Bangko Sentral expects trade deficit to drop to $10.7 billion

MANILA, Philippines - The country’s trade deficit for this year would be smaller than originally expected, dropping to $10.7 billion as a result of a sharp drop in global trade.

Preliminary projections made by the Bangko Sentral ng Pilipinas (BSP) indicated that as of February this year, the emerging scenario indicated a dramatic narrowing in the trade deficit compared with the projections made last year.

The last official projection made by the BSP was in August 2008 when the trade deficit for 2009 is projected to hit $16.5 billion mainly because of rising oil prices.

Because of the dramatic shift in global economic outlook, however, the BSP said its projections were also shifting significantly because the data was still moving around with very little certainty.

Based on the latest projections, the BSP indicated that the improvement in the trade deficit was due to the anticipated decline in exports and imports which would wipe out a significant portion.

The BSP said the expected decline in the value of imports, for instance, was expected to exceed the decline in exports in 2009, leading to a narrower trade gap.

As of early February, the BSP projected that exports would decline by 8 percent this year and imports were also projected to decline by 8 percent.

The decline in the country’s exports would be the result of the slowdown in some of the country’s major trading partners and the outright contraction in others such as the US, Japan, Europe and East Asia.

The BSP said this would have adverse repercussions on the demand for and prices of leading export commodities particularly electronics which had started to contract early this year.

The decline in the trade deficit was part of the reason why the BSP said it expected the country’s balance of payments to remain in surplus level this year.

The most recent projection made by the BSP indicated that the BOP surplus would be about $700 billion, with the country’s foreign exchange reserve reaching $37.5 billion this year.

The gross international reserve (GIR) is the sum of all foreign exchange flowing into the country and the balance of payment (BOP) position is the remaining balance net of all external payments for debt servicing and imports.

The BSP said remittances from overseas Filipinos will reach $16.4 billion this year, unchanged from the same level in 2008—marking the first time that remittances would not expand since the country stated exporting workers.

“There is a very real danger that the global economy would weaken more and the Philippines has to face this,” Tetangco said. “We might be an island of calm but we are at risk of a negative feedback loop if credit markets freeze up and economic activities grind to a halt.”

With weakening inflows, Tetangco said the gross international reserves would be $37.5 billion to $38.5 billion, slightly lower than earlier projections which placed the expected level at $39 to $40-billion for this year.

Tetangco said the country’s relatively robust external position would allow the economy to tolerate inflationary pressures while supporting sustainable growth trajectory that would lead to a 3.7 to 4.4 percent expansion in gross domestic product.

The BOP is keenly watched by both credit rating agencies and investors since it was one of the major determinants of the country’s ability to continue servicing its external debt and other payments.

The BSP had originally projected that the BOP surplus would reach $2.3 billion but the slowdown in exports, remittances, investments and other inflows would weight down the reserves, offsetting the relief from lower oil prices.

But the central bank chief said weakening imports would also ease some pressure on the country’s reserves sine global demand was expected to fall even more dramatically this year.

As global consumption slows down, the country’s import-dependent exports would also weaken and this would hit the BOP from two opposing sides: on the one hand, there would be less dollar outflows paying for imported components and on the other, there would also be less inflow from exports.