The Monetary Board has recently approved the new set of 2023 and 2024 balance of payments (BOP) projections during its March 16, 2023 meeting. The current set of BOP projections incorporates the latest available data and 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 be weighed down by broadly the same 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 critical risks to the country’s external sector outlook, albeit with lesser adverse impact than 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, the persistently high inflation and the expected easing of pent-up demand, as the impact of policy rate increases on the economy takes effect, dampen the growth forecast for this year.
External outlook likely to be subdued in the next 2 years
In a BSP report, it was noted that the impact of the BSP monetary policy action and the restoration of inflation to a target-consistent path is 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 development is driven mainly by the better-than-earlier anticipated actual data for key BOP accounts. These include the latest data on foreign direct investments (FDIs), business process outsourcing (BPO), and tourism and travel-related accounts.
Sustained remittance inflows from overseas Filipinos (OFs), driven by renewed demand from OF-destination countries, are also seen to support the BOP outlook. The recent reopening of China’s economy could yield positive cross-border spillovers from the resumption of international business and travel and a pickup in Chinese consumer spending, which could 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 for 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 substantial influx of foreign tourists to the Philippines, especially during the latter part of 2022.
In addition, the recent launch of the Philippine Development Plan (PDP) 2023-2028, which highlighted the government’s strategies and programs, and the ratification of the Regional Comprehensive Economic Partnership (RCEP) agreement, may be expected to bolster the country’s trade and investment prospects for the year.
The deceleration in global fuel prices from their 2022 levels is another critical consideration in this forecast round. At the same time, the latest forecasts reflect continued downside risks to external demand conditions, mainly stemming from monetary tightening by major central banks in 2022 to ward off inflation.
Uncertainty in monetary adjustment and potential ripple effects from banking concerns (the most recent collapse of the Silicon Valley Bank in the US) could contribute to financial market volatility and dampen external demand.
Overall BOP position to remain in deficit in 2024
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 will remain growth drivers for exports next year and over the medium term. At the same time, 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.
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, and OF remittances are expected to remain key growth drivers for the external sector next year.
The full operationalization of investment-related structural reforms and trade agreements also bodes well for both foreign direct and portfolio investments for next year. The sustained buildup of international reserves is expected to reinforce positive investor sentiment and increase investment flows, despite the 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.
The BSP emphasizes forecast limitations, particularly given the buildup of external challenges. The BSP will continue to monitor closely emerging external sector developments and risks and how these may impact the BSP’s fulfillment of its price and financial stability objectives.