Nomura sees wider PHL current account deficit

The Philippines’ current account gap is expected to widen next year, according to Nomura Global Markets Research, reflecting a surge in imports amid a recovering economy and rising commodity prices.

“We still forecast a gradual widening of the current account deficit to 2.5% of gross domestic product (GDP) in 2025 from 2.3% in 2024, driven by the same factors that led to the return of the deficits,” Nomura analysts Euben Paracuelles and Nabila Amani said in a report.

They did not provide an amount.

In the first half of the year, the country’s current account deficit stood at $7.1 billion, accounting for 3.2% of GDP.

The Bangko Sentral ng Pilipinas (BSP) estimates the current account deficit to reach $6.8 billion this year, equivalent to 1.5% of economic output. It expects the deficit to hit $5.5 billion or 1.1% of GDP next year.

“From a savings-investment perspective, the swing to the current account deficit reflects a pickup in investment ratios, while savings ratios have fallen, especially after the pandemic,” Nomura said.

It also noted that the current account deficit has been driven by the widening goods trade deficit.

The Philippines’ trade deficit widened by 18.05% to $4.87 billion in July, according to data from the local statistics agency.

In July, the value of imports increased by 7.2% year on year to $11.12 billion, the fastest rise since 13% in April. It was also the highest since March 2023.

The country’s balance of trade in goods has been in the red for nine years.

“Unlike regional peers, goods exports have remained relatively flat over the past several years, likely reflecting the lack of industrial policy to move up the value chain, particularly in the electronics sector (60% of goods exports),” Nomura said.

“In contrast, imports have more than doubled, reflecting rising domestic demand and an increasingly supply-constrained economy.”

It noted the persistent rise in food imports, particularly rice, reflecting “low productivity in the agriculture sector and the vulnerability to weather-related shocks and external risks.”

In June, President Ferdinand R. Marcos, Jr. issued Executive Order No. 62, cutting tariffs on rice imports to 15% from 35% until 2028.

“The country remains one of the region’s largest oil importers and is therefore susceptible to international crude oil price hikes,” it added.

Nomura also said the trade deficit is “no longer being fully offset by the sum of worker remittances (secondary income) and receipts from outsourcing and tourism sectors (services balance).”

Data from Nomura showed that in nominal dollar terms, worker remittance growth has slowed to 3.1% per year since 2018 from the 6% average from 2011 to 2017.

“Adjusted for inflation and in local currency terms, real remittance growth is even lower, at just 0.7% on average,” it added.

Meanwhile, Nomura said the Philippines’ balance of payments (BoP) has undergone “structural changes” in the past decade.

“First, the current account balance has shifted to a deficit from a surplus since 2016 (except during the pandemic),” it said. “Net unclassified items have also added to the deficit.”

The capital and financial account surplus has also “expanded significantly” after the pandemic, the central bank said and has remained elevated due to external state loans.

Financial account outflows stood at $10.5 billion in the first half, according to data from the central bank.

“Given these new BoP dynamics, we look at a ‘broad basic balance,’ which is showing an increasing deficit and implies greater sensitivity of the BoP to swings in portfolio flows and hence to risk-on/risk-off episodes,” Nomura said.

The country’s BoP level stood at a $1.6-billion surplus as of August.

“The composition of the capital and financial surplus has changed, with external loans now larger than net foreign direct investments (FDI), which indicates a new way of current account deficit financing,” Nomura said.

“A closer look at these loans shows a healthy pipeline through 2025, but the drawndowns are irregular and only partially converted into local currency, contributing to BoP volatility,” it added.

The central bank expects the BoP to post a surplus of $2.3 billion this year, equivalent to 0.5% of GDP. – Luisa Maria Jacinta C. Jocson, Reporter