Philippine seen running a narrower current account deficit

MANILA, Philippines — Fitch Solutions said the Philippines may post a narrower current account (CA) deficit in 2019 and 2020 due to weaker import demand.

In its latest economic analysis titled “Philippines’ current account deficit to narrow,” the research arm of Fitch Group revised downwards its CA deficit projection to 0.4 percent this year and to 1.2 percent for next year.

“The sharp revision for 2019 reflects the significant drop in import demand through the year, with a negative growth of 10.8 percent year-on-year in October. Part of this is on the back of base effects from 2018 and a fall in the cost of energy imports, but it also represents weaker economic activity in the Philippines and a wider moderation in trade activity within the Asia region,” it said.

The CA position measures the net transfer of real resources between the domestic economy and the rest of the world. It consists of transactions in goods, services as well as primary and secondary income.

A deficit means, the Philippines spends more foreign exchange than what comes in in the form of foreign direct investments, foreign portfolio investments, remittances, among others.

The BSP expects a record CA deficit of $10.1 billion this year, 27.8 percent wider than the $7.9 billion shortfall recorded last year. The shortfall, however, thinned to $1.74 billion in the first half from $3.75 billion in the same period last year.

Fitch Solutions said export growth has been flat in the first 10 months as the Philippines met the same external headwinds faced by other countries within the region.

 “We expect these external challenges to remain in place, namely in the form of continued US-China trade tensions, slowing growth in both countries and political uncertainty in Hong Kong. However, with the Philippine government set to ramp-up its expenditure through 2020, import demand should recover and thus will drive a widening of the deficit over the coming quarters,” the research arm said.

However, Fitch Solutions said the ramp-up in government expenditure next year would drive a rebound in import demand and contribute to the CA deficit widening once again.

 “The deficit could widen more aggressively in the event of weaker external demand, with downside risks emanating from US-China tensions or a sharper slowing of activity from the major economies,” it said.

External headwinds, Fitch Solutions said, are unlikely to fade significantly enough to provide strong boost to Philippine’s export sectors.

According to the research arm, trade in Asia has suffered as a result of increased political tensions and slowing growth in China, while trade tensions between the US and China are unlikely to abate.

 “We see little evidence of these trends reversing in 2020. Political uncertainty and trade tensions are likely to remain a factor over the coming quarters, as trade disputes persist and Mainland China’s intervention in Hong Kong becomes increasingly likely,” it said.