The dual budget system of the Philippines and current account deficits are seen to continue to exist, Nomura Global Market research said.
In its Global Macro Outlook 2025 report, Nomura said the Philippines’ twin deficits “will remain significant.”
“In the Philippines, we expect the government to slightly miss the targets of its medium-term fiscal framework (MTFF), with a still large deficit of 5.5% of gross domestic product (GDP) in 2025, due to infrastructure spending priorities and the midterm elections,” the report said.
Nomura expects the deficit ratio to reach 5.9% this year and 5.5% in 2025.
While the deficit appears to be narrowing, Nomura says this is still above the assumptions of the medium-term fiscal framework and also “still well above the pre-COVID average of 2.4%.”
“We believe the MTFF targets are likely to be challenging to meet due to the elections and spending priorities (e.g. flagship infrastructure projects),” it added.
Based on the assumptions of the Development Budget Coordinating Committee (DBCC), the deficit ceiling this year is expected to reach P1.52 trillion or 5.7% of economic output.
The deficit is expected to fall to 5.3% of GDP next year and further to 3.7% in 2028.
The DBCC has said it has had to recalibrate its medium-term budget program to reduce the deficit in a “more gradual and realistic way” and boost long-term investments to create more jobs and raise incomes.
The national government’s budget deficit fell to 963.9 billion euros in the first ten months, compared to 1.02 trillion euros in 2023, according to the latest data from the Ministry of Finance.
Meanwhile, Nomura expects the current account deficit to continue to rise.
“The changing composition of growth we expect in 2025 (i.e. softer export growth but tempered by robust domestic demand) suggests that current account balances will be weaker overall,” the report said.
Nomura forecasts that the current account deficit (CAD) will increase from 2.3% in 2024 to 2.5% of GDP in 2025.
This is driven by “the government’s drive to build additional infrastructure and strengthen domestic food supplies, thereby increasing capital goods and food imports.”
It is also “consistent with a more domestic demand-led economic recovery and higher external pressures.”
The latest data from the Bangko Sentral ng Pilipinas (BSP) shows the current account deficit stood at $5.7 billion in the third quarter, equivalent to 5.2% of GDP. This was much higher than the deficit of 2.2% in the same period a year ago.
Over the nine-month period, the current account deficit increased by 19.3% to $12.9 billion or 3.9% of GDP.
“Trump’s policies are likely to weaken remittances from the US, which will further depress the CAD. From a savings-investment gap perspective, this reflects a faster increase in investment rates, which is positive in the long term,” Nomura said.
Newly elected US President Donald J. Trump has promised to introduce stricter immigration controls and a tighter trade policy. such as plans to impose tariffs on Chinese goods.
Markets are pricing in the impact of these policies on the Philippines, which is heavily dependent on the US for business and economic activities.
Central bank data shows that the US accounted for 41.2% or most of the Philippines’ total remittances in the January-October period.
“Nonetheless, we still caution that CAD financing now comes from more volatile sources, with external borrowing exceeding net FDI inflows (foreign direct investment), leaving a deficit on the ‘broad base balance’ and a greater dependence on the general economy is suggested. balance of payments on net investment flows.”
The government’s plans to boost infrastructure spending could also drive the growing current account deficit, it added.
“This could lead to a widening current account deficit as infrastructure spending is a top priority of President Marcos.”
The government plans to spend 5-6% of GDP on infrastructure annually.
‘GRADUALLY IMPROVE’ GROWTH
“We expect growth to gradually improve in 2025, but still remain below growthFcial goals. The economy is vulnerable to Trump’s policies, but public investment and election-related spending will support domestic demand,” Nomura said.
On the other hand, domestic demand will help drive growth, it added.
“We expect growth to outperform in Asian economies with stronger domestic demand buffers – such as Malaysia and the Philippines, while growth disappointment is likely in India, Thailand and Korea.”
Nomura expects the Philippine economy to grow 5.6% this year, 6% in 2025 and 6.1% in 2026.
If achieved, GDP would remain below the government’s revised target of 6-6.5% this year, but close to the lower end of the 6-8% target for both 2025 and 2026.
“We believe public investment will remain a key driver of growth as the government pushes for more progress on infrastructure projects,” the report said, noting that the upcoming elections will also boost infrastructure spending.
However, it also noted “strong external headwinds,” such as the impact of the new Trump administration’s proposals.
Nomura said the Philippines is among the most vulnerable economies to Trump’s possible policies.
“We therefore expect slow growth in exports of goods and services, with tariffs likely to weigh on external demand, while worker remittances, which support domestic consumption, are likely to be negatively affected by stricter immigration policies in the USA, similar to Trump’s. first term.”
“Foreign direct investment inflows have been more limited than in the region and could be further limited by rising tensions in the South China Sea, if the US under Trump provides less regional security amid China’s increased assertiveness in the disputed waters.”
Net foreign direct investment inflows fell 36.2% to $368 million in September, the lowest level in more than four years, BSP data showed.
Meanwhile, inflation is also seen to “remain benign” and within the BSP’s target range of 2-4%.
“In the coming months, we will place headline inflation at the lower end of the BSP target, partly due to the impact of lower rice import tariffs on food inflation and a still negative output gap, allowing BSP to implement rate cuts and move the economy forward . implementation of Trump’s policies,” Nomura said.
Overall inflation was 2.5% in November, bringing the eleven-month average to 3.2%. The central bank expects inflation to average 3.1% this year.
“In the Philippines, the favorable inflation outlook implies that the BSP will continue to cut its policy rate by another 100 basis points (bp) despite still large deficits.”
Nomura expects the Monetary Board to cut by 25 basis points on Thursday and make three more cuts of 25 basis points during the first three meetings of 2025.
A Business world A poll last week showed that 13 out of 16 analysts expect the Monetary Board to cut policy rates by 25 basis points at its last meeting of the year.
If this is achieved, it would bring the reference interest rate from the current 6% to 5.75%.
“If inflation continues on a downward path as we expect in the near term, BSP will likely look to further remove restrictiveness in monetary policy to support a recovery in domestic demand,” Nomura said.
“A weaker Fed austerity cycle is unlikely to be a significant constraint given BSP’s laissez-faire approach to currency weakness as interest rate differentials with the US narrow.”
Nomura also noted the country’s improved policy transmission.
“This reflects several issues we have previously discussed, including a fragmented banking system and constraints from structurally tight liquidity conditions,” the report said.
It said the “faster and more complete” transmission is due to the implementation of structural reforms, such as the policy corridor framework in 2016, and the use of more liquidity management tools.
“In the Philippines, BSP kicked off the region’s austerity cycle in August, cutting a total of 50 basis points so far. Lending rates have since fallen by 41 basis points, indicating a pass-through of 81.5%, which is much higher than the 34% in 2019/20.”
“The availability of these instruments has allowed BSP to resume reserve requirement cuts, the latest of which was the 250 basis point cut to 7% at the end of October, with an estimated liquidity injection of more than 1% of GDP and coinciding with BSP’s interest rate. cuts, further promoting transmission.” — Luisa Maria Jacinta C. Jocson