The Philippines' Surging Current Account Deficit in H1 2025: Implications for Global Investors

The Philippines' current account deficit in the first half of 2025 has been a focal point for global investors, offering a complex narrative of vulnerability and resilience. By Q1 2025, the deficit had widened to $4.2 billion (3.7% of GDP), nearly doubling from $2.1 billion in Q1 2024. This surge was driven by a 14.7% increase in the merchandise trade deficit, as imports outpaced exports, and a contraction in net service exports. Yet, by March 2025, the deficit had already narrowed to $1.565 billion, with projections pointing to a further reduction to $800 million by the end of Q2. This trajectory reflects a mix of structural challenges and policy-driven resilience that investors must dissect carefully.

The Drivers Behind the Deficit

The widening deficit in Q1 2025 was fueled by a surge in imports of telecom equipment, vehicles, and food oils—indicative of domestic consumption growth and inflationary pressures. Meanwhile, exports stagnated at a 1.2% year-on-year increase, and net service exports contracted by 9.3%, hit by lower transport services receipts and rising outbound tourism spending. However, the deficit was cushioned by robust inflows of foreign direct investment (FDI) and remittances. FDI nearly tripled to $1.8 billion in Q1 2025, driven by infrastructure and renewable energy projects, while remittances from overseas Filipino workers (OFWs) hit $7.7 billion—a 1.7% year-on-year increase.

The Bangko Sentral ng Pilipinas (BSP) has played a pivotal role in stabilizing the economy. Gross international reserves (GIR) remain robust at $106.7 billion, sufficient to cover 7.2 months of imports and 3.27 times short-term external debt. This liquidity buffer, combined with interest rate cuts and reserve requirement adjustments, has created a more favorable investment climate. The central bank projects the current account deficit to narrow to 3.3% of GDP in 2025 and 2.5% in 2026, reflecting confidence in policy efficacy.

Asset Class Implications

The Philippines' narrowing deficit and capital inflows have had tangible effects on asset valuations.

1. Equities: The Philippine Stock Exchange Index (PSEi) has benefited from FDI inflows and structural growth drivers. Sectors like infrastructure, technology, and agribusiness are particularly attractive. For instance, firms in the BPO and tech sectors, such as Globe Telecom (TEL) and DITO Telecommunity (DITO), have seen robust performance due to rising global demand for digital services.

2. Bonds: Peso-denominated government securities have gained traction as a safe-yield asset. The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) has made the bond market more appealing by reducing corporate tax rates. Investors might consider ETFs like PHLS for exposure to the local bond market.

3. Real Estate: Urban centers like Metro Manila and Cebu are seeing renewed interest in commercial and industrial real estate, driven by infrastructure projects and BPO expansion. Developers such as Ayala Land (ALI) and SM Prime Holdings (SMPH) are well-positioned to benefit from this trend.

Comparative Advantage in Southeast Asia

The Philippines stands out in Southeast Asia for its strong domestic consumption and public spending. While Vietnam and Indonesia posted higher GDP growth in Q1 2025 (6.9% and 4.9%, respectively), the Philippines' economy is less exposed to global trade risks. Its reliance on services (62.2% of GDP) and a resilient BPO sector provide a buffer against tariff shocks. The Asian Development Bank (ADB) forecasts the Philippines to grow at 6.0% in 2025 and 6.1% in 2026, positioning it as a key growth driver in the region.

Risks and Hedging Strategies

Despite the positives, investors must remain cautious. The Philippines' heavy reliance on oil imports (90%) leaves it vulnerable to global price volatility. Geopolitical tensions, such as the Israel-Iran conflict, could further disrupt energy markets. Additionally, the recent drop in cash remittances in April 2025 highlights the sector's sensitivity to external shocks.

To mitigate these risks, investors should consider hedging strategies such as currency swaps or energy-linked derivatives. Diversification across sectors—balancing exposure to FDI-driven infrastructure and FDI-sensitive sectors like manufacturing—can also reduce volatility.

Conclusion

The Philippines' current account deficit in H1 2025, while a cause for concern, is being offset by strong capital inflows and policy interventions. For global investors, the country offers a compelling mix of structural growth drivers and asset class opportunities, particularly in infrastructure, technology, and real estate. However, hedging against oil price volatility and geopolitical risks is essential to capitalize on the long-term potential of Southeast Asia's fourth-largest economy.