Current account deficit seen to widen

By Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINES’ current account deficit (CAD) is seen to widen further, which could put pressure on the currency, ANZ Research said.

In a report released on Monday, ANZ said it expects the country’s current account deficit to widen to 2.9% of gross domestic product (GDP) this year.

“A wider CAD will help maintain higher levels of investments given the low savings rate in the economy,” it said.

“Nonetheless, we think the current account deficit is likely to widen further as the government is more focused on enhancing economic growth. We think that this could exert further depreciation pressure on the peso.”

The Bangko Sentral ng Pilipinas (BSP) estimates the current account deficit to reach $6.8 billion this year, equivalent to 1.5% of GDP. Next year, the deficit is seen to hit $5.5 billion or 1.1% of GDP.

In the first half of the year, the country’s current account deficit stood at $7.1 billion, accounting for 3.2% of economic output.

ANZ Research said a persistent current account deficit 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,” it said.

“The savings rate in the Philippines declined at the beginning of the pandemic and has remained almost flat at a lower level. Given a low level of savings in the economy, a wider CAD is required to maintain a high rate of investment growth.”

However, ANZ warned that a higher CAD will impact the peso.

“Furthermore, the CAD will 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 added.

The peso again teetered closer to the P59-per-dollar level on Monday, closing at P58.99 against the greenback. It weakened by 12 centavos from its P58.87 finish on Friday. 

The local unit sank to the P59-per-dollar level on Thursday, its worst showing since Oct. 17, 2022.

Meanwhile, ANZ Research said that strong remittances and the moderate service exports growth could support the current account balance but not the trade deficit.

“Nonetheless, we don’t think the surpluses from remittances and services will be enough to completely offset the wider trade deficit in the second half of 2024,” it added.

The latest data from the BSP showed that cash remittances rose by 3% to $25.23 billion in the first nine months.

ANZ Research flagged the risk of a “greater divergence between exports and imports and an elevated trade deficit by implication.”

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

The country’s trade deficit widened by 43.4% year on year to $5.09 billion in September, the biggest trade gap in 20 months, according to the latest data from the Philippine Statistics Authority (PSA).

ANZ said the lackluster export performance was due to the country’s “limited productivity gains in the tradables sector.”

“This is evident from the following developments: the Philippines’ share in world exports has been declining since 2017 and there have been no gains in exports in absolute terms.

“In fact, since 2021, monthly exports have remained remarkably static at a little over $6 billion,” it added.

In September, exports declined 7.6% to $6.26 billion from a year ago. This was the biggest drop in exports since June.

“The problem of declining competitiveness has been particularly pronounced for the electronics sector, which accounts for 55% of the Philippines’ overall exports,” ANZ said.

Electronic products, the country’s top export, fell by 23.1% to $3.15 billion in September.

“The competitiveness issue becomes even more stark when semiconductors are considered in isolation,” it added.

Semiconductor exports, which accounted for the majority of electronic goods, plunged by 30.6% to $2.31 billion during the month.

“We think that competitive pressure on the Philippines’ semiconductor industry, which remains limited to low value-added activities like assembly and packaging, will increase,” ANZ said.

It also attributed the weakness in exports to challenges in domestic demand.

“Domestic demand and household consumption in particular have moderated but remain relatively imbalanced compared with the weakness in exports,” it said.

“Furthermore, growth in capital goods imports is significantly correlated to the change in the government’s infrastructure spending. The sharp increases in the government’s capital outlays in the second and third quarter have translated into larger imports of capital goods.”

Imports are also not expected to ease, ANZ said, amid the government’s push to ramp up infrastructure spending and expectations of further policy easing by the central bank.

“Any impetus to domestic demand from these impending rate cuts will bolster imports,” it added.

The value of imports rose by 9.9% to $11.34 billion in September from $10.32 billion a year ago, PSA data showed.