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PHL current account seen under pressure from inflation

THE DEFICIT in the Philippine current account will take up a larger share of gross domestic product (GDP) as inflation makes commodity imports more expensive, Nomura Global Markets Research and ANZ Research said.

The two research houses released notes after the Bangko Sentral ng Pilipinas (BSP) raised its current account deficit forecast for the year last week.

In response, Nomura Global Markets raised its 2022 current account deficit forecast to 3.5% of GDP from 2.8% previously.

The projections were contained in a report, “Philippines: The current account deficit reached a record high in Q1,” prepared by Nomura Chief ASEAN (Association of Southeast Asian Nations) Economist Euben Paracuelles and analyst Rangga Cipta.

“We believe there is a risk that the full-year 2022 (current account deficit) will be significantly wider than our forecast, which we just raised to 3.5% of GDP from 2.8% previously (Consensus: 3.0%). Still, the drivers of the widening are the same,” Nomura Global Markets said.

“High energy prices will likely continue to lead to a terms-of-trade deterioration, but the Philippines is also among the most vulnerable to surging global food prices.”

Philippine inflation was 5.4% in May, the highest in three and a half years, exceeding the BSP’s 2-4% target range, which is expected to trigger rate hikes until inflation is brought back in line with government targets.

The BSP last month raised its average inflation estimate to 4.6% this year from 4.3%.

“Moreover, as we flagged before, the new government will likely still prioritize infrastructure implementation, which should boost imports of capital goods and raw materials further,” Nomura Global Markets said.

ANZ Research said it forecasts a current account deficit equivalent to 3.8% of GDP in 2022, which would be the highest  since the Asian Financial Crisis.

ANZ Research said in a quarterly report that the “divergence between prices of non-discretionary items and headline inflation is evident in almost all economies and is particularly pronounced in the Philippines and Thailand.”

It said the peso will likely weaken further as a result.

“A strong recovery in domestic demand at a time when the trade deficit is at a record high and inflation running above target mean more downward pressure on the peso if the Bangko Sentral ng Pilipinas (BSP) does not tighten aggressively to rein in demand,” ANZ Research said.

“The Philippines’ current account deficit is forecast to widen to levels last seen in 2000, which is consistent with a much weaker currency.”

The BSP said on Monday that it will likely raise interest rates by 25 basis points (bps) on Thursday, despite market expectations of more aggressive tightening.

A BusinessWorld poll last week showed that 15 out of 16 analysts expect a rate hike at the June 23 meeting. Nine analysts expect the Monetary Board to raise rates by 25 bps, while six see an increase of 50 bps.

Felipe M. Medalla, current Monetary Board member and incoming BSP governor, said he expects two more rate hikes this year and possibly more if elevated inflation persists.

After June 23, the Monetary Board has four more policy meetings scheduled this year — Aug. 18, Sept. 22, Nov. 11, and Dec. 15. — Keisha B. Ta-asan

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