The Bangko Sentral ng Pilipinas (BSP) expects a higher balance of payments (BOP) deficit of $8.4 billion in 2022, up from its $6.3 billion estimate three months ago, due to external risk factors that have “intensified” including a much depreciated peso versus the US dollar.
In an online press briefing on Friday, Sept. 16, BSP officials said the overall BOP, a summary of economic transactions of a country with the rest of the world for a specific period, for both 2022 and 2023 will remain in deficit positions as global demand will continue to decline with countries including the Philippines trying to temper high inflation by increasing interest rates and stabilizing local currencies against the strong US dollar.
As part of external accounts, the BSP has also revised – and approved on Friday in a Monetary Board meeting -- the expected gross international reserves (GIR) which has taken a hit as BSP was intervening in the exchange rate market to ease pressures off the peso which has depreciated past $57, a new record low.
For 2022, the BSP expects a below $100 billion-level GIR at $99 billion. The previous GIR forecast was $105 billion by end-year. Next year, the BSP only sees slight improvement to the GIR at $100 billion. As of end-August this year, the GIR has dropped to $98.97 billion, partly because of US dollar buying to smoothen the peso volatility.
The GIR is BSP’s foreign assets invested in foreign-issued securities, monetary gold, and foreign exchange. The emerging 2022 GIR is equivalent to 7.5 months import cover, lower than the previous forecast of eight months of import cover.
The revised GIR is “reflective of the latest actual data as well as the buildup in external risks that could weigh on the country’s major sources of foreign exchange,” according to BSP Director for Economic Research (DER) Sittie Hannisha M. Butocan, who presented the revised external accounts on Friday.
Butocan said the “weakness in global demand (will) weigh on external accounts but impact tempered by resilient domestic economic activity.”
Butocan noted the factors that affected the revised numbers: the wider goods trade gap from lower exports and increased imports; eased mobility and travel conditions to support remittances, business process outsourcing (BPO) revenues and travel receipts; and moderate financial account flows due to US Federal Reserve’s accelerated rate hikes.
Under the BOP, the emerging current account deficit for 2022 is bigger at $20.6 billion, this is the highest current account shortfall on record, if it happens. The current account covers trade in goods, services, primary income, and secondary income. Trade in goods such as exports and imports is the first component of the current account.
For the first six months, the current account deficit was at $12 billion. BSP Senior Director for the Department of Economic Statistics, Redentor Paolo M. Alegre Jr. said the current account registered a higher deficit on the back of a higher trade in goods deficit, reflecting increased domestic demand and higher global commodity prices.
The previous current account deficit forecast for 2022 was $19.1 billion. For next year, the BSP expects a current account deficit of $20.1 billion.
The BSP also revised the 2023 overall BOP projections but it notes a milder BOP deficit of $2.5 billion, lower than what it estimated last June of $2.6 billion.
BSP officials said the “risks of further downward revision in global growth prospects, record-high inflation print worldwide, more aggressive monetary policy tightening by major central banks, continued economic slump in China, and lingering Ukraine-Russia conflict, among others, are expected to broadly weaken global demand conditions, and hence, the country’s external sector.”
“In particular, these are expected to moderate the growth in merchandise exports and, along with increased imports, will result in a further widening of the goods trade gap,” it added.
“While tighter global financial conditions are expected to restrain inward financial flows, there continues to be some optimism on the domestic front that could partly offset the impact of elevated external risks on the BOP (such as the) economy's solid macroeconomic fundamentals with strong recovery momentum in the first half of this year following increased mobility and expanded vaccination coverage,” said BSP officials.
The current account deficit is expected to widen to $20.6 billion this year due to sustained acceleration of goods imports alongside moderation of goods exports.
BSP forecasts goods imports to grow by four percent this year, and three percent in 2023, lower than previous projections of seven percent this year and six percent in 2023 amid softening of global demand, persistent supply bottlenecks, and the rise in input costs.
As for services exports and imports, the BSP revised its forecasts to 14 percent both for 2022, from previous forecasts of 11 percent and 13 percent last June. The BSP said the revised growth is based on stronger-than-expected recovery in travel receipts and BPO revenues in the first half of 2022. Services exports, meantime, is expected to grow by 12 percent in 2023, while services imports at eight percent.
Under BOP, the BSP also expects financial account to register net inflows at $11.1 billion for this year and $16.5 billion in 2023. The financial account consists of direct investments, portfolio investments and other forms of investment.
The BSP said the key drivers are the sustained uptrend of non-resident foreign direct investments (FDI) inflows of $10.5 billion and foreign portfolio inflows of $4.5 billion this year. Next year, FDIs are expected to increase to $12.5 billion while hot money inflows could grow to $6.7 billion.
Alegre said the financial account posted net inflows despite external risks in the first six months of the year. The financial account stood at $7.2 billion as of end-June.