Angelo Taningco
Economist, Treasury Group

The Philippines’ current account shifted to a surplus position in the second quarter (Q2) after incurring deficit levels for four-consecutive quarters. Similarly, the balance of payments (BOP) swung to a surplus in Q2 following two-straight quarters of deficits. Such change in the country’ external position raises the question: Is this sustainable?

Q2 current account surplus stood at $15 million (0.02% of gross domestic product [GDP]), a reversal from its deficit levels in the first quarter (Q1) of $248 million (-0.3% of GDP) and in Q2 2016 of $1.9 billion (2.5% of GDP), according to the Bangko Sentral ng Pilipinas (BSP) Q2 BOP report released on 15 September. This in part helped the BOP to post a surplus of $289 million (0.4% of GDP) in Q2 following its Q1 deficit of $994 million (-1.4% of GDP), though smaller compared to its Q2 2016 surplus level of $843 million (1.1% of GDP). Note that the BOP surplus in Q2 depended largely on net inflows in the financial account ($688 million) (Figure 1).

Figure 1: BOP & Current Account
Q1 2008 – Q2 2017
(% of GDP)

 
The Q2 current account surplus was driven by net receipts in trade-in-services ($2.3 billion), primary income ($1.0 billion), and secondary income ($6.5 billion) that combined have slightly outweighed the trade-in-goods deficit (-9.7 billion) (Figure 2). Among its specific major contributors were overseas Filipinos (OFs) personal remittances ($7.7 billion) and business process outsourcing (BPO) exports ($5.5 billion) (Figure 3).

Figure 2: Components of Current Account
Q1 2016 – Q2 2017
($ billion)

Figure 3: BPO Exports & OFs Remittances
Q1 2014 – Q2 2017
($ billion)

 
The first-half (H1) current account deficit shrank 45% year-on-year (yoy) to $234 million (-0.2% of GDP) due to a bigger combined net receipts in trade-in-services, primary income, and secondary income in comparison to the trade-in-goods deficit. Meanwhile, the BOP posted a deficit amounting to $706 million (-0.5% of GDP) in H1, a reversal from its H1 2016 surplus of ($634 million or 0.4% of GDP) primarily caused by its financial account shifting to net outflows coming from a large net inflow position.

We think the current account will likely record a deficit for the second half and full-year 2017, suggesting that its Q2 surplus could very well be temporary. This is based on our assessment that the Q2 surplus was very small and shadowed four-consecutive quarters of deficits starting in the fourth quarter (Q4) 2016. Moreover, the domestic economy is now driven more by investment relative to saving and that this investment-saving gap, we think, could widen especially when there’s a pickup in infrastructure spending, which would increase import demand for capital goods and raise the trade-in-goods deficit. Likewise, we do not see the Philippine peso to depreciate sharply vis-à-vis the US dollar in the near term and thereby exert strong narrowing pressure on the trade deficit; in fact, we have penciled in 51.25 for the end-2017 USD/PHP rate. Against this backdrop, our forecast for the full-year 2017 current account deficit is −0.2% of projected GDP.

On the BOP, we believe its deficit will be maintained for the full year, with our full-year 2017 forecast pegged at -0.3% of GDP. Note that the cumulative BOP spanning January-July recorded a deficit of $1.4 billion, exacerbated by July’s deficit of $678 million.

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