After providing resilience for the Philippine economy during bouts of external headwinds, the country’s current-account surplus has recently been showing breaks of weaknesses, with several analysts projecting a year’s deficit in this area for the first time in decades due to the bleak future of international trade.
In 2016 the impact of global volatilities was already evident in the country’s lower current-account surplus of $601 million, a 91.7-percent decline from the $7.3-billion surplus in 2015.
Also, despite being in the surplus territory in the previous year, the fourth-quarter surplus has already shown significant weakness to end the last three months of 2016 at a deficit of $1 billion. This reverses the $1.4-billion surplus posted in the same quarter in 2015.
A country’s current-account position is usually a gauge of economic health for the jurisdiction, as it measures the difference between its foreign-exchange savings and investments.
The Central Bank blamed the weakness of the fourth-quarter current-account position on the widening trade-in-goods deficit, along with the decline in net receipts in the trade-in-services and primary-income accounts.
In particular, the trade-in-goods deficit increased to $10 billion in the fourth quarter of 2016, from the $7.5 billion in the fourth quarter of 2015. This, as the growth in imports of goods outpaced that of the exports by more than four times.
The BPO factor
Exports of goods during the period grew only moderately at 3.8 percent in the fourth quarter of 2016 at $10.6 billion. This is up from the $10.2 billion seen in the same quarter in the previous year.
In the past, the current account has also shown signs of weakness prior to the growth of the business-process outsourcing (BPO) receipts and the boom from the remittances sent home by Filipino migrant workers.
A recent study from the Central Bank showed the Philippines’s current-account position, especially its relation to the country’s GDP, has fluctuated over the past decade due largely to the dynamics of its trade balance.
The study, titled “The Dynamics of Current Account in the Philippines: What Causes Its Fluctuation”, also showed the current-account position’s recent dependence on remittances and BPO receipts for its resilience.
The Bangko Sentral ng Pilipinas (BSP) said one of the recorded weaknesses of the current-account position was in the first quarter of 2000 to the third quarter of 2001, where it registered current account-to-GDP ratio deficits, due mainly to deficits in merchandise and services-trade accounts prior to the growth of the BPO industry.
Temporary surplus
Meanwhile, in the fourth quarter of 2001 to the first quarter of 2002, the current account-to-GDP ratio recovered and exhibited a temporary surplus, due mainly to lower goods imports driven by the decrease in petroleum crude prices and lower imports for electronic inputs associated with the slowdown of the US economy in the aftermath of the 9/11 attack.
The BSP further said from the third quarter of 2005 to early 2007, the current account-to-GDP trend returned to a more significant surplus, as services exports began to strengthen, driven by the surging BPO industry and the rise in remittances from overseas Filipino workers (OFWs).
Meanwhile, the adverse effects of the global financial crisis in mid-2007 led the current account-to-GDP ratio to again post a deficit.
Since then, the current account-to-GDP ratio exhibited a surplus driven by the continued strength of both the BPO sector and OFW remittances, the BSP said.
However, more recently, the BSP acknowledged the share of current account-to-GDP has been on a declining trend—even with the continued inflows of both BPO receipts and remittances.
Pitfall
Trade deficits due to weak global demand is not the only pitfall for the country’s current account, as remittances have shown signs of maturity in recent years, exhibited by slower growth rates.
In particular, the primary income account in the last quarter of 2016—one of the components of the current account—hit $721 million—21.6 percent lower than the $920-million net receipts in the fourth quarter of 2015. This was mainly attributed by the Central Bank to the decline in compensation inflows from resident OFWs—specifically from sea-based workers.
The national government has pegged its remittance-growth projection for the year at 4 percent.
Also among the evolving problems that may hinder the current account to reverse its declining path is the rising protectionism trend across the globe—particularly under the new administration of the United States’ new government.
In a recent speaking engagement, Central Bank Governor Amando M. Tetangco Jr. said among the downside risks to global economic activity include heightened inward-oriented sentiment—a development that could undermine global trade and dampen financial-market sentiment.
“Whether Asia will follow the advanced economies’ new mediocre or not would depend on how Asia would overcome [these] risks and/or take advantage of the opportunities. First on my list is growing protectionism,” Tetangco said.
“So far, we have only heard rhetoric from the current US president. There are still no clear policies, only desired directions. In the United Kingdom, while they have moved to trigger Article 50, the negotiations for the formal exit can take some time,” he added.
Counterbalance
Counterbalancing this and the weakness in advanced economies, Tetangco said, in the meantime, intra-Asean trade has been increasing for the Philippines.
“In the case of the Philippines, Asean [as an aggrupation] has moved to become our No. 1 overall trading partner,” he said.
Another growing opportunity of increased exports in the region is coming from the agriculture industry, which has been noted to expand strongly last year after overcoming the impact of natural disasters.
In its recent economic news, Oxford Business Group (OBG) noted the rising opportunities of exports of the country’s agricultural goods, citing the $1-billion agreement with China to step up imports of Philippine agricultural products.
“The agreement with China represents a significant boost for the agricultural sector in the Philippines, with the value of the deal roughly equivalent to revenue from farm exports for the fourth quarter of last year,” OBG said.
Image credits: Nonie Reyes