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Q2 07 BOP Reverses to Surplus From Year-Ago Deficit, Bringing First Semester 07 BOP Surplus to US$3.2 Billion


The balance of payments (BOP) in the second quarter of the year reversed to a surplus of US$1.8 billion from a deficit of US$81 million a year ago, spurred by the continued strength in the current account and the rebound in the capital and financial account. On a cumulative basis, the BOP position for the first half of the year yielded a US$3.2 billion surplus, considerably higher by 56.8 percent compared to the US$2.0 billion posted during the same period a year ago.

The developments in the external payments position brought the BSP’s gross international reserves (GIR) to US$26.4 billion as of end-June 2007. This was higher by 14.9 percent compared to the end-December 2006 GIR level of US$23.0 billion. At this level, the GIR cushion was equivalent to 4.8 months’ worth of imports of goods and payment of services and income. In terms of short-term debt coverage, the reserve level was 5.2 times the amount of the country’s short-term external liabilities based on original maturity and 2.8 times based on residual maturity.

Second Quarter 2007 Developments

Current Account

The current account (CA) surplus of US$1.8 billion improved by 18.9 percent compared to the level posted in the same period last year due to increased remittances from overseas Filipinos (OFs) as well as net inflows in the income account. The CA surplus was equivalent to 5.2 percent of GDP, the highest ratio recorded since 2005. 

a)  Trade-in-Goods Account

The deficit in the trade-in-goods account was slightly higher at US$1.9 billion compared to the year-ago deficit level. Total exports of goods posted an increase of 5.0 percent to US$12.2 billion from US$11.6 billion a year ago as all key commodity groups, except for sugar and related products, increased from their comparable levels in 2006. The major export drivers during the quarter were manufactured goods (85 percent of total goods exports) such as electronics, chemicals, wood manufactures, machinery and transport equipment, and processed food and beverages. Exports of mineral and petroleum products posted the highest growth rates at 35.9 percent and 44.2 percent, respectively, while shipments of agricultural products (coconut, fruits and vegetables, forest and other agro-based commodities) also performed strongly. Meanwhile, the total import bill grew by 4.6 percent to US$14.1 billion as all major commodity groups, except for capital goods, posted year-on-year increases. Higher purchases of raw materials and intermediate goods, mineral fuels and lubricants, and consumer goods were used mainly as inputs for export and domestic production.
b) Services Account

The trade-in-services account posted a deficit of US$130 million from a surplus of US$167 million during the same quarter a year ago.  Gains were posted in construction, transportation and other business services particularly miscellaneous business, professional and technical services.  However, lower net inflows in communication, computer and information services and higher net outflows in financial services, insurance, royalties and fees, as well as government, and personal, cultural and recreational services were recorded.  Net travel receipts also declined even as tourism earnings remained strong, as the strong peso and the foreign exchange liberalization measures adopted beginning April encouraged Filipinos to travel overseas.
c) Income Account

The income account reversed to a surplus of US$307 million from a deficit of US$42 million last year. The improvement was due mainly to  the 11.5 percent increase in the gross earnings of resident overseas Filipino workers (OFWs) which amounted to US$759 million; and the 37.5 percent reduction in the net outflow in investment income arising mainly from (1) higher income on residents’ investments abroad, (2) decreased interest payments on loans partly due to prepayments of loans; and (3) decreased payments of dividends and profits and reinvested earnings on direct investments.

d)  Current Transfers

Net current transfers expanded by 8.3 percent to US$3.5 billion from the year-ago level of US$3.3 billion, buoyed mainly by the 8.5 percent increase in remittances from non-resident overseas Filipinos to US$3.3 billion. This favorable outcome can be attributed to greater access to financial services and efficient delivery of remittances as local money transfer agents such as banks expanded the number of their remittance centers and tie-ups abroad to reach more Filipino remitters overseas and their families.

Capital and Financial Account

The capital and financial account (CFA) balance reversed to a surplus of US$77 million during the second quarter, from a deficit of US$1.7 billion a year ago on account of the robust performances of both the portfolio and other investment accounts even as the direct investment account recorded a net outflow following the acquisition by a resident company of shares of a foreign power company abroad.

a)  Direct Investments

The direct investment account reversed to a deficit of US$2.5 billion, from a surplus of US$594 million posted in the same quarter in 2006. Non-residents’ net equity capital placements remained robust, rising by more than a hundred percent to US$895 million. Recipients of these investments were the manufacturing, services, and mining sectors. The deficit in the direct investment account, however, was due to the combined effects of higher residents’ equity placements abroad—reflecting in part the impact of the foreign exchange liberalization measures implemented beginning April this year—as well as net repayments of intercompany loans by local subsidiaries to their parent companies. This may be traced in part to the strong financial positions of the local subsidiaries.

b)  Portfolio Investments

The portfolio investment account shifted to a surplus of US$964 million from a deficit of US$1.3 billion in the same quarter last year. Largely accounting for this development is the almost threefold rise in non-residents’ equity securities placements in some private corporations which aggregated US$3.3 billion as well as the withdrawal of residents’ placements in debt securities abroad.  
c)  Other Investments

The other investment account also reversed to a surplus of US$1.7 billion from the deficit of US$947 million posted during the same quarter last year. This outturn was due mainly to the US$3.1 billion loan availment by private corporations, specifically by a power holding firm. Partly offseting these inflows were loan repayments made by monetary authorities amounting to US$71 million and loans provided to non-residents by private corporates (US$513) as well as short-term interbank loans by local banks (US$602 million) totalling US$1.1 billion.

January-June 2007 Developments

Current Account

The current account yielded a surplus of US$3.7 billion (equivalent to 5.7 percent of GDP), rising by 41.8 percent from the previous year’s surplus of US$2.6 billion. The hefty expansion reflected mainly the combined effects of higher net current transfers and lower deficits in the trade-in-goods and income accounts. Net current transfers posted a 13.2 percent year-on-year growth due mainly to strong inflows of remittances from non-resident OFs which rose by 13.4 percent to US$6.6 billion. Meanwhile, the trade-in-goods deficit narrowed by 11.4 percent to US$3.0 billion from last year’s deficit of US$3.4 billion following higher export growth of 7.3 percent compared to that of imports at 4.9 percent. The key export growth drivers were manufactures (mainly electronics, machinery and transport, chemicals, wood, processed food & beverages, and iron & steel), minerals, petroleum products, fruits and vegetables and other agro-based products. On the other hand, the net outflow in the income account declined by 30.8 percent to US$209 million due to higher gross earnings of resident OFWs which grew by 12.5 percent to US$1.5 billion, and lower net outflows of direct investment income. The improvement in the latter was brought about by lower outlays for reinvested earnings of direct investors and lower interest payments on bonds and notes due to loan prepayments  and lower interest rates compared to last year’s levels.

Capital and Financial Account

Strong macroeconomic fundamentals and heightened investor confidence contributed to the reversal of the capital and financial account balance to a net inflow of US$258 million during the first half of 2007 from a net outflow of US$522 million in the same period last year. This developed following the higher net inflows in the portfolio investment account coupled with the reversal of the other investment account to a net inflow, even as the direct investment account recorded a net outflow. The latter developed in spite of stronger non-resident direct investments into the Philippines as there was a significant investment overseas by a resident. The major contributory factors to financial inflows included: 

a) Direct Investment: non-residents’ net equity capital placements (US$1.6 billion);

b) Portfolio Investment: non-residents’ net equity securities placements in some private corporations (US$2.4 billion); and non-residents’ subscription to the bonds and notes issuances of the National Government (US$1.0 billion);

c) Other Investment: NG’s program loans from official creditors (i.e., US$250 million World Bank Development Policy loan; US$250 million ADB Policy Support loan; and US$295 million Power Sector Development loan from the Japan Bank of International Cooperation); and loan availments by corporates (US$3.2 billion).

The surplus in the CFA would have been higher had there not been prepayments of obligations by both public and private sector borrowers in the first semester aggregating US$938 million.

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