BSP sees narrower balance of payments deficit in 2023, 2024

The Bangko Sentral ng Pilipinas (BSP) is expecting the country’s balance of payments (BOP) to yield a deficit, albeit narrower, this year and next as it takes into consideration a confluence of external risks that could potentially hamper global growth.

The BOP consists of a country’s economic transactions with the rest of the world during a specific period, including trade in goods, services, and capital.

A surplus means more funds entered the country, while a deficit means more funds exited.

In its 2023-2024 BOP outlook released Friday, the BSP’s policy-setting Monetary Board said that the overall payments position of the Philippines registered a lower deficit of $1.2 billion this year from the $7.3 billion BOP shortfall recorded in 2022.

The latest projection is also slightly narrower than the $1.6-billion deficit forecasted by the BSP in its March 2023 projection exercise.

“This development is underpinned largely by a narrower merchandise trade gap, as goods imports growth is expected to slow down sharply following the pullback in international prices of major commodities, particularly fuel,” the BSP said.

“This is accompanied by a sustained fall in goods exports as global demand weakens further,” the central bank said.

The BSP added that the global optimism arising from the reopening of China’s economy, remains tentative given the numerous domestic challenges, among which is declining property sales and real estate investment in the Asian powerhouse.

“Nonetheless, prospects for business process outsourcing (BPO) and tourism industries remain positive, alongside stable remittance inflows from overseas Filipinos (OFs), providing support to the current account,” the central bank said.

However, inflows from foreign direct investments (FDIs) were expected to be lower at $9 billion than the $11-billion seen in the previous projection round due to slowdown in foreign investments globally.

“This is attributed to the observed geoeconomic fragmentation of FDIs and slowdown in the globalization process triggered primarily by rising geopolitical tensions between major economies,” the BSP said.

“Emerging market economies are more susceptible to FDI relocation as most rely heavily on capital investment from distant countries,” it said.

The central bank added that emerging financial market vulnerabilities combined with the after-effects of monetary policy adjustments in advanced economies, such as the US, “cast a shadow on the country’s external sector prospects for the year.”

For 2024, the BSP expected the overall BOP position to post a slightly lower deficit of $500 million.

The central bank said the lower BOP deficit forecast next year was mainly on the foreseen normalization and return to pre-pandemic levels of global and domestic economic activity.

The International Monetary Fund, in particular, expected global economic activity and trade to rise by 3% and 3.5% in 2024, respectively - higher than their 2023 forecasted growth rates.

“These developments bode well for the country’s trade and investments prospects for next year, with the downturn in the global semiconductor market predicted to bottom out by the middle of 2023 and into 2024,” the BSP said.

“Global demand for electronics, which remains a key growth driver of Philippine exports, is therefore seen to make a recovery,” it added.

The central bank said goods imports could continue to benefit from the government’s infrastructure projects “lined up over the medium term and increased domestic production capacity, shoring up inward shipments of capital goods as well as raw materials and intermediate goods.”

Likewise, growth prospects for the BPO and travel sectors remain on a steady course.

“The latter is forecasted to exceed its pre-pandemic level by 2024 buoyed by much-improved international mobility and supported by government-led tourism promotion programs to regain market losses from the pandemic,” the BSP said.

Remittance inflows from OFs would expand at a steady pace as Filipino workers fill in for the labor shortage resulting from pandemic-induced job losses and aging populations in host economies.

On the other hand, foreign investment inflows were seen to improve by 2024 as FDI was seen to hit $11 billion amid “better domestic economic growth prospects and the expected finalization of the rules and regulations governing recently enacted FDI-supportive legislation.”

“The country’s comfortable level of international reserves likewise continues to provide a sufficient buffer against external shocks and a source of confidence for Philippine external sector prospects moving forward,” the BSP said.

The central bank said its latest projections 2023 and 2024 reflect mainly the slightly weaker global growth prospects for this year and the next relative to the assumptions of the previous projection exercise.

“Nonetheless, the BSP remains vigilant and stands ready for any necessary policy action to support its stabilization function and, in turn, help engender continued resilience of the domestic economy,” it said. — DVM, GMA Integrated news