Overall BOP Position to Post Lower Deficits in 2023 and 2024

The Monetary Board of the Bangko Sentral ng Pilipinas approved the new set of 2023 and 2024 balance of payments (BOP) projections during its 16 March 2023 meeting.

The current set of BOP projections incorporates latest available data and recent emerging developments.

The emerging BOP forecasts for 2023 and 2024 are underpinned by expectations of subdued global and domestic economic activity this year followed by slightly improved activity by next year.

Global growth prospects in 2023 will continue to be weighed down by broadly the same set of forces and risk factors highlighted in the December 2022 BOP projection exercise.

Persistent high inflation, the protracted Ukraine-Russia conflict, and pandemic-related legacies remain the key risks to the country’s external sector outlook, albeit with lesser adverse impact relative to previous estimates (based on the October 2022 IMF WEO).

Modest upward revisions in IMF 2023 GDP growth forecasts for major trading partners such as the US, Euro area, Japan, and China reflect the observed domestic demand resilience in these economies in 2022.

On the domestic front, persistent high inflation and the expected easing of pent-up demand, as the impact of policy rate increases on the economy takes effect, are seen to dampen the growth forecast for this year.

Nevertheless, the impact of BSP monetary policy action and the restoration of inflation to a target-consistent path are seen to support business and consumer sentiment.

Overall, however, the external outlook for the next two years is likely to remain subdued.

For 2023, the external sector is seen to register modest improvements relative to the December 2022 forecast round.

This is driven mainly by the better than earlier anticipated actual data for key BOP accounts. These include latest data on the foreign direct investments (FDIs), business process outsourcing (BPO), and the tourism and travel-related accounts. Sustained remittance inflows from overseas Filipinos (OFs), driven by renewed demand from OF-destination countries, is also seen to support the BOP outlook.

The recent reopening of China’s economy could likewise yield positive cross-border spillovers from resumption of international business and travel as well as a pickup in Chinese consumer spending, which could in turn revitalize demand for Philippine export products and services.

From a trade perspective, possible gains from China’s recovery can soften the impact of a broader downturn in global demand on Philippine exports. Based on actual PSA data for 2022, China ranked as the third largest destination of Philippine exports with a share of 13.9 percent.

More broadly speaking, significant progress in mobility conditions and easing travel protocols across jurisdictions are likely to further prop up travel and tourism-related activities as seen in the strong influx of foreign tourists to the Philippines, especially during the latter part of 2022.

In addition, the recent launch of the Philippine Development Plan 2023-2028 that highlighted the government’s strategies and programs as well as the ratification of the Regional Comprehensive Economic Partnership (RCEP) agreement are expected to bolster trade and investment prospects for the year.

The deceleration in global fuel prices from its 2022 levels is also another key consideration coming into play in this forecast round.

At the same time, the latest forecasts reflect continued downside risks to external demand conditions, largely stemming from monetary tightening by major central banks in 2022 to ward off inflation.

Uncertainty in monetary adjustment along with potential ripple effects from banking concerns (the most recent collapse of the Silicon Valley Bank in the US) could likewise contribute to financial market volatility and dampen external demand.

For 2024, the overall BOP position is anticipated to remain in deficit territory with a smaller deficit than in the previous forecast, consistent with the normalization of global and domestic economic activity.

The IMF forecasts global trade growth to rise to 3.4 percent in 2024 from a projected 2.4-percent expansion in 2023. Electronics and mineral products are to remain as growth drivers for exports next year and over the medium term, while goods imports could continue to be supported by private and public infrastructure investments and improved domestic production capacity shoring up inward shipments of capital goods and raw materials/intermediate goods, respectively.

Moreover, with the resumption of economic activity in most jurisdictions, high-value services exports are expected to post a robust rebound. Resilient foreign exchange inflows from travel and tourism-related activities, BPO transactions, as well as OF remittances, are expected to remain as key growth drivers for the external sector next year.

The full operationalization of investment-related structural reforms and trade agreements also bode well for both foreign direct and portfolio investments for next year. The sustained build-up of international reserves is expected to reinforce positive investor sentiment and bring in investment flows, despite the current challenging global environment.

On the downside, weaker global growth, a potential stalling of China’s economic recovery, an escalation of the Ukraine-Russia war, and increased financial market volatility, could adversely influence external sector prospects over the near term.

2023-2024 Balance of Payments (BOP) Outlook

Emerging as of Q1 2023

*Approved by the Monetary Board (MB) on 9 December 2022

p/ Preliminary estimates

a/ Overall BOP position January 2023 posted a surplus of US$3.1 billion, a reversal from the US$102 million BOP deficit recorded in the same month last year.

b/ Gross international reserves (GIR) as of end-February 2023 amounted to US$99.3 billion, from the end-January 2023 level of US$100.7 billion.

c/ Negative entry indicates inflow.

Note:  Numbers may not add-up due to rounding