

A “three phase leverage cycle” is beginning to unfold now in Southeast Asia driven mainly by the increase in domestic liquidity and decline in savings rate, UBS economist Edward Teather said in a report.

“Driven by low interest rates and rising domestic leverage, current account deficits already exist in India and Indonesia,” Teather said.

“Policy settings implied a sustained deficit in Thailand in the near future and further declines in surpluses in Philippines, Singapore and Malaysia,” he added.

Current account, part of the balance of payments, measures the amount of inflows and outflows in trade and other “physical economy” transactions. It includes those from exports, imports, tourist receipts and remittances.

Across the region, economies are benefitting from large inflows escaping the low yields from developed markets. This, Teather said, has allowed them to gain “excess liquidity” and boost asset prices.

As they move on to the second phase though, Southeast Asia could experience “tighter” credit conditions as banks’ deposits are used up to fund loans financing economic activity.

At the end of the cycle, a rise in debt relative to economic output would set the stage for higher financing in needs and eventually to higher current account deficits.

“A combination of high oil prices and reduced appetite for credit in advanced economies has also forced deteriorating external balances on South and Southeast Asia,” Teather explained.

He clarified that not all possible deficits should alarm central banks, especially in the case of the Philippines, where this could occur as a result of an investment boom that will assist growth.

Over the past few years, the Philippines has been operating under a current account surplus, meaning it generates more than enough resources to meet the economy’s financing needs.

In 2012, the surplus hit $7.1 billion, up by $1 million from year-ago level. The figure accounts for 2.8 percent of gross domestic product (GDP), slightly down from 3.1 percent the previous year.

By UBS’ estimates, the surplus may further narrow down to 1.8 percent this year and to just 0.8 percent by 2014.

“In Philippines, savings are falling relative to GDP implying that strong growth is propped up by the current consumption,” Teather said.