Trade deficit likely to widen further

MANILA, Philippines — The country’s trade deficit is likely to remain on the rise amid continued government infrastructure spending as well as higher private sector demand due to easing monetary policy, according to ANZ Research.

In its Philippine Insight report, ANZ Research said the country’s trade deficit has been increasing since April 2024, hitting $5.1 billion in September, the highest in 20 months.

“The recent deterioration is due to diverging paths of exports and domestic demand. Essentially, exports are stagnating at a time when policymakers are stepping up infrastructure-related spending,” ANZ Research said.

“This divergence is likely to stay as the government keeps up with its infrastructure spending program and monetary policy easing lifts up private sector demand,” it added.

ANZ Research said the weakness in exports lies in limited productivity gains in the tradables sector.

It said the Philippines’ share in world exports has been declining since 2017 and that there have been no gains in exports in absolute terms, with monthly exports remaining static since 2021 at a little over $6 billion.

“The problem of declining competitiveness has been particularly pronounced for the electronics sector, which accounts for 55 percent of the Philippines’ overall exports. The monthly run rate of electronics exports in 2024 has been $3.4 billion, the lowest in four years. This contrasts with the performance of electronics exports of its regional peers such as Singapore, South Korea and Taiwan,” ANZ Research said.

In contrast, it said that imports have been relatively stronger particularly in the third quarter of the year as it rebounded six percent year-on-year following a 2.4-percent decline in the first half.

“This was driven by broad-based growth across major categories. Consumer goods imports rose 7.8 percent year-on-year in Q3, rising to the highest level on record. Capital goods and raw material imports have registered an increase of 6.7 percent and 12.5 percent year-on-year, respectively,” ANZ Research said.

It said growth in capital goods imports is significantly correlated to the change in the government’s infrastructure spending, noting that the sharp increases in the government’s capital outlay in the second and third quarters have translated into larger imports of capital goods.

“We do not expect imports to taper off in near future for two reasons. Firstly, the government has allocated 5.2 percent of GDP to infrastructure spending in 2025. Secondly, the central bank has lowered its policy rate by 50bp and intends to cut by another 100bp over the course of the monetary cycle. Any impetus to domestic demand from these impending rate cuts will bolster imports,” ANZ Research said.

“Overall, this outlook portends greater divergence between exports and imports and an elevated trade deficit by implication,” it added.

ANZ Research, however, said the stable growth in remittances and a moderate increase in service sector exports have partly offset the losses from the higher trade deficits.

It said the wider trade deficit coupled with the falling services trade surplus have resulted in the widening of the country’s current account deficit (CAD) in the first half.

“Given the ongoing weakness in the goods trade balance, the stable growth in remittances and moderate increase in service sector exports will help buttress the current account balance. Nonetheless, we don’t think the surpluses from remittances and services will be enough to completely offset the wider trade deficit in H2 2024,” ANZ Research said.

The research firm expects to see the CAD widening to 2.9 percent of gross domestic product (GDP) this year compared to the 2.7 percent last year.

“A persistent CAD is not detrimental for growth at the current stage of development for the Philippines. Instead, it complements domestic savings to support higher investment levels, thereby enhancing potential growth,” ANZ Research said, noting that a wider CAD is required  to maintain a high rate of investment growth, given the low level of savings in the economy.

It added that the CAD would remain elevated because the government intends to continue prioritizing infrastructure spending.

“With further reductions in the policy rate, the overall depreciation pressure on the peso is unlikely to wane,” it said.