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1st Quarter 2005 BOP Position Yields a US$783 Million Surplus

06.23.2005

The balance of payments (BOP) position yielded a surplus of US$783 million in the first quarter of 2005, a reversal from the US$378 million deficit in the same quarter last year. Both the current and the capital and financial accounts showed significant improvement. With these developments, the BSP’s gross international reserves (GIR) as of end-March 2005 remained at a comfortable level of US$16.5 billion, sufficient to cover 3.7 months’ worth of imports of goods and services and income payments to the rest of the world. Based on other reserve coverage measures, the level of reserves was 3.5 times the amount of the country’s short-term external debt based on original maturity or, alternatively, 1.7 times the amount of short-term external debt based on residual maturity.

Current Account

The current account posted a higher surplus of US$546 million in the first quarter of 2005 (2.5 percent of GDP) compared to the US$109 million (0.6 percent of GDP) surplus registered in the same quarter a year-ago. The factors that lent support to the strong gains posted by the current account were the lower deficits in trade-in-goods, services and income accounts, coupled with the higher surplus in current transfers.  

a) Merchandise Trade Account

Propelled by the sustained growth in shipments of electronics, garments, and machinery and transport equipment, exports of goods expanded by 4.3 percent to reach US$9.3 billion in the first quarter of the year. These leading export commodities that comprised almost 80 percent of total exports remained the prime movers of the export sector. Exports of electronic products (including electronic equipment and parts) turned in a modest growth of 3.2 percent during the quarter despite the weakness in global IT demand which started to manifest in the latter part of 2004. Meanwhile, exports of garments rebounded with a 1.5 percent growth while exports of machinery and transport equipment performed strongly with a double-digit growth of 19.6 percent, boosted by the grant of incentives to the automotive industry. 

Imports of goods in the first quarter paced slower than exports at 3.5 percent. The growth was traced mainly to higher procurement of mineral fuels and lubricants and consumer goods which more than offset the contraction in imports of capital and raw materials and intermediate goods. Imports of mineral fuels and lubricants rose by 26.1 percent following the hike in the average price and volume of imported crude petroleum. The average import price of petroleum crude rose from US$30.41 per barrel to US$37.09 per barrel in the first three months of this year while its import volume increased by 19.5 percent to 19.25 million barrels from 16.11 million barrels. Meanwhile, imports of consumer goods reached US$797 million, triggered by the rise in purchases of both durable and non-durable goods. The 21.1 percent growth in consumer goods imports was traced largely to higher imports of rice and other food products as the country braces for a mild El Niño this year.  

It should be noted that the first quarter 2005 data on goods import released by the National Statistics Office (NSO) do not include yet the adjustments to correct the valuation of consigned raw materials imports for electronics based on the methodology agreed upon by the members of the Inter-Agency Committee on Trade Statistics (IACTS) on 18 May 2005.[1] The availability of the NSO adjusted 2005 data, however, does not coincide with the release of the BOP Developments Report for the first quarter 2005. To make the 2005 imports data comparable with the revised 2004 data, the BSP applied the new methodology in computing the adjustments on the first quarter 2005 imports data. This was implemented not only to uphold data quality and consistency but to bring about a better analysis of the developments in trade-in-goods.

b) Services Account

Meanwhile, the deficit in the services account narrowed by 33.7 percent during the review quarter due to higher net inflows from international trade in services for the following categories: passenger transport, finance, construction, computer and information and miscellaneous business, professional and technical services, coupled with the lower net outlays for government and other business services particularly those dealing with operational leasing. Other services such as travel and communication services remained in surplus but at lower levels. Net receipts from travel declined due to the higher travel imports (16.4 percent) compared to travel exports (4.5 percent). It must be noted, however, that travel imports include the expenses abroad of resident OFWs. On the other hand, the growth in travel receipts was traced to the 11.0 percent increase in the number of tourists visiting the country during the first quarter of the year as the government, through the Department of Tourism (DOT) intensified its market promotion drive to help boost the country’s tourism industry.           

c) Income Account

The income account in the first quarter of 2005 yielded a lower deficit of US$106 million compared to a deficit of US$145 million in the same quarter in 2004 due mainly to the 17.9 percent increase in compensation income of resident OFWs, which climbed to US$725 million during the review quarter. This was due, in turn, to the 6.7 percent increase in the deployment of sea-based workers. The net investment income, on the other hand, turned in a higher deficit of US$831 million due mainly to the higher payments of interest on loans and dividends. In particular, interest expense on debt more than doubled to reach US$325 million following higher interest outlays by the NG and the private sector. Meanwhile, payment of dividends by other sectors climbed from US$8 million to US$36 million. 

d)  Current Transfers

Workers’ remittances under current transfers increased by 14.7 percent in the first quarter to reach $2.3 billion. This was traced to the continued deployment of higher-paid professional OFWs and the intensified marketing efforts by commercial banks through the expansion of their remittance services abroad. [2]

Capital and Financial Account

The capital and financial account deficit reversed to a surplus of US$636 million in the first quarter of 2005 from a deficit of US$518 million posted in the same period a year ago on account mainly of the robust performance of the financial account as all investment accounts posted significant gains, except for financial derivatives.  

a)  Direct Investments

Net foreign direct investments (FDI) in the first quarter of 2005 posted a net inflow of US$262 million from a net outflow of US$180 million in the comparable quarter last year. This reflected investors’ optimism in the Philippines as an investment site following the government’s resolve to instill fiscal discipline and undertake aggressive fiscal reform measures. Non-residents’ equity capital placements surged to US$284 million from only US$39 million last year while equity capital placements abroad by residents contracted during the review quarter. Equity infusion by non-residents was channeled to the manufacturing, trading and services sectors and came largely from the U.S., Hong Kong, Japan and Malaysia.   

b)  Portfolio Investments

The net portfolio investment account also turned in a net inflow of US$648 million in the first quarter of 2005 reverting from a net outflow of US$9 million last year. The reversal was due to the substantial increase in non-residents’ investments in both equity and debt securities, which strongly indicate improved business and investment sentiments. Net placements in equity securities surged to US$1.024 billion in the first quarter of 2005 from only US$70 million a year ago while the increased subscription to the bond/notes issuances by the NG and local commercial banks led to the more than eightfold expansion in non-residents’ investments in debt securities.  

c)  Other Investments

On the other hand, the deficit in the other investment account narrowed to US$223 million in the first three months of 2005 compared to the US$323 million net outflow in the same quarter in 2004. The 31.0 percent improvement was due to higher currency and deposits which reversed to a net inflow of US$208 million from a net outflow of US$624 milllion. This more than offset the net repayments in trade credits and loans.


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[1]  See the BSP website on Notes on the 2003 and 2004 BOP revisions, section on imports.

[2]  Workers’ remittances cover both remittances in cash and in kind. Cash remittances include those sent through banks and informal channels. Moreover, only remittances of land-based workers, with the exclusion of performing artists, are covered in Current Transfers. Earnings of sea-based and performing artists are covered in the Income account as Compensation of Employees, whether remitted or not to the Philippines. The revised treatment of OFW and classification of their earnings are consistent with the BPM5 one-year residency rule. Under this rule, land-based workers (excluding performing artists) are considered as non-residents since they are hired under a two-year contract. On the other hand, performing artists work under a six-month contract and therefore treated as residents. Sea-based workers are to remain residents of the home economy regardless of the length of their contract.  Since sea-based and performing artists are treated as residents, their expenditures abroad are recorded as travel imports. Thus, their net contribution to the BOP is measured by their compensation less travel expenditures, or the amount of cash and remittances in kind although this is not readily identifiable in the BOP unlike Workers Remittances under Current Transfers.

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