In a tale of two countries, Bangladesh, Brazil, and the Philippines, the burden of debt has taken a toll on their financial accounts and current account deficits.
In Bangladesh, the financial account has fallen into deficit due to a decline in short-term external loans. The country has experienced higher repayment than borrowing of short-term foreign loans, widening the deficit by nearly $4 billion. This has eroded the confidence of foreign financiers and resulted in negative growth in short-term loans. To rebuild reserves and turn the financial account into surplus, Bangladesh needs an inflow of $14 billion to $16 billion in short-term loans. However, the inflow of short-term loans has been declining due to problems in both demand and supply sides. Bangladeshi banks and businesses are not willing to take short-term loans due to rising costs, while foreign lenders are not willing to lend due to low reserve coverage of external debt. The country needs more short-term loans to enhance its capacity to make other payments and improve dollar availability. Improving dollar supply by removing barriers to remittance through legal channels and increasing exports is crucial for rebuilding the confidence of foreign financiers.
Meanwhile, in Brazil, the current account deficit in October was lower than expected, standing at $230 million. The deficit over the past 12 months decreased to 1.62% of GDP. The trade balance showed a surplus of $7.4 billion in October. However, foreign direct investment for the month fell short of expectations at $3.3 billion.
In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has raised its balance of payments (BoP) surplus forecast for 2024 to $2.3 billion (0.5% of GDP), up from $1.6 billion (0.3% of GDP). However, the current account deficit is projected to widen to $6.8 billion (-1.5% of GDP) from $4.7 billion (-1% of GDP). The Philippine economy grew by 6.3% in Q2 2024, with GDP averaging 6% in the first half of 2024. The government targets 6-7% growth for the year. The BoP surplus for 2025 is expected to be $1.7 billion (0.3% of GDP), while the current account deficit for that year is projected at $5.5 billion (-1.1% of GDP). Additionally, foreign direct investment (FDI) net inflows are forecasted to increase to $10 billion, and gross international reserves are expected to reach $106 billion. However, risks from commodity price volatility and geopolitical tensions remain a concern [3777acab].
Both countries are grappling with the challenges posed by the burden of debt. In Bangladesh, the banking sector is burdened with debt, as loan write-offs have more than tripled in the first half of the year. The increasing amount of defaulted loans in banks is directly leading to a corresponding increase in written-off loans. The total default loan reached $18.3 billion in June, accounting for 10.11% of the total outstanding loans. Additionally, foreign loan interest payments have tripled in the July-September quarter of the current fiscal year. The government aims to secure $8.977 billion in loan commitments in the current fiscal year, but the disbursement of foreign loans has decreased due to a lack of capacity to implement development projects.
In Brazil, the current account deficit has been a concern, but the October figures provided some relief. The country has been working towards reducing the deficit and improving the trade balance. However, foreign direct investment fell short of expectations, highlighting the need for more investment to support the economy.
In the Philippines, while the current account deficit is projected to widen in 2024, there are expectations of a rebound in domestic demand, improved economic activity, and a potential increase in foreign direct investment. The BSP's revised forecasts indicate a more optimistic outlook for the balance of payments despite the anticipated widening of the current account deficit.
Despite the challenges, there is a glimmer of hope for all three countries. In Bangladesh, the current account balance has turned positive in the July-September period of fiscal year 2023-24, mainly due to a sharp fall in imports and an increase in exports. The reduction in imports was a result of austerity measures implemented by the government and the central bank to preserve foreign exchange reserves. In Brazil, the current account deficit has decreased over the past 12 months, indicating progress in managing the deficit. In the Philippines, while the current account deficit is projected to widen in 2024, the BSP's positive outlook for the BoP suggests potential for economic resilience.
The burden of debt and its impact on financial accounts and current account deficits is a complex issue that requires careful management and strategic measures. Bangladesh, Brazil, and the Philippines need to address the challenges in their respective financial sectors and work towards sustainable economic growth and stability.
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