Headwinds sent Philippines' dollar position into deficit in 2022

MANILA, Philippines — Persistent headwinds in 2022 — a strong dollar and wider trade deficits — burdened the country’s dollar position and put it in a deficit.

For 2022, the country’s balance of payments (BOP) amounted to a deficit of $7.3 billion. This was a far cry from the $1.3 surplus recorded in 2021, the Bangko Sentral ng Pilipinas reported on Thursday. 

The BOP in December amounted to a surplus of $612 million in December 2022. The dollar position reversed the outturn in November, when it landed a $756-million deficit.  

The BOP is a summary of the country’s transactions with the world for a specific period of time. A deficit happens when foreign fund outflows exceed inflows.

As it is, the BSP already raised its projection for the BOP position to hit $11.2 billion deficit this year, higher compared to the central bank's previous forecast of $8.4 billion deficit.

The surplus in December trimmed the BOP’s deficit. 

The BSP attributed the BOP’s deficit position to a wider trade deficit in 2022, as the US dollar strength sent the peso to historic lows. As a result, the foreign currency swings sent imported fuel purchases to costly territory, which strained the country’s trade balance. Likewise, the reopening of the domestic economy in the second quarter rejuvenated consumer spending.

The BOP amounted to a surplus in December owing to “inflows arising mainly from the BSP’s net foreign exchange operations and net income from its investments abroad.” 

Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said that the surplus in December “rejected” the increases in the country’s dollar reserve and the peso’s gains towards the end of 2022. 

“Narrowing trade deficits due to moderating energy prices also contributed as did the return of portfolio flows on expectation for a less aggressive monetary tightening in the coming months,” he said in a Viber message. 

Data broken down showed the country’s dollar reserves inched up to $96.1 billion as of end-December. The level represents a buffer equivalent to 7.3 months’ worth of imports of goods and services. 

This is about 5.9 times the country’s short-term external debt based on original maturity and 3.9 times based on residual maturity. 

Domini Velasquez, chief economist at China Banking Corp., expects the country's dollar position to receive some much-needed help from a decreasing imports bill.

"In 2023, we expect the BOP deficit to continue narrowing due to lower import bill (both prices and demand for imported items) as economic growth moderates. Moreover, there is some upside opportunity for exports due to China's reopening," she said in a Viber message.