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First Half 2006 BOP Posts US$2.04 Billion Surplus Despite Second Quarter Deficit

09.22.2006

The overall balance of payments (BOP) position for the first half of 2006 came out strong at a surplus of US$2.04 billion given the solid gains achieved during the first quarter of 2006.  The robust performance of the current account which reached a surplus of US$2.87 billion for the first six months of 2006 more than offset the net outflow posted in the capital and financial account specifically in the second quarter.

For the second quarter of 2006, a BOP deficit of US$81 million was recorded as the capital and financial account reversed to a net outflow following the net repayment of external obligations, including prepayment of maturities. The substantial current account inflows, however, helped moderate the weak capital and financial account during the quarter.

The positive external payments position brought the BSP’s gross international reserves (GIR) to US$21.12 billion as of end-June 2006. This was 14.2 percent higher compared to the end-December 2005 level of US$18.49 billion. At this level, GIR remained comfortable and was equivalent to 4.3 months’ worth of imports of goods and payment of services and income (MIGSI). In terms of short-term debt coverage, the reserve level was 3.4 times the amount of the country’s short-term external liabilities based on original maturity and 1.8 times based on residual maturity.

Current Account

The current account (CA) surplus in the second quarter of 2006 surged to US$1.47 billion (5.3 percent of GDP), a reversal from the US$44 million deficit (0.2 percent of GDP) a year ago. The significant improvement was traced to higher inflows in current transfers particularly from OFW remittances, higher net income receipts, and lower deficit in the trade-in-goods and services accounts. This favorable outturn led the cumulative six-month current account surplus to rise to US$2.87 billion (5.3 percent of GDP) compared to the US$621 million (1.3 percent of GDP) posted in the comparable period in 2005.

a)  Trade-in-Goods Account

The trade-in-goods account registered a lower deficit of US$1.95 billion in the second quarter of 2006 compared to the US$2.54 billion deficit posted a year ago as the expansion in exports at 19.8 percent exceeded the growth in imports at 10.9 percent. Merchandise exports during the quarter in review reached US$11.61 billion, driven mainly by higher shipments in manufactured goods specifically electronics and garments. Exports of minerals, petroleum, chemicals, wood manufactures, iron and steel, and fruits and vegetables also helped boost export receipts. Meanwhile, merchandise imports amounted to US$13.56 billion, traced primarily to increased procurement in mineral fuels and lubricant and raw materials and intermediate goods, notably imports of materials/accessories for the manufacture of electronics exports. Imports of mineral fuels and lubricants posted the highest growth at 30.7 percent among all major commodity groups owing to the continually rising international oil prices. In particular, imports of petroleum crude rose by 42.1 percent to US$1.46 billion as the average crude oil price increased to US$64.7 per barrel during the second quarter from US$48.6 per barrel during the same period last year. The second quarter developments resulted in the 11.1 percent narrowing of the trade-in-goods deficit to US$3.47 billion in the first half of the year, with export growth at 17.1 percent and the rise in imports at 12.3 percent. 

b) Services Account

The deficit in trade-in-services account during the quarter narrowed significantly to US$3 million from US$418 million a year ago. The 99.3 percent improvement compared favorably with the 5.0 percent growth a year ago. Higher net receipts from travel, communication, financial and other business services combined with lower net outlays for transportation and insurance services as well as royalties and fees helped bring down the deficit in the services account. Combined with the surplus recorded in the first quarter of the year, the substantial narrowing of the deficit in the second quarter resulted in the reversal of the services account to a net inflow of US$149 million in the first half of 2006 from a net outflow of US$784 million in the same period last year. Net travel receipts grew by 52.0 percent to reach US$631 million during the six-month period reflecting the 10.4 percent expansion in tourist arrivals. Meanwhile, the gains in communication and other business services, specifically miscellaneous business, professional and technical services were attributed to increasing revenues from business process outsourcing (BPO) notably contact centers, medical transcription, software development, animation and backroom operations, among others.

c) Income Account

The income account in the second quarter of 2006 posted a higher surplus of US$117 million compared to year-ago level of US$31 million. This was attributed mainly to the lower deficit in investment income due, in turn, to increased reinvested earnings from direct investments coupled with decreased net outlays for dividends and profits. Meanwhile, remittances from resident OFWs during the quarter in review contracted by 9.1 percent to US$681 million from the year-ago level of US$749 million as the implementation of Japan’s immigration rules continued to take its toll on the number of deployed resident OFWs, specifically overseas performing artists. The effect was, however, moderated by the 16.9 percent increase in the deployment of sea-based OFWs in the second quarter of the year. As a result of the higher surplus in the second quarter, the income account for the first semester posted a lower net outflow of US$78 million compared to US$113 million a year ago.

d)  Current Transfers

Net current transfers in the second quarter of 2006 expanded to US$3.31 billion from the year-ago level of US$2.88 billion due to strong remittances from non-resident OFWs which reached US$3.07 billion during the quarter. The 13.7 percent rise was due mainly to the combined impact of rising demand for highly skilled and higher-paid Filipino workers and increased access of a greater number of overseas Filipinos to commercial banks and private remittance agents. The government and private sector initiatives to enhance workers’ competence through skills upgrading, technical training and better education have contributed largely to the increasing preference for the Philippines as a source of skilled labor. Net current transfers from foreign government institutions as well as gifts and donations from migrants also contributed to the 14.7 percent improvement of the current transfers account during the quarter in review. These positive developments drove the current transfers in the first six months of the year to expand by 15.6 percent to US$6.27 billion.

Capital and Financial Account

The capital and financial account yielded a deficit of US$1.74 billion in the second quarter of 2006, a reversal from the US$2.25 billion surplus in the same quarter last year. This developed on account of the net outflows registered in both portfolio and other investments—mostly repayment of loans and bonds—which negated the effect of higher net inflows posted by both direct investments and financial derivatives. As a result, the capital and financial account balance for the first semester likewise reverted to a net outflow of US$1.14 billion from a net inflow of US$3.91 billion.

a)  Direct Investments

 The direct investment account surplus widened to US$636 million in the second quarter of 2006, more than five times the year-ago level of US$117 million. Non-residents’ investments surged to US$633 million compared to US$136 million in the same quarter in 2005 as the other capital account—representing primarily inter-company accounts between investee companies and their corresponding foreign direct investors— reversed to a net inflow of US$433 million. This more than offset the net outflow of US$42 million in the reinvested earnings account. Net equity capital placements also improved by 19.2 percent to US$242 million during the quarter in review.

These favorable developments brought the net inflows in direct investments to US$967 million in the first half of 2006, or an increase of 53.5 percent from the year-ago level of US$630 million. Foreign direct investments in the Philippines rose to US$996 million, up by 47.6 percent from last year’s level. Bulk of the capital placements were infused to the manufacturing; services; financial intermediation and real estate sectors.

b)  Portfolio Investments

The portfolio investment account reversed to a net outflow of US$1.10 billion in the second quarter of 2006 from a net inflow of US$2.06 billion a year ago. The deterioration was due to the combined effects of increased residents’ investments abroad, both in equity and debt securities, and the net repayments of maturing bonds and notes. The decline in the second quarter resulted in the contraction of the net portfolio investment inflows in the first half of the year by 85.8 percent to US$460 million compared to the US$3.25 billion net inflow a year ago. The major contributory factors included: a) lower net investments in equity securities by non-resident private corporations due, in turn, to limited supply of available domestic instruments (e.g., lower amount of initial public offerings issued this year compared to last year); b) lower net bond availments by the public sector (US$1.43 billion); c) net bond repayments by the private sector (US$374 million); and d) net purchase by residents of Philippine debt papers issued offshore (US$739 million). It should be noted that the NG’s repayments included the pretermination in May 2006 of US$411 million Brady bonds originally maturing in 2017.
  
c)  Other Investments

The other investment account reversed to a deficit of US$1.31 billion in the second quarter of 2006 from a surplus of US$54 million a year ago. The turnaround was due mainly to lower loan borrowings, and higher net loan repayments of both the public and private sectors (US$1.31 billion). This led the other investment account to revert to a net outflow of US$2.55 billion during the six-month period from  a net inflow of US$39 million in 2005.

The BSP will also release the revised BOP statistics from 1999 to 2005, accompanied by technical notes, to reflect updates, late entries and data audit, among others.

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