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Q3 2007 BOP Posts Historical High of US$3.5 Billion Surplus; BOP for the First Three Quarters of the Year at US$6.7 Billion


The balance of payments (BOP) posted a surplus of US$3.5 billion in the third quarter of 2007, almost six times the US$579 million surplus posted in the same quarter a year ago. This was the highest BOP surplus achieved in any given quarter. This favorable development can be attributed to continued strong foreign exchange inflows, particularly in the capital and financial account, where the balance reversed to a net inflow from a net outflow. The current account also remained in surplus (at US$613 million or 1.8 percent of GDP) but at a level that was lower compared to the level posted in the same period last year.

The robust external payments position in the third quarter caused the BSP’s gross international reserves (GIR) to rise to US$30.9 billion as of end-September 2007, higher by 34.3 percent compared to the end-December 2006 GIR level of US$23.0 billion. At the current level, the GIR was equivalent to 5.6 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 3.1 times based on residual maturity.

Third Quarter 2007 Developments

Current Account

The current account remained in surplus at US$613 million (equivalent to 1.8 percent of GDP) due to strong net current transfers, specifically remittances of overseas Filipinos (OFs), as well as higher net services receipts. However, the current account surplus was lower by 47.9 percent relative to last year’s level due to the wider deficit in the trade-in-goods account.

a)  Trade-in-Goods Account

The US$2.6 billion deficit in the trade-in-goods account was higher by 63.6 percent compared to the year-ago level. Both export and import growth slowed down but the slowdown in growth was more pronounced for exports which decelerated to 1.6 percent from 17.1 percent in the comparable quarter a year ago. Total exports of goods aggregated US$12.5 billion from US$12.3 billion a year ago, with growth driven mainly by manufactured goods (more than 85 percent of total goods exports) such as electronics, chemicals, wood manufactures, machinery and transport equipment, and processed food and beverages. Agricultural products (coconut, fruits and vegetables, sugar, forest and other agro-based) also registered expansion over last year’s level. Meanwhile, imports grew at a faster pace than exports during the quarter at 8.7 percent, although slightly lower than the 9.6 percent expansion recorded in the same quarter in 2006. The total import bill reached US$15.0 billion as all major commodity groups, except for capital goods, posted year-on-year increases. Imports of mineral fuels and lubricants recorded the highest increment among the commodity groups as both the quantities and the import prices of most of these items increased.
b) Services Account

The trade-in-services surplus in the third quarter was higher at US$93 million from US$16 million in the comparable period a year ago. The more than fivefold increment resulted from higher net inflows of receipts coming from travel, communication, construction and other business services, particularly, miscellaneous business, professional and technical services. These developments negated the higher net outflows posted in transportation, insurance, royalties and fees, government and financial services.
c) Income Account

The income account deficit was reduced by more than half to US$207 million from a deficit of US$525 million last year. The improvement was due mainly to: a) the 12.6 percent increase in the gross earnings of resident overseas Filipino workers (OFWs) which amounted to US$778 million; and b) the 19.0 percent reduction in the net outflow in investment income. The latter, in turn, was traced to: 1) higher income receipts by residents from their holdings of foreign debt securities, currency and deposit placements abroad, banks’ lending abroad; and 2) lower repatriation of dividends and profits and reinvested earnings

d)  Current Transfers

Net receipts from current transfers expanded by a modest 1.4 percent to US$3.3 billion from the year-ago level, boosted primarily by the 8.0 percent increase in remittances from non-resident overseas Filipinos to US$3.3 billion. During the quarter, the number of deployed land-based workers rose by 5.8 percent. The deployment of highly skilled and professional workers continued to increase. Moreover, remittances have remained strong as local banks continued to provide expanded banking services to remitters and their beneficiaries, thus encouraging the use of formal channels of remittance transfer.  Local banks have also been increasing the number of remittance centers abroad and establishing more tie-ups with foreign financial institutions to better respond to the needs of overseas workers.

Capital and Financial Account

The balance of the capital and financial account during the third quarter reversed to a net inflow of US$2.9 billion, from a net outflow of US$514 million in the comparable quarter a year ago due mainly to the reversal of the other investment account to a net inflow and the continued net inflows of both direct and portfolio investments.    

a)  Direct Investments

The direct investment account recorded a higher net inflow of US$502 million in the third quarter of 2007, or a year-on-year growth of 14.1 percent.  This was brought about by higher non-residents’ investments, following the intercompany loan availment by a local beverage manufacturing company from its direct investor abroad. Equity capital and reinvested earnings also posted net inflows, but the levels were lower than in the comparable quarter in 2006. Equity capital during the quarter were infused mainly into the manufacturing, services, mining, real estate, and financial intermediation sectors.

b)  Portfolio Investments

Net inflows of portfolio investment narrowed to US$1.2 billion during the third quarter from US$2.0 billion same period last year.  The net inflows were due mainly to: a) net equity placements by non-residents of US$880 million; and b) residents’ withdrawal of their portfolio placements abroad amounting to US$420 million.
These inflows were partly offset by outflows arising from the redemption by the National Government (NG) (US$298 million) of maturing bond/notes and repayments of loans by some private corporates (US$105 million). The net purchase by residents of NG bonds originally issued offshore (US$88million) also contributed to the contraction in portfolio investment net inflows.
c)  Other Investments

The other investment account in the third quarter of 2007 reversed to a US$1.2 billion net inflow from a US$2.9 billion net outflow in the comparable quarter last year. These net inflows were due mainly to: a) net loan availments of banks (US$460 million) and private corporations (US$394 milllion) which were partly intended for debt refinancing; and b) residents’ net withdrawal of their currency and deposit placements abroad (US$276 million). It should be noted that the net inflows in the other investment account was realized despite prepayments of private corporate loans amounting to US$762 million.

January-September 2007 Developments

Overall Balance of Payments

The BOP yielded a surplus of US$6.7 billion in the first three quarters of 2007, more than twice the US$2.6 billion surplus in the same period in 2006. The healthy external payments position drew support from a robust current account and a strong capital and financial account notwithstanding some changes in the risk appetite of investors due to the sub-prime mortgage crisis in the U.S. and the subsequent credit crunch. Moreover, the surplus was achieved even with prepayment of public (US$329 million) and private sector obligations (US$1.5 billion).

Current Account

The current account yielded a surplus of US$4.2 billion (4.2 percent of GDP) in the first nine months of 2007, higher by 9.3 percent from the previous year’s surplus of US$3.8 billion. The expansion reflected mainly the combined impact of a higher surplus in the current transfers account and a lower deficit in the income account, which more than offset the higher trade-in-goods deficit and lower net services receipts.

Net current transfers grew by 9.3 percent to US$10.3 billion. Contributing largely to the strong inflows were remittances of non-resident OFs which rose by 11.5 percent to reach US$9.9 billion in the first three quarters of 2007. Meanwhile, the income account deficit narrowed in the first nine months to US$680 million. The 17.8 percent reduction in the deficit was due mainly to higher gross earnings of resident OFWs, which reached US$2.3 billion, to register a year-on-year growth of 12.7 percent.

On the other hand, the trade-in-goods deficit widened by 12.2 percent to US$5.5 billion from last year’s deficit of US$4.9 billion as the growth of imports outpaced that of exports. Imports of goods expanded by 5.9 percent, supported by higher purchases of raw materials and intermediate goods, mineral fuels and lubricants, and consumer goods. Exports of goods rose by 5.0 percent, driven by higher shipments of manufactures (mainly electronics, machinery and transport, chemicals, wood, and processed food & beverages), mineral and petroleum products, fruits and vegetables and other agro-based products. Net services receipts reached US$77 million, lower by 47.6 percent from US$147 million in the same period last year. The contraction was due to the combined effects of higher net outflows in transportation (specifically freight in line with the increase in imports of goods), insurance, financial, royalties and fees, as well as personal, cultural, and recreational, and government services and lower net inflows from communication, and computer and information services.

Capital and Financial Account

Continued favorable economic developments during the first nine months of 2007 as well as a strong economic outlook bolstered investor confidence and encouraged more capital flows into the economy. The capital and financial account reversed to a net inflow of US$3.2 billion from a net outflow of US$1.0 billion in the comparable period last year as the other investment account yielded a net inflow of US$1.7 billion (from a net outflow of US$4.5 billion) and as net inflows of portfolio investment grew by close to 44 percent to US$2.8 billion.

The other investment account yielded a net inflow of US$1.7 billion for the first nine months of 2007, a reversal of the net outflow of US$4.5 billion same period a year ago. Largely contributing to this development were: a) the disbursements of program loans to the NG from official creditors (i.e., US$250 million Development Policy Loan from the World Bank; US$250 million Policy Support Loan from the ADB; and US$295 million Power Sector Development Loan from the Japan Bank for International Cooperation); b) net availment of loans by corporates (US$2.2 billion) and banks (US$477 million); and c) higher net currency and deposit placements of non-residents (US$136 million). Meanwhile, the portfolio investment account posted a net inflow of US$2.8 billion for January-September 2007, 43.8 percent higher than the level of US$2.0 billion registered  last year. This development was largey attributed to:   a) lower net placements of residents abroad (US$880 million from US$1.7 billion last year), particularly in money market instruments; and b) higher net inflows from placements by non-residents in equity securities of private corporations (US$3.3 billion from US$1.4 billion). On the other hand, the direct investment account recorded a net outflow of US$1.2 billion (from a net inflow of US$1.5 billion) mainly due to: a) higher residents’ net equity capital placement abroad following the acquisition of shares of a foreign power company (US$3.0 billion); and b) repayment of intercompany loans of local subsidiaries to their mother companies abroad.

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