Philippines to post huge twin deficits this year

The Philippines will continue to post large deficits for the current account and budget this year due to an expected increase in rice imports and infrastructure spending, Nomura Global Markets Research said.

“We expect the current account deficit (CAD) to remain large and fiscal consolidation targets to be challenging this year,” it said in a report.

“In our view, prioritization of infrastructure projects under the ‘Build Better More’ program and a substantial reduction of rice import tariffs will result in the current account deficit remaining large, make fiscal consolidation more challenging and could imply persistence in currency weakness.”

The government is aiming to spend 5-6% of gross domestic product (GDP) on infrastructure annually. The Marcos administration has approved 185 infrastructure flagship projects valued at PHP 9.55 trillion.

“The upshot is a still-large CAD, which we forecast at 2.7% of GDP in 2024, well above the pre-pandemic (2016-2019) average of 1.1% and reflecting, in part, rising capital goods and raw materials imports due to infrastructure implementation,” Nomura said.

The central bank projects a USD 4.7-billion current account deficit for 2024, equivalent to 1% of GDP.

The current account deficit stood at USD 1.7 billion in the first quarter, equivalent to 1.6% of GDP.

Meanwhile, Nomura also sees the National Government’s (NG) fiscal deficit reaching 5.9% of GDP this year. This is slightly higher than the government’s deficit ceiling of 5.6% of GDP, equivalent to PHP 1.48 trillion.

Nomura said its higher deficit-to-GDP forecast is due to the Philippine government’s “challenging” fiscal targets.

“Our recent discussions with officials suggest the risk of a repeat of last year’s underspending is low, thanks to catch-up plans and recent budget reforms,” it added.

Latest data from the Treasury showed that the NG’s budget deficit in the January-May period widened by 24.06% to PHP 404.8 billion.

The Budget department last month tasked underspending government agencies to submit “catch-up plans” to address low budget utilization.

Meanwhile, Nomura said that the recent reduction in rice import tariffs will also contribute to the twin deficits.

“Food importation will remain a recourse of the government to increase domestic supply amid continued weather-related risks and now likely higher rice import demand due to lower tariffs,” it said.

President Ferdinand R. Marcos, Jr. last month signed Executive Order No. 62, which slashed tariffs on rice imports to 15% from 35% previously, until 2028.

The Department of Agriculture expects rice imports to hit 3.9 million metric tons (MMT) this year, while the US Department of Agriculture expects imports to reach 4.6 MMT.

“The tariff cut also implies some forgone fiscal revenues of about 0.05% of GDP, by our estimates,” Nomura said.

The Finance department earlier estimated that foregone revenues from the tariff cut could reach up to P22 billion.

Due to the tariff cut, Nomura also cut its inflation forecast to 2.8% this year from 3.7% previously. The BSP expects full-year inflation to settle at 3.3%.

The government’s efforts to ramp up infrastructure spending as well as the recent tariff cut may also lead to “persistent foreign exchange (FX) weakness.”

“Relatively large twin deficits under BSP’s flexible market-determined FX regime could imply persistence in currency weakness,” it added.

The peso closed at P58.795 against the dollar on Tuesday, weakening by 14.5 centavos from its P58.65 finish on Monday.

The peso has been trading at the P58-per-dollar level since May. — Luisa Maria Jacinta C. Jocson