Philippines current account surplus declines in 1H16, trade deficit likely to fall further

Philippines’ current account surplus declined during the first half of this year, after comments from Bangko Sentral ng Pilipinas (BSP) last week suggested that a revision to the central bank’s USD 5.8 billion  2016 current account (C/A) surplus forecast is forthcoming.

The current account surplus came in at USD 0.8 billion in 1H16, well below the USD 5.3 billion registered during the same period a year ago. As indicated by the BSP, the real drag on the C/A balance is the growing trade deficit. Indeed, exports of goods are set to fall another 5 percent this year. That the weakness is beginning to show in the electronics cluster is also a worry, given how this sector has emerged as a key driver of growth in recent years, DBS reported.

At the same time, however, the narrowing of the C/A surplus may not necessarily be a bad thing at all. By far, the cause of the increasingly high trade deficit is robust import growth. On a monthly basis, imports of capital goods are trending at 20 percent higher than where they were at the end of 2015.

Further, up to July 2016, total imports are already 50 percent more than the amount during Jan-Jul a year ago. Clearly, the narrowing of the C/A surplus merely reflects this rapid rise in domestic investment, which will only support long-term growth potential. And at a time when foreign reserves coverage of short-term external debt remains above 5x, the external liquidity position is unlikely to pose any real threat anytime soon, the report added.