By means of Luisa Maria Jacinta C. Jocson, Reporter
The current of the Philippines acA counting deficit (CAD) is taken into account. widen further, which could put pressure on the currency, ANZ Research said.
In a report published on Monday, ANZ said it expects the country’s current account deficit to rise to 2.9% of gross domestic product (GDP) this year.
“A broader CAD will help sustain higher investment levels given the low savings rate in the economy,” the report said.
“Nevertheless, we believe that the current account deficit is likely to widen further as the government focuses more on promoting economic growth. We believe this could put further depreciating pressure on the peso.”
The Bangko Sentral ng Pilipinas (BSP) estimates this year’s current account deficit at $6.8 billion, equivalent to 1.5% of GDP. Next year the deficit is expected to reach $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 to growth at the Philippines’ current stage of development.”
“Instead, it complements domestic savings to support higher levels of investment, thereby increasing potential growth,” the report said.
“The savings rate in the Philippines fell at the beginning of the pandemic and has remained virtually unchanged at lower levels. Given the low level of savings in the economy, a broader CAD is needed to maintain high investment growth.”
However, ANZ warned that a higher CAD will impact the peso.
“Additionally, the CAD will remain high as the government plans to continue prioritizing infrastructure spending. “With further cuts in policy rates, overall depreciation pressure on the peso is unlikely to ease,” the report said.
The peso again wobbled closer to the P59 per dollar level on Monday, closing at P58.99 against the dollar. It weakened by 12 centavos from Friday’s P58.87 finish.
The local unit fell to the level of P59 per dollar on Thursday, its worst performance since October 17, 2022.
Meanwhile, ANZ Research said strong remittances and subdued service export growth could support the current account balance but not the trade deficit.
“Nevertheless, we do not believe that surpluses from remittances and services will be sufficient to fully offset the broader trade deficit in the second half of 2024,” it added.
The latest data from the BSP shows that remittances rose 3% to $25.23 billion in the first nine months.
ANZ Research flagged the risk of “greater divergence between exports and imports and an implicit increased trade deficit.”
“The recent deterioration is due to divergent developments in exports and domestic demand. Essentially, exports are stagnating at a time when policymakers are ramping up infrastructure-related spending.”
The country’s trade deficit widened 43.4% year-on-year to $5.09 billion in September, the largest trade deficit 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 tradable goods sector.”
“This is evident from the following developments: the share of the Philippines in world exports has been declining since 2017 and there have been no export gains in absolute terms.
“Since 2021, monthly exports have remained remarkably stable at just over $6 billion,” the report said.
In September, exports fell by 7.6% to $6.26 billion a year ago. This was the biggest drop in exports since June.
“The problem of declining competitiveness is particularly pronounced for the electronics sector, which accounts for 55% of total Philippine exports,” ANZ said.
Electronic products, the country’s top export, fell 23.1% to $3.15 billion in September.
“The competitiveness problem becomes even greater when semiconductors are considered in isolation,” it added.
Semiconductor exports, which accounted for the majority of electronic goods, fell 30.6% to $2.31 billion during the month.
“We believe competitive pressure on the Philippine semiconductor industry, which is limited to low value-added activities such as 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 are subdued, but remain relatively unbalanced compared to the weakness in exports,” the report said.
“Moreover, the growth in capital goods imports is significantly correlated with the change in government infrastructure expenditure. The sharp increases in government capital expenditure in the second and third quarters have translated into increased imports of capital goods.”
Imports are also not expected to slow, ANZ said, amid the government’s push to boost infrastructure spending and expectations of further policy easing from the central bank.
“Any boost to domestic demand from these upcoming rate cuts will boost imports,” it added.
The value of imports increased by 9.9% to $11.34 billion September compared to $10.32 billion a year ago, PSA data showed.