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3rd Quarter BOP Remains Strong; January - September 2006 BOP Surplus at US$2.6 Billion

12.21.2006

The balance of payments (BOP) posted a surplus of US$579 million in the third quarter of the year spurred by the continued strength in the current account. This was, however, lower by 21.1 percent compared to the surplus recorded in the same quarter last year as the capital and financial account reversed to a net outflow following the country’s repayment and pretermination of some of its external obligations.

On a cumulative basis, the BOP position for the first three quarters of the year yielded a US$2.62 billion surplus. However, this level was 3.5 percent lower than the US$2.71 billion surplus a year ago. The ample foreign exchange liquidity from the strong current account receipts and the net inflows in foreign direct and portfolio investments, coupled by the appreciation of the peso encouraged the public and some private borrowers to prepay part of their foreign borrowings.  The pretermination of loans and bonds payable, amounting to US$1.4 billion, reduced the capital and financial account balance. Without the prepayments, the BOP position would have been stronger by the same amount. 1

The developments in the external payments position brought the BSP’s gross international reserves (GIR) to US$21.59 billion as of end-September 2006. This was 16.8 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 3.9 times the amount of the country’s short-term external liabilities based on original maturity and 1.9 times based on residual maturity.

Third Quarter 2006 Developments

Current Account

The current account (CA) posted a surplus of US$929 million (3.2 percent of GDP), almost three times the US$334 million surplus last year. The significant improvement was traced to higher inflows in current transfers from OFW remittances and lower deficit in the trade-in-goods and services accounts.

a)  Trade-in-Goods Account

The deficit in the trade-in-goods account narrowed to US$1.67 billion compared to the US$2.16 billion deficit posted a year ago as exports growth outpaced that of imports. Export earnings grew by 16.4 percent to US$12.19 billion from US$10.47 billion in the same period last year, bolstered mainly by the rise in shipments of manufactured goods specifically electronics, garments and machinery and transport equipment. Growth in other manufactured goods such as chemicals, wood manufactures, processed food and beverage, and iron and steel; and the increases in mineral and petroleum products exports also lent support to the double-digit export performance. Meanwhile, the total import bill reached US$13.86 billion, attributed to higher procurement in almost all major commodity groups. The 9.7 percent year-on-year increment was traced to the double-digit expansion in key commodities such as mineral fuels and lubricant (16.4 percent), consumer goods (14.5 percent) and raw materials and intermediate goods (10.1 percent), notably imports of materials/accessories for the manufacture of electronics exports.
    
b) Services Account

The deficit in trade-in-services account narrowed to US$236 million from US$286 million a year ago. The 17.5 percent improvement was attributed to higher net inflows in financial and other business services and lower net outflow in insurance services. The gains in other business services, specifically miscellaneous business, professional and technical services reflected increasing revenues from business process outsourcing (BPO) activities notably contact centers, medical transcription, software development, animation and backroom operations, among others.
 
c) Income Account

The income account posted a higher deficit of US$497 million compared to year-ago level of US$242 million. This was caused by the combined effects of the following: 1) decline of 3.4 percent in earnings of resident OFWs to US$691 million from the year-ago level of US$715 million following the stricter implementation of Japan’s immigration rules which placed a heavy toll in the deployment of performing artists; and 2) higher deficit in investment income resulting from increased net outlays for dividends and profits on direct investments coupled with higher National Government (NG) interest payments on bond and note issues.

d)  Current Transfers

Net current transfers expanded by 10.1 percent to US$3.30 billion from the year-ago level of US$3.03 billion. This developed on account of the 8.9 percent rise in remittances from non-resident OFWs, which reached US$3.08 billion, due mainly to the continuing demand for Filipino manpower abroad and the financial system’s provision of innovative remittance services in response to OFWs’ clamor for secure, timely and cost-efficient modes of transfer of funds to their beneficiaries. 

Capital and Financial Account

The current and financial account (CFA) surplus narrowed to US$56 million from US$1.10 billion a year ago due largely to the significant net outflows in the other investment account following higher loan repayments, including pretermination, of public and private sector loans, as well as accumulation of banks’ foreign exchange assets. The decline in other investment account overshadowed the strong performance of portfolio and direct investment accounts.   

a)  Direct Investments

The surplus in the direct investment account widened to US$369 million, 19.4 percent higher than the level posted during the comparable quarter in 2005. Contributing to these developments were: 1) increased foreign equity capital placements at US$393 million from US$372 million a year ago, specifically in the local electronics manufacturing industry; and 2) the improvement in the other capital account (comprising of inter-company borrowing/lending between foreign direct investors and their local affiliates) which posted a lower outflow of US$5 million from US$67 million same quarter last year.

b)  Portfolio Investments

The portfolio investment account surplus reached US$2.16 billion, 35.8 percent higher than the US$1.59 billion surplus posted a year ago. The improvement was traced to the more than sixfold  increase  in non-residents’ investments following the US$750 million NG bond flotation in August, the US$1.21 billion NG bond issue in exchange for the advanced retirement of ROP bonds amounting to US$1.02 billion in September, and the US$1.09 billion placements in equity securities issued by private entities. 
  
c)  Other Investments

The other investment account deficit of US$2.43 billion rose almost threefold from the  level recorded in the same quarter last year. The deterioration emanated from: 1) the build-up in domestic banks’ short-term placements abroad of  US$1.04 billion; and 2) net repayments, including pretermination, of loans by the NG (US$256 million), domestic banks (US$440 million); and the public and private corporations (US$321 million). These outflows, were however, tempered by the receipt of inflows including non-residents’ currency and deposit placements in domestic banks amounting to US$197 million.

January-September 2006 Developments

Current Account

The CA surplus rose by more than threefold to reach US$3.30 billion, representing 4.0 percent of GDP. This was driven by higher inflows in current transfers as well as lower deficit in the trade-in-goods and services accounts which negated the higher deficit in the income account. The net inflows in the current transfers account increased by 13.7 percent to reach US$9.60 billion due mainly to the robust inflows from remittances of non-resident OFWs. Meanwhile, the trade-in-goods balance registered a narrower deficit of US$5.15 billion, or an improvement of 15.2 percent from the year-ago level as the export growth of 16.9 percent exceeded that of imports at 11.4 percent. The key export drivers were manufactured goods such as electronics, garments, chemicals; mineral and petroleum products.  The net outflow in the services account narrowed by 52.6 percent to US$507 million from US$1.07 billion in the same period last year following the higher net inflows from travel, communication, computer and information and other business services.

Capital and Financial Account

The CFA balance reversed to a net outflow of US$710 million from a net inflow of US$5.00 billion as the other investment account deficit widened to US$5.05 billion from only US$794 million in the comparable period in 2005. The net outflow in the CFA was attributed to higher net repayments of maturities as well as pretermination of loans and other bond issues by both the public and the private sectors. These outflows negated the robust inflows of direct and portfolio investments.

Direct investments grew by 67.6 percent to US$1.57 billion owing to equity capital placements by non-residents combined with the improvement in the other capital account. Among the recipients of these inflows were:  manufacturing, services, real estate, financial intermediation and construction industries. Major investors were from the U.S., Japan, Netherlands, U.K., Hong Kong, Switzerland and the Federal Republic of Germany.    On the other hand, portfolio investment net inflows remained significant at US$2.73 billion.  However, this was 43.6 percent lower than last year’s level following the pretermination by the BSP and NG of its notes/bond payable and certain maturing bonds owed by the private sector.

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1 Excludes prepayment of bonds and loans owed to residents amounting to US$430 million

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