The balance of payments (BOP) yielded a surplus of US$221 million in Q2 2008 as both the current and capital and financial accounts registered net inflows. This brought the cumulative BOP surplus to US$1.9 billion in the first half of the year. The BOP surpluses for the quarter and for the first semester 2008, however, were lower relative to the levels in the comparable period in 2007 by 87.3 percent and 39.3 percent, respectively, due to the lower current account surplus following the wider deficit in the trade-in-goods account.
It was noted that 2007 was an exceptional year capped by ample foreign exchange liquidity from strong overseas Filipinos’ remittances and foreign investments. In the first half of 2008, however, the external environment was characterized by high oil and food prices in the world commodities market, as reflected in a higher import bill for the country, resulting in increased trade-in-goods deficit and a lower current account surplus. In the capital market, risk aversion prevailed among investors in view of the lingering global financial market uncertainties that manifested in net outflows in portfolio investment.
With the positive external payments position, the country’s gross international reserves (GIR) rose to US$36.7 billion as of end-June 2008, up by 8.8 percent compared to the end-December 2007 level of US$33.8 billion. At this level, reserves were equivalent to 6.0 months’ worth of imports of goods and payment of services and income (import cover). In terms of short-term external debt coverage, the reserves level was 5.1 times the amount of the country’s short-term external liabilities based on original maturity and 2.9 times based on residual maturity.
Second Quarter 2008 Developments
The current account remained in surplus at US$823 million (equivalent to 1.9 percent of GDP), supported by increased net receipts from current transfers, income and services. However, the surplus was lower by 50.7 percent compared to the level in the same quarter in 2007, mainly due to higher trade-in-goods deficit.
a) Trade-in-Goods Account
The trade-in-goods deficit widened by 76.1 percent to reach US$3.7 billion from US$2.1 billion a year ago, as the growth in merchandise imports at 15.5 percent outpaced that of merchandise exports at 5.2 percent. Total exports of goods rose to US$12.9 billion from US$12.2 billion a year ago, propelled largely by higher shipments of: a) manufactured goods (up by US$388 million) such as electronics, wood manufactures, machinery and transport equipment, and processed food and beverages; and b) agricultural products (US$168 million) such as coconut and other agro-based goods (US$33 million). Meanwhile, the total import bill reached US$16.5 billion from the year-ago level of US$14.3 billion, following higher purchases of goods across all major commodity groups, notably, mineral fuels and lubricants (up by 43.6 percent) and consumer goods (62.5 percent), particularly rice. These commodities posted increases in both volume and price imports.
b) Services Account
The trade-in-services account posted a surplus of US$183 million in Q2 2008. The almost threefold increase from the year-ago surplus of US$62 million was a result mainly of the combined effects of: a) higher net receipts from computer and information, and other business services, particularly, business, professional, technical and miscellaneous services; and b) lower net outflow in financial and personal, cultural and recreational services. These positive developments more than compensated for the decline in net inflows from travel, communication and construction services as well as the increase in net outflows from transportation, royalties and fees, insurance, and government services
c) Income Account
The income account surplus expanded by 61.7 percent to US$$414 million. Underpinning this development were the following: a) higher gross earnings of resident overseas Filipino workers (OFWs) which reached US$1.1 billion, or a year-on-year expansion of 46.8 percent; and b) higher net income receipts from holdings of foreign debt securities, particularly by the BSP (amounting to US$229 million). The surplus was, however, moderated by interest payments on private corporate loans.
d) Current Transfers
Net receipts from current transfers increased by 13.3 percent to US$3.9 billion from the year-ago level, boosted primarily by the 16.2 percent increase in remittances from non-resident OFs to US$3.8 billion. Robust remittance flows were shored up by strong overseas demand for Filipino workers due to the diversity and quality of skills they offer. The level of remittances also drew strong support from the expanded presence of local banks and non-bank remittance agents in countries with large concentration of OFs, as these remittance entities forged stronger partnerships and ties with foreign counterparts.
Capital and Financial Account
The capital and financial account in Q2 2008 reversed to a net inflow of US$442 million from a net outflow of US$395 million posted a year ago. The significant improvement emanated from the reversal of the direct investment account to a net inflow, and the gains in financial derivatives transactions from the losses posted last year. These net inflows more than offset the net outflow in the portfolio investment account. The net inflow in the other investment account, meanwhile, slightly increased during the quarter.
a) Direct Investments
The direct investment account in Q2 2008 reversed to a net inflow of US$216 million, recovering from a net outflow of US$2.7 billion realized in the same period a year ago. The improvement was largely on account of lower equity capital placements abroad by residents (US$77 million) from US$3.3 billion last year. It may be noted that in June 2007, a large outflow (US$3.0 billion) was recorded following a private sector’s acquisition of shares of a foreign power company abroad. Meanwhile, non-residents’ investments declined to US$293 million from US$545 million in Q2 2007 due mainly to the more than 60 percent contraction in net equity capital placements (US$334 million). The investment environment was weighed down by the generally cautious stance of foreign investors due to concerns on lingering global financial market stresses and the downturn in many advanced economies.
b) Portfolio Investments
Portfolio investments in Q2 2008 reversed to a net outflow of US$636 million from a net inflow of US$1.7 billion recorded in Q2 2007. Contributory factors include: a) net withdrawal by non-residents of their investments in equity securities issued by private corporations (US$225 million); and b) repayment of bonds by the National Government (NG) (US$740) million and private corporations (US$381 million). These outflows were, however, mitigated by net inflows of maturing debt securities placements abroad (US$1.0 billion) by local banks.
c) Other Investments
The net inflows in other investments increased by 8.8 percent year-on-year to US$792 million. Supporting these inflows were the following: a) inward repatriation of loan placements abroad by resident offshore banking units (OBUs) (US$202 million); b) withdrawals of currency and deposits abroad by resident corporates (US$69 million); c) trade credits extended by non-residents to private corporations (US$1.1 billion); d) foreign loan availments by the NG (US$467 million), corporations (US$802 million), and banks (US$353 million); and e) currency and deposit placements by non-residents (US$252 million). Partly offsetting these inflows, however, were loan repayments of the NG (US$242 million), banks (US$808 million), and the private sector (US$703 million).
January-June 2007 Developments
The current account registered a surplus of US$1.7 billion (2.0 percent of GDP), lower by 52.3 percent from the previous year’s surplus of US$3.6 billion. The decline in the current account balance reflected mainly the higher deficit in trade-in-goods, which more than offset the improvements in the current transfers, services and income accounts. Net current transfers receipts grew year-on-year by 9.9 percent, on account of the 12.1 percent rise in remittances of non-resident OFs, to reach US$7.2 billion in the first semester of 2008. The surplus in the services account rose by more than twofold to US$653 million from US$308 million, due mainly to higher net receipts from computer and information (from US$5 million to US$192 million) and other business services (from US$144 million to US$923 million). The deficit in the income account narrowed by 83.3 percent to US$68 million due mainly to higher gross earnings of resident OFWs, which accelerated by 44.5 percent, to US$2.1 billion. Meanwhile, the trade-in-goods deficit widened by more than twofold to reach US$6.4 billion from last year’s deficit of US$3.2 billion. The higher deficit was due to the acceleration of import growth to 15.5 percent while exports growth was more subdued at 4.1 percent. All major import commodities grew during the first half of the year, with purchases of consumer goods and mineral fuels & lubricants posting the highest growth rates of 58.2 percent and 60.6 percent, respectively.
Capital and Financial Account
The capital and financial account recorded a sizeable increase in net inflows, aggregating US$1.2 billion in the first semester of 2008 from US$144 million in the same period in 2007, as net inflows in both the direct and other investment accounts negated the net outflows recorded in the portfolio investment account.
a) The direct investment account in the first half of the year recovered to a US$742 million net inflow, from a US$1.4 billion net outflow a year ago due mainly to lower residents’ equity capital placements abroad amounting to US$71 million from US$3.3 billion in the comparable semester in 2007. These were partly offset by lower net non-resident investment inflows, particularly, in equity capital (US$487 million).
b) The other investment account recorded a net inflow of US$643 million in the first semester, a turnaround from the net outflow of US$632 million a year ago. This resulted from the a) repayment of loans by non-residents (US$1.5 billion) and withdrawal of currency and deposit placements (US$266 million) abroad by residents; b) higher currency and deposit placements of non-residents in local banks (US$636 million); c) long-term loan availments by private corporations (US$1.0 billion); and d) loan availments by local banks (of which US$853 million were of short-term maturity and US$240 milllion were long-term. Partly mitigating the impact of these inflows were the loan repayments made by the NG (US$571 million), banks (US$808 million) and private corporations (US$1.4 billion).
c) The portfolio investment account posted a net outflow of US$191 million during the semester, a turnaround from the US$2.3 billion net inflow recorded in the comparable quarter in 2007. These transactions arose from the a) bond repayments by the NG (US$740 million) and private sectors (US$660 million) and net bond repayment by local banks (US$236 million); and b) net withdrawal by non-residents of equity securities placements with private companies (US$386 million). These outflows were cushioned by maturing debt securities placements by residents abroad aggregating US$2.0 billion.
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