2017 BoP headed for large deficit

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A country’s balance of payments is a numerical representation of the state of its economic relations with the rest of the world. Negative bottom lines for the BoP’s two components—the capital account and the current account—indicate that the economic relations between a country and the rest of the world are in a bad state: foreign institutions and individuals pulling their funds out of that country, foreign companies disinclined to make investments there, foreign importers and consumers refraining from buying its goods, tourists visiting it in decreasing numbers and international and foreign aid-givers reducing the levels of their assistance. Positive current-account and capital-account balances, on the other hand, indicate an opposite state of affairs.

Recent reports of the Bangko Sentral ng Pilipinas, the agency responsible for its computation and management of the BoP, suggest that things have not been going well for the Philippine economy’s external sector.

One report stated, that in July—two months ago—this country’s BoP posted a deficit of $678 million, a reversal of the $215 million surplus posted during President Rodrigo Duterte’s first month in office. The July 2017 deficit was the largest since the $1.671 billion deficit registered in November 2016 At end-July the BoP was in deficit to the extent of $1.384 billion, the report stated.

Another BSP report indicated that in November 2016 the peso posted its lowest exchange rate against the US dollar in 11 years. At that point the peso breached the 51-to-a-dollar mark for the first time since 2006. For several months the peso-dollar rate has gravitated around P51.40.

The third BoP report dealt with the current-account component of the BoP. The report noted the sustained negative trend of the account. “The BSP’s foreign exchange operations (have been) driven by increasing market demand for foreign exchange largely to finance capital goods imports.” The monetary authority said that the surge in imports of capital goods was (in support of) the growing economy as well as the government’s plan to ramp up infrastructure investments. As “imports growth outpace exports growth,” the BSP expects the current account of the BoP to swing from a 2016 surplus of $600 million to a 2017 deficit of $600 million.

Reading these reports, the conclusion is inescapable that things are not going well for the external sector of this country’s economy. These bad things can be allowed to go uncorrected at the risk of sustained Philippine economic growth.

BSP has indicated that it expects the BoP to post a deficit of around $500 million in 2017. A $400 million deficit was recorded last year.

What is the basis for the BSP’s expectation of a $500 million BoP deficit in 2017? “The BSP expects that the recovery and higher-than0expected overseas (Filipino worker) remittances and business process outsourcing revenues will mitigate the current account (deficit) and the overall balance of payments for the whole year 2017,” a BSP statement has said.

Taking into consideration all the circumstances attending the trend of the BoP—the political as well as the economic circumstances—I find it difficult to accept a $500 million BoP deficit forecast for 2017. With a highly distracted political leadership, an uncertainly financed “Build, Build, Build” infrastructure program and a weak recovery of exports, I think that this country is headed for a 2017 BoP deficit considerably higher than $500 million.

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