INTERNATIONAL think tank Fitch Solutions warned that the Philippines could face challenges managing its current account deficit over the longer term, as domestic goods demand recovers from the pandemic shock.
In a research analysis published on Thursday, the research arm of the Fitch Group said the country’s current account could revert to a deficit status as early as next year after posting a surplus of 3.6 percent of the country’s output in 2020.
The research group forecasts a smaller current account surplus for this year, at 1.3 percent of the country’s gross domestic product (GDP).
“With the economy still hampered by outbreaks of Covid-19 and resultant on-and-off re-tightening of domestic restrictions, we expect the rebound in import demand to be moderate and the Philippines to post another current account surplus in 2021,” Fitch Solutions said.
“However, as the economy gradually climbs back to pre-pandemic output levels in 2022, we anticipate the current account to slip back into deficit,” it added.
“Over the coming years we forecast this deficit to widen as demand for goods imports rebound, driven in particular for a rising need for commodity imports as the country’s infrastructure needs grow,” Fitch Solutions further said.
The expected deficit could be partially tempered, according to the think tank, by remittance flows and services exports. However, the extent to which the services exports can thrive will depend on improved infrastructure and the effectiveness of reforms.
“Without attracting foreign direct investment [FDI], funding such plans may tip the Philippines’s towards more volatile ‘hot money’ inflows, which would make the running of current account deficits less stable over the long term,” Fitch Solutions said.
The country’s gross international reserves (GIR) and net external creditor position is also expected to limit risks from running a current account deficit through the medium term.
Earlier this week, the research firm slashed its growth forecast of the Philippines for the year amid the country’s struggle with new Covid-19 outbreaks.
The research arm of the Fitch group said it now projects the country to grow by 4.2 percent for the year, down from their earlier projection of 5.3 percent, citing the continued disruptions to output from rising Covid-19 cases.
The new projection came amid the Philippine Statistics Authority’s (PSA) announcement that the country’s gross domestic product in the second quarter of the year hit 11.8 percent, effectively ending the recession in the country.