The balance of payments (BOP) yielded a surplus of US$1.9 billion in the fourth quarter of 2007, 66.7 percent higher than the US$1.2 billion surplus registered in the same quarter a year ago. Behind this favorable development was the reversal of the capital and financial account balance from a net outflow to a net inflow and the continued surplus in the current account.
Continued favorable external sector developments brought the BOP for 2007 to a record high surplus of US$8.6 billion, more than twice the US$3.8 billion surplus in 2006. Robust foreign exchange (FX) inflows were recorded in both the current account and the capital and financial account. The ample FX liquidity in the system allowed the prepayment of some of obligations ahead of maturity, with total prepayments reaching US$2.2 billion in the year. Without these prepayments, the external payments position would have ended higher.
As a result of the healthy external payments position in 2007, the gross international reserves (GIR) rose to US$33.8 billion as of end-December 2007, higher by 47.0 percent relative to the end-December 2006 level of US$23.0 billion. The GIR level as of end-December 2007 was equivalent to close to six months’ worth of imports of goods and payment of services and income. In terms of short-term external debt coverage, the reserves level was 4.9 times the amount of the country’s short-term external liabilities based on original maturity and 3.0 times based on residual maturity.
Fourth Quarter 2007 Developments
The current account remained in surplus at US$1.6 billion (equivalent to 3.6 percent of GDP) due to higher net current transfers which were bolstered by robust remittance flows from overseas Filipinos (OFs), as well as higher net services receipts coming largely from travel and business process outsourcing (BPO). However, the current account surplus was lower by 26.0 percent relative to the previous year’s level due to the wider deficits in the trade-in-goods and income accounts.
a) Trade-in-Goods Account
The trade-in-goods deficit widened by 50.6 percent to US$2.7 billion compared to the year-ago level following the faster rate of growth in merchandise imports (14.6 percent) than merchandise exports (9.1 percent). Exports of goods reached US$12.7 billion from US$11.7 billion a year ago. The expansion was driven largely by higher shipments of: a) manufactured goods, (about 83 percent of total goods exports) particularly electronics products which increased by 6.1 percent to US$8.2 billion; and b) other manufactures such as processed food and beverages, chemicals, wood manufactures, and travel goods and handbags which posted notable increments. Exports of machinery and transport equipment also registered an 8.5 percent growth to reach US$484 million. Garments exports dropped by 16.1 percent but remained the second leading source of export earnings, with revenues of US$528 million. Exports of mineral products and agricultural products (coconut, fruits and vegetables, sugar, and other agro-based) also posted gains relative to year-ago levels. Meanwhile, imports of goods rose to US$15.5 billion from the year-ago level of US$13.5 billion. All major commodity groups posted year-on-year increments during the review quarter. In particular, imports of mineral fuels and lubricants rose significantly by 58.6 percent to US$2.9 billion due to higher procurement of petroleum crude and other mineral fuels and lubricant. Imports of consumer goods at US$1.3 billion also posted a hefty increase of 47.6 percent.
b) Services Account
The trade-in-services surplus grew by 109.9 percent to US$447 million from US$213 million in the comparable period a year ago as a result of higher net receipts coming from travel, construction and other business services, particularly, miscellaneous business, professional and technical services.
c) Income Account
The deficit in the income account was slightly higher at US$34 million compared to US$26 million in the same quarter last year. The wider deficit was caused mainly by the 2.6 percent increase in the net outflow in investment income which negated the higher gross earnings of resident overseas Filipino workers (OFWs). The higher net outflow in investment income was due largely to higher outlays for dividends and profits, and reinvested earnings related to direct investments.
d) Current Transfers
Net receipts from current transfers increased by 3.2 percent to US$3.9 billion from the year-ago level, buoyed primarily by the 2.7 percent increase in remittances from non-resident OFs to US$3.7 billion following continued demand for highly skilled and professional Filipino workers. The robust remittance flows can also be attributed to enhanced remittance services provided by banks and non-bank remittance agents following increased presence of commercial banks and local money transfer agents in countries with high concentrations of Filipino manpower.
Capital and Financial Account
The capital and financial account recorded significant gains during the last quarter of 2007, posting a net inflow of US$538 million from a net outflow of US$145 million in the same quarter last year. The major contributor to this improvement was the reversal of the other investment account to a net inflow, which more than offset lower net inflows of both direct and portfolio investments.
a) Direct Investments
Net inflows of direct investment, at US$371 million, were lower by 34.9 percent compared to the comparable quarter in 2006 due mainly to lower non-residents’ other capital investments. The other capital account during the fourth quarter reversed to a net outflow of US$89 million from a net inflow of US$300 million as local subsidiaries settled loans obtained from their parent companies abroad. Net foreign equity capital infusion was also lower, with gross equity capital placements posting a 24.1 percent decline to US$208 million. Equity capital inflows were infused mainly into manufacturing, services, construction, mining, real estate, financial intermediation and agricultural sectors.
b) Portfolio Investments
Net inflows of portfolio investments narrowed to US$82 million from US$723 million in the same quarter of 2006 due to net repayments of maturing loans by private corporations (US$583 million), which include prepayments by the private sector (US$152 million); net purchases by residents of debt papers originally issued abroad by domestic banks (US$142 million) and by the monetary authorities (US$6 million); and net withdrawal by non-residents in equity securities issued by banks and corporations (US$162 million) following domestic and global concerns. It should be noted that foreign investors were net sellers in the equities market in November and December, reflecting risk aversion due to uncertainties about the strength of the global economy stemming from worries about a credit crunch and an economic slowdown.
c) Other Investments
The other investment account in the fourth quarter of 2007 reversed to a net inflow of US$193 million from the US$1.4 billion net outflow in the comparable quarter a year ago. The robust improvement in the other investment account was largely the result of a confluence of the following factors: a) repayment by non-residents of loans obtained from domestic banks (US$241 million) and private corporations (US$301 million); b) net currency and deposit placements by non-residents in local banks and deposits of head offices in local offshore banking units in the Philippines (US$408 million); and c) net foreign loan availments by corporations (US$55 million).
January-December 2007 Developments
The current account posted a surplus of US$6.4 billion (4.4 percent of GDP) in 2007, higher by 18.8 percent than the previous year’s surplus of US$5.3 billion. This can be traced to strong inflows in the current transfers and services accounts coupled with the lower deficit in the income account. These developments more than compensated for the higher trade-in-goods deficit. In particular, net current transfers receipts grew by 5.9 percent to US$14.0 billion driven mainly by higher remittances of non-resident OFs, which rose by 6.3 percent to reach US$13.3 billion in 2007. Net services receipts of US$1.1 billion were more than eight times the US$137 million surplus in 2006. The expansion was attributed mainly to the gains posted in travel, construction and other business services, particularly miscellaneous business, professional and technical services. The income account deficit was reduced to US$467 million due to the combined effects of: a) higher gross earnings of resident OFWs which reached US$3.0 billion, or a year-on-year growth of 9.1 percent; and b) lower deficit in investment income due mainly to higher income receipts by the monetary authorities on its holdings of foreign debt securities and currency and deposit placements abroad as well as corporations’ holdings of debt securities. Meanwhile, the trade-in-goods deficit widened by 22.3 percent to US$8.2 billion from US$6.7 billion a year ago following a faster growth in goods imports (8.1 percent) relative to that of goods exports (6.0 percent). Imports of goods were bolstered by higher purchases across almost all major commodity groups, led by raw materials and intermediate goods. Notable increases of more than 20 percent growth were observed in imports of mineral fuels and lubricants and consumer goods while the expansion in capital goods imports remained steady at 1.9 percent.
Capital and Financial Account
Strong macroeconomic fundamentals in 2007 boosted investor sentiment, notwithstanding worries of a global economic slowdown and political noise. As a result, the capital and financial account recorded substantial net inflows aggregating US$3.9 billion from only US$20 million in 2006 as the other investment account reversed to a net inflow from a net outflow and the portfolio investment account registered a modest net inflow. The other investment account yielded a net inflow of US$1.6 billion, a turnaround from the net outflow of US$5.8 billion a year ago due to: a) 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 Development Policy Support Loan from the ADB; and US$295 million Power Sector Development Loan from the Japan Bank for International Cooperation); b) loan availment by corporations (US$5.3 billion); c) short-term loan availment by banks (US$390 million); d) higher net currency and deposit placements of non-residents (US$528 million); e) lower residents’ lending (US$1.2 billion and currency and deposit placements (US$1.6 billion) abroad. The portfolio investment account also posted a net inflow of US$3.1 billion in 2007, US$45 million higher than the 2006 level on account of: a) higher net placements by non-residents in equity securities of private corporations (US$3.2 billion from US$2.2 billion); b) non-residents’ subscription to bonds/notes issuances by the National Government (NG) (US$1.0 billion); and c) lower residents’ investment abroad (US$481 million from US$1.6 billion in 2006), specifically, bonds and notes net placements by domestic banks (US$844 million from US$1.2 billion). These developments negated the US$514 million net outflows of direct investments brought about mainly by: 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 (US$1.5 billion). These outflows were mitigated by higher non-residents’ net equity capital placements (US$2.0 billion) and reinvested earnings (US$567 million).
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