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BSP expects bigger BoP, current account deficits as global demand weakens

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THE PHILIPPINES’ balance of payments (BoP) deficit could end this year wider than initially expected due to darker global growth prospects that have caused weaker demand.

The Bangko Sentral ng Pilipinas (BSP) announced its revised BoP projections for 2022 and 2023 approved during the Monetary Board’s meeting on Friday.

The BoP gives a glimpse of the country’s transactions with the rest of the world at a given time. A deficit shows more funds exited the country than what went in, while a surplus means more money entered the economy.

“The emerging BoP outlook over the near term remains subdued as external risks have intensified relative to the last forecast round in June 2022. These risks of further downward revision in global growth prospects, record-high inflation print worldwide, more aggressive monetary policy tightening by major central banks, continued economic slump in China, and lingering Ukraine-Russia conflict, among others, are expected to broadly weaken global demand conditions, and hence, the country’s external sector,” the BSP said.

“In particular, these are expected to moderate the growth in merchandise exports and, along with increased imports, will result in a further widening of the goods trade gap,” it added.

The BSP said while global financial conditions remain tight, the economy’s continued recovery from the coronavirus disease 2019 (COVID-19) pandemic could offset their impact on the Philippines’ external position.

“This, along with the expected revival of foreign travel receipts, sustained resilience of overseas Filipinos (OF) remittances and business process outsourcing (BPO) revenues, as well as inflows from foreign direct investments are expected to positively contribute to the external sector outlook,” the central bank said.

The country’s BoP is now expected to yield a deficit of $8.4 billion this year, equivalent to -2% of gross domestic product (GDP), bigger than the previous projection of a $6.3-billion gap (-1.5% of GDP) announced in June.

Latest BSP data showed the country’s BoP stood at a $3.1-billion deficit in the January-June period from the $1.9-billion deficit in the comparable period in 2021.

The central bank said it expects a wider balance of payments gap this year as it expects a current account deficit of $20.6 billion (-5% of GDP) from the earlier forecast of $19.1 billion (-4.6% of GDP) “owing to the sustained acceleration of goods imports alongside moderation of goods exports.”

Broken down, imports of goods are now expected to grow by 20%, up from 18% previously, amid higher commodity prices and the continued reopening of the domestic economy. Meanwhile, goods exports are seen to increase by a more moderate 4% from 7% previously “amid expectations of continued softening of global demand, persistent supply bottlenecks, and the rise in input costs.”

On the other hand, services imports and exports are both expected to expand by 14% this year (from 13% and 11%, respectively) “based on stronger-than-expected recovery in travel receipts and BPO revenues in the first half of 2022 following the further reopening of the domestic economy and easing of travel restrictions for foreign tourists beginning February 2022.”

BPO receipts are seen to grow by 9%, faster than 8% previously, while travel receipts are projected to surge by 250%, also up from the June forecast of 100%.

Meanwhile, the BSP retained its 4% growth forecast for overseas Filipino workers’ cash remittances on the back of rising deployment amid renewed hiring interest and wider use of digital financial services. In the first seven months of 2022, cash remittances rose by 2.8% year-on-year to $18.26 billion.

The country’s current account deficit was at $7.9 billion in the second quarter, higher than the $1.3-billion gap seen the year prior amid a wider trade in goods deficit.

In the first semester, the current account balance ballooned to a $12-billion deficit from the $1.3-billion gap seen in the same period last year.

Meanwhile, for the financial account, it is expected to register net inflows of $11.1 billion this year, slightly lower than the previous projection of $11.8 billion, as the central bank still sees a sustained rise in foreign direct and portfolio investments.

The central bank expects foreign direct investments (FDI) to end the year at a net inflow of $10.5 billion, lower than the June outlook of $11 billion, while foreign portfolio investments (FPI) or hot money are expected to post a $4.5-billion net inflow, steady from its previous projection, amid planned initial public offerings.

Latest BSP data showed total FDI net inflows in the first semester rose by 3.1% to $4.641 billion.

Meanwhile, FPI yielded a net inflow of $625 million from January to July, a turnaround from the $446-million net outflow seen in the same period last year.

Lastly, the country is now expected to end the year with gross international reserves (GIR) of $99 billion, equivalent to 7.5 months of import cover, lower than the previous forecast of $105 billion (8 months).

The BSP said this is “reflective of the latest actual data as well as the buildup in external risks that could weigh on the country’s major sources of foreign exchange.”

The Philippines’ dollar reserves declined for a sixth straight month in August, hitting a two-year low of $99.98 billion from $99.83 billion as of July.

OUTLOOK FOR 2023

For 2023, the BSP kept its forecast of a $2.6-billion BoP deficit, equivalent to -0.6% of GDP, “underpinned mainly by expectations of sustained inflows in the financial account supported by improved business and consumer sentiments for next year, resilient domestic demand, and continued operationalization of key legislations aimed at improving the country’s overall investment climate alongside narrower current account deficit.”

The central bank said it expects a slightly narrower current account deficit of $20.1 billion (-4.5% of GDP) next year from $20.5 billion (-4.4% of GDP) previously as the country’s trade in goods gap is expected to taper.

Goods exports growth is now seen at a slower 3% next year from 6% in the June forecast round and imports of goods are seen to rise by 4%, down from 6% previously.

Services exports are now expected to increase by 12% next year from 9% previously. Meanwhile, growth projections for services imports, BPO receipts and travel receipts were retained at 8%, 5% and 150%, respectively.

The BSP likewise kept its cash remittances growth forecast for 2023 at 4%.

“The foreseen sustained recovery momentum of trade in services … as well as the steady inflow of OF remittances … are expected to lend some offsetting effect to the current account imbalance. As the COVID-19 situation becomes more manageable and international travel restrictions further lifted across jurisdictions, both international tourism and OF workers’ deployment prospects will remain favorable,” the central bank said.

On the other hand, the financial account is now expected to register slightly lower net inflows of $16.5 billion in 2023 from $16.8 billion previously.

FDI net inflows are now seen at $12.5 billion in 2023 from the previous forecast of $12 billion, while the FPI net inflows are still expected to come in at $6.7 billion.

Lastly, the central bank lowered its 2023 GIR projection to $100 billion from the June forecast of $106 billion on expectations of foreign exchange flows amid continued external risks, which could be “tempered by domestic economic resilience.”

“Looking further ahead, while there is scope for global economic conditions to improve next year, particularly with regard to commodity price conditions, the downside risks to external demand amid tighter global financial conditions also highlight the importance of building up domestic sources of resilience to cushion the domestic economy from external shocks,” the BSP said.

“Preserving strong macroeconomic fundamentals will be a key factor that will be relied upon to sustain external sector resilience over the near term,” it added.

The central bank said it will continue to monitor external sector developments and their potential impact on price and financial stability. — Keisha B. Ta-asan

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