The Department of Finance remains optimistic of the country’s economic growth trajectory in the months ahead despite the record deficit of $7.9 billion in current account registered in 2018.
In an economic bulletin over the weekend, the DoF said the current account—one of the main components of the balance of payments—remained financeable even as the deficit rose to 2.4 percent of GDP in 2018.
“Foreign investors and lenders find the country an attractive investment destination,” the DoF said.
“Maintaining good fundamentals by keeping the twin deficits—budget and current account—manageable thru maintaining interest rates at the level that raises both the volume of savings and investments will enable the country to sustain rapid economic growth in the medium-term,” DoF said.
The current account deficit widened from a negligible 0.7 percent of GDP ($2.1 billion) in 2017 to 2.4 percent ($7.9 billion) in 2018 due to the significant rise in imports of capital goods.
But the DoF said the deficit was financeable given the surplus in services trade and income balances and the upsurge in foreign investment.
The current account is the balance of exports and imports of goods and services and income balances. A rising current account deficit implies that the country is using more foreign savings—both investment and borrowing— to finance local investment.
It also implies that interest of foreign investors and lenders in the local economy is growing. The economy is expected to grow between 6 and 7 percent this year on the back of higher fiscal spending, robust domestic demand and investments.
According to the Philippine Statistics Authority, the trade-in-goods deficit for full-year 2018 rose by 21.9 percent to $49 billion, reflective of the 9.4-percent expansion in imports of goods and the 0.3 percent decline in exports of goods.
Exports of goods dropped to $51.7 billion in 2018 from $51.8 billion in the previous year owing mainly to lower export shipments of coconut and mineral products.
Imports of goods expanded to $100.7 billion in 2018 from $92 billion in 2017. The 9.4 percent increase was attributed to higher imports across all major commodity groups, notably raw materials and intermediate goods, indicating increased domestic production activity.
Imports of raw materials and intermediate goods grew by 16.7 percent to reach $37.6 billion, supported by increased importation of manufactured goods (20.4 percent) and higher purchases of materials and accessories for the manufacture of electronic products (60 percent).
Imports of mineral fuels and lubricants, capital goods, and consumer goods expanded by 21.3 percent, 5 percent, and 7.6 percent, respectively.
Net receipts in the trade-in-services account aggregated $10.5 billion in 2018, 20.7 percent higher than the $8.7 billion net receipts posted last year. This developed on account largely of increased net receipts in technical, trade-related and other business services; manufacturing services; and telecommunications services, combined with lower net payments in travel services.
The country’s balance of payments’ position ended 2018 with a deficit of $2.31 billion driven mainly by the widening trade deficit.
The deficit was better when compared to the government target of a $5.5-billion deficit for the year. But it was significantly bigger than the deficit of $863 million posted in 2017.
For the month of December alone, the BOP posted a surplus of $2.44 billion, significantly higher than the $917-million surplus in the same month of the previous year.
Inflows in December 2018 stemmed mainly from the BSP’s foreign exchange operations, the government’s net foreign currency deposits, and BSP’s income from its investments abroad during the month.
These were partially offset, however, by the payments made by the government for its foreign exchange obligations during the month in review.
The reported BOP position in 2018 reflected the final gross international reserves level of $79.19 billion as of end-December 2018.
For 2019, the Bangko Sentral projected the BOP to post a lower deficit of $3.5 billion, which is equivalent to 1 percent of gross domestic product for that year.
Current account is expected to post a bigger deficit of $8.4 billion in 2019.
The balance of payments summarizes the country’s economic transactions with the rest of the world, with a deficit indicating that foreign exchange payments outstripping receipts and a surplus the reverse.
Persistent surpluses help build up the country’s gross international reserves, an ample supply of which helps prop up the peso against the US dollar and keep domestic inflation at bay.