The Bangko Sentral ng Pilipinas (BSP) forecasts a lower balance of payments (BOP) deficit for this year of $1.2 billion versus $1.6 billion announced in March, citing narrower trade gap and growth in remittances, travel and business process outsourcing (BPO) receipts.
Photo Insert: The BSP now expects a lower current account deficit of $15.1 billion for this year compared to its previous forecast of $17.1 billion.
For 2024, the BOP is expected to still be in a deficit position of $500 million amid continued recovery of goods exports and imports, as well as sustained expansion of travel receipts and BPO revenues.
BOP is a summary of the economic transactions of a country with the rest of the world for a specific period. It becomes a shortfall position when imports outpace exports. In the case of the Philippines, a BOP deficit persists because of excess demand due to an expanding economy.
The new BOP deficit projection for 2023 is 0.3 percent of gross domestic product (GDP) while it is 0.1 percent of GDP for next year. In a press briefing on June 16, Friday, BSP officials said the BOP forecasts for 2023 and 2024 also assume weaker global growth prospects and the downside risks of the trade outlook.
BSP Director Sittie Hannisha M. Butocan of the Department of Economic Research said that along with the risks to global growth, the downside risks from the local side will come from a still elevated but gradually decelerating inflation, waning pent-up demand as an impact of higher interest rates, and the tighter fiscal space.
China, she said, has both a downside and upside risks to global trade, especially regional trade that affects BOP. While China’s economy is reopening and it is unwinding supply-side disruptions, particularly oil, it has weaker-than-expected growth.
Meanwhile, the BSP said the weak external demand will probably continue and this will “weigh on the trade and investment prospects in emerging market economies, including the Philippines (and even) as the domestic economy sustained its robust recovery from the pandemic, the spillover effects from the global economic slowdown can be a major drag.”
The latest BOP revisions were approved by the Monetary Board. As of end-April this year, the BOP deficit is at $3.3 billion. The BSP only reports the current account which is a major component of the BOP, on a quarterly basis.
In a presentation on Friday by Officer-in-Charge Redentor Paolo M. Alegre Jr. of the Monetary Policy Sub-Sector, he said the latest current account registered a shortfall of $4.3 billion as of the first quarter this year. He said this was due to the widening trade in goods deficit and lower net receipts in the primary income account, and partly muted by the increase in net receipts in the trade in services account.
The BSP now expects a lower current account deficit of $15.1 billion for this year compared to its previous forecast of $17.1 billion. The sustained recovery in BPO and tourism sectors as well as the resilient remittances will support the current account, said Butocan.
For next year, the current account deficit will remain the same, slightly higher at $15.4 billion, lower than the previous 2024 forecast of $16.8 billion. The central bank also revised the projections for foreign direct investments (FDI) for 2023 to $9 billion from $11 billion. The outlook for foreign portfolio investments or “hot money” is maintained at $2.5 billion.
The FDI is lower because of an expected slowdown in non-resident investments this year. However, Butocan said FDIs and hot money net inflows are expected to continue to be in positive territory because of improving domestic activity and helpful investment-related or FDI-supportive legislation to encourage investors to infuse capital and funds in the country.
For 2024, FDIs are projected to be around $11 billion from the previous forecast of $12 billion, while hot money is estimated to hit $3.5 billion, higher than what is projected for this year. The BSP noted a “geoeconomic fragmentation of FDIs and slowdown in the globalization process triggered primarily by rising geopolitical tensions between major economies.”
“Emerging market economies are more susceptible to FDI relocation as most rely heavily on capital investment from distant countries. Furthermore, emerging financial market vulnerabilities combined with the after-effects of monetary policy adjustments in advanced economies, such as the US, cast a shadow on the country’s external sector prospects for the year,” said the BSP.
Meanwhile, the outlook on the country’s gross international reserves (GIR) is unchanged and the BSP still expects a 2023 GIR of $100 billion and a 2024 dollar stock of $102 billion. The BSP also did not change the expected remittances growth rate for 2023 and 2024 which remains at three percent.
The BSP said that next year, the overall BOP position is “hinged mainly on the foreseen normalization and return to pre-pandemic levels of global and domestic economic activity.”
The better global growth outlook for 2024 bodes well for the country’s trade and investment prospects, especially with the expected recovery in the demand for electronics, which remains a key growth driver of Philippine exports, said the BSP.