Think tank sees trade deficit rising to $50 billion

THE country’s trade deficit is expected to swell to $50 billion this year on the back of more expensive imports which have been affected by the war in Eastern Europe, according to a local think tank, echoing an earlier prediction by economists.

In the midyear economic briefing of the First Metro Investment Corp-University of Asia and the Pacific (FMIC-UA&P) Capital Market Research on Wednesday, UA&P senior economist Victor A. Abola said this is $7 billion or about 16 percent higher than the $43 billion posted in 2021.

The Philippine Statistics Authority (PSA) data earlier showed that the trade deficit in May has reached $5.68 billion and the deficit in January to May 2022 has already reached $25 billion.

“The trade deficits have been ballooning and have reached a record high of $43 billion in 2021, which we expect to hit more than $50 billion in 2022. The peso depreciation is the corrective mechanism by which this will be lowered,” Abola said.

His comment came a day after local economists, remarking on the trade deficit in May, said more expensive fuel and food items as well as the soaring dollar could bloat the trade gap.

For this year, the FMIC-UA&P expects the dollar-peso rate to average P54 to P55 to the dollar and inflation to reach 5 percent.

However, the think tank expects GDP growth to hit the lower end of its 6 to 7 percent forecast that it made at the start of the year.

Despite the outlook of higher inflation and slightly lower growth, Abola said a credit rating downgrade is still not expected this year and even next year.

Remittances

THIS will be driven by the steady source of remittances which will help drive consumer spending, which accounts for 70 percent of the country’s GDP. Abola noted that remittances would also benefit greatly from the depreciation of the peso.

The think tank said OFW remittances, which increased to $35 billion in 2021, will likely grow by 3.5 to 5.5 percent this year.

Another important factor, Abola said, is the growth of the Business Process Outsourcing (BPO) sector, which is expected to post a growth of 6 percent this year. The BPOs would also benefit from the peso depreciation.

“So my call is that we will have a low probability of downgrading in 2022 to 2023 and unlikely further on as we grow faster,” Abola stressed.

Abola also noted that the President’s choice of economic managers is “excellent,” stating that the economic team is now composed of the “best of the best” for the job. He added that the economic managers have experience and the integrity for the posts they occupy.

This means, Abola said, that the choice of economic team went beyond partisan lines, thus creating a formidable group.

He also noted that the President’s decision to take on the Agriculture portfolio says a lot about the administration’s commitment to the sector.

With this, Abola said the President may actually be “generating positive” for the country’s economic growth. He also agreed with some policies of the administration such as focusing on agriculture and infrastructure.

“We’re thankful for their confidence and trust in us. We’ll give our best. As always, if we honestly believe that we’ve done the best we can, given the conditions and circumstances, we don’t have anything to prove or regret. We only have to be thankful for the opportunity and privilege to serve our country and people,” Socioeconomic Planning Secretary Arsenio M. Balisacan told the BusinessMirror on Wednesday.

Growth drivers

IN a statement, the think tank said the country’s economic growth will be driven by sustained domestic demand—household consumption, government and investment spending—which grew by 11 percent in the first quarter of the year.

As central banks continue to rein in elevated inflation, interest rates are expected to rise from its current levels by an average of 100 basis points across the curve.

In the capital markets, corporate bond issuances in the first half have already exceeded last year’s full year volume. With the current interest rate environment, corporate bond issuances could slowdown in the second half of the year.

In the equities market, earnings per share (EPS) growth is seen to hit 10 percent and 17x PE. The Philippine Stock Exchange index (PSEi) is projected to reach 7,100 by yearend fueled by attractive valuation and positive investor sentiment.

Expected to drive the market upward include the new government’s pronouncement of the continuation of policy reforms; economic expansion; infrastructure rollout; and market-friendly reform measures.

Image credits: Qilai Shen/Bloomberg