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Second Quarter 2011 BOP Sustains Surplus; First Half BOP Level Rises to US$5.0 Billion

09.22.2011

The balance of payments (BOP) registered a surplus of US$1.5 billion in the second quarter of 2011. This was, however, lower than the US$1.9 billion surplus registered in the same period a year ago. The sustained surplus in the country's external payments position was underpinned mainly by the higher surplus in the current account. Meanwhile, the capital and financial account continued to improve, recording lower net outflows during the second quarter of the year due to higher net inflows of direct and portfolio investments. Like most emerging Asian economies, the Philippines continued to experience strong inflows of capital, attracted by the country's strong growth prospects. This development offset the moderation in trade-related activities experienced by most export-oriented countries due to softer demand from advanced economies, tensions in the Middle East and North Africa (MENA) region, and transitory supply-chain disruptions following the earthquake-related tragedy in Japan. As a result of these developments, the BOP position yielded a surplus of US$5.0 billion in the first six months of 2011, representing close to 60.0 percent expansion compared to the year-ago surplus of US$3.1 billion. This developed due mainly to the higher net inflows in the capital and financial account which more than compensated for the lower surplus in the current account.

Given the healthy external payments position, the country's gross international reserves (GIR) rose appreciably to US$69.0 billion as of end-June 2011, 41.7 percent higher than the year-ago level of US$48.7 billion. At this level, reserves could adequately cover 10.3 months' worth of imports of goods and payments of services and income. It was also equivalent to 10.2 times the country's short-term external debt based on original maturity and 5.9 times based on residual maturity.

Second Quarter 2011 Developments

Current Account.  The current account yielded a surplus of US$2.1 billion (equivalent to 3.7 percent of GDP), 20.1 percent higher than the surplus of US$1.8 billion in the comparable quarter in 2010. This developed on account of higher net receipts in current transfers, services and income which more than offset the widening of the trade-in-goods deficit.  The trade-in-goods deficit widened by 8.2 percent to US$3.3 billion from US$3.0 billion last year as the expansion in imports of goods (by 2.4 percent) in Q2 2011 was higher  compared to that of exports of goods (by 1.0 percent). The disruptions in oil supply brought by the social unrest in the MENA region continued to put pressure on oil prices, pulling up imports of mineral fuels and lubricants. Exports growth further moderated during the quarter as manufactured products exports declined, particularly shipments of electronic goods, including other electronics. During the quarter, exports of goods grew modestly by 1.0 percent year-on-year to US$12.3 billion, following the decline in shipments of electronic products which were affected by the spate of disasters that hit Japan in March this year.

Nevertheless, exports were supported by the improved performance of non-electronic products, backed by favorable weather conditions, as well as aggressive programs on product promotion and market diversification. On the other hand, imports of goods grew modestly by 2.4 percent to US$15.6 billion as demand for foreign goods softened amid escalating world prices and weak global growth prospects. Purchases of most major commodity groups contracted, except for mineral fuels and lubricants as prices of coal, petroleum crude and other mineral fuels and lubricants rose in anticipation of supply risks given the lingering concerns over the conflict in the MENA region.

Net receipts from trade-in-services expanded to US$657 million in Q2 2011, more than twice the US$324 million net receipts registered in the same quarter a year ago. Gains realized in business process outsourcing (BPO)-related transactions boosted the computer and information, and miscellaneous business, professional, and technical services which registered growth rates of 10.3 percent and 25.1 percent, respectively, during the quarter in review. These, combined with lower net payments in travel, and royalties and license fees helped mitigate the higher net payments in transportation, construction, insurance, financial, other personal, cultural and recreational, and government services as well as lower net receipts in communication services.

Net receipts in the income account increased to US$350 million in Q2 2011 compared to US$219 million a year ago. The nearly 60.0 percent increment was due to higher earnings of resident overseas Filipino (OF) workers amounting to US$1.4 billion, up by 17.4 percent than the year-ago level. This positive development more than negated the higher payments in the investment income account (by 8.2 percent) at US$1.1 billion during the quarter. This was brought about by higher payments of:  a) dividends and distributed branch profits on equity investments and reinvested earnings by residents to direct investors (20.2 percent); b) dividends to equity portfolio investors abroad (by 14.5 percent) by resident corporations and banks; and c) interest payments on bonds issued by the National Government (NG) (7.3 percent) and by banks (100.0 percent).

Net receipts from current transfers registered a surplus of US$4.4 billion, representing a 3.2 percent growth from the year-ago level of US$4.2 billion. The steady expansion in current transfers during the quarter was buoyed up primarily by strong remittance flows from non-resident OFs amounting to US$4.3 billion. The sustained demand abroad for Filipino workers as well as the diversity of their skills and destinations have contributed to the resilience of remittance flows even with the lingering uncertainties on the MENA region's political situation and the Eurozone sovereign debt crisis. Increased capture of money transfers has also been made possible with the expanded offering of financial products and services to overseas Filipinos by banks and other financial institutions that have established more tie-ups with foreign service providers.

Capital and Financial Account.  The capital and financial account continued to register net outflows in the second quarter of the year at US$126 million, albeit lower than the US$230 million net outflows posted in the same period last year. The net outflows in the capital and financial account were driven by the sharp reversal of the other investment account to a net outflow of US$2.3 billion from a net inflow of     US$338 million last year.  This was tempered, however, by the rebound in the portfolio investment account to net inflows and the increase in net inflows in the direct investment account. Notwithstanding the generally bearish global investor  sentiment  due to  lingering  concerns over the European financial markets and the strength of the US economy, the country continued to attract investment inflows on the back of strong macroeconomic fundamentals coupled with the upgrades of the country's sovereign credit ratings by Moody's and Fitch.

Direct investment net inflows amounted to US$439 million in Q2 2011, considerably higher than the US$18 million net inflows registered in the same quarter last year. Foreign direct investments yielded net inflows amounting to US$293 million, on account of positive balances posted in all components of the account. In particular, non-residents' net equity capital investments increased to US$95 million, more than   50 percent higher than the US$61 million registered in the same quarter a year ago.  Investments were channeled to the real estate, mining and quarrying, and manufacturing sectors. Reinvested earnings likewise realized higher inflows of US$110 million from only US$49 million in Q2 2010. Non-residents' investments in other capital (consisting mainly of intercompany borrowing/lending between foreign direct investors and their subsidiaries/affiliates in the Philippines), on the other hand, reversed to positive territory, posting net inflows of US$88 million from US$6 million net outflows in the same quarter a year ago. On the asset side, other capital registered net inflows of  US$194 million arising from advances to the resident parent company by its affiliate abroad.

Net inflows of portfolio investments reached US$1.6 billion in the second quarter of 2011, a sharp turnaround from the US$590 million net outflows   registered in the same quarter a   year ago.  Significant inflows during the review quarter included:  i) non-residents' net placements in peso-denominated government securities  (US$617 million); ii) net placements by non-residents in equity securities             (US$431 million); iii) subscription by non-residents to the bonds flotation of local private corporations (US$275 million); iv) non-residents' net placements in bonds/notes issued by local banks (US$140 million); and v) resident banks' maturing bonds/notes placements abroad   (US$457 million).

The other investment account yielded net outflows amounting to US$2.3 billion during the review period, a reversal of the US$338 million net inflows in the comparable period last year. The following transactions contributed  to the net outflows during the quarter: i) accounts receivable by local banks from non-residents (US$2.5 billion);   ii) net withdrawal by non-residents of currency and deposits in local banks and corporations (US$551 million); iii) net repayment by local banks of accounts payable to non-residents (US$392 million); and iv) net loan availments by non-residents from residents  (US$280 million).    

January-June 2011 Developments

Current Account. The surplus in the current account declined to US$3.1 billion (2.9 percent of GDP) in the first half of the year compared to US$3.4 billion (3.6 percent of GDP) a year ago. The 7.9 percent contraction was due primarily to the higher deficit in trade-in-goods, which more than offset the higher net receipts in services, income and current transfers in the first six months of 2011. Net current transfers receipts rose year-on-year by 3.8 percent, on account of the 4.2 percent rise in remittances of non-resident OFs, which reached US$8.2 billion in the first half of the year. The income account registered a surplus of US$219 million, a reversal of the US$278 million deficit recorded in the same period last year. The marked improvement was due mainly to the 14.7 percent expansion in gross earnings of resident OFWs which reached US$2.8 billion. Also contributing to the strong performance of the income account was the reduced deficit in investment income (by 5.2 percent). This was due to the higher receipts in direct investment income, particularly dividends and distributed branch profits (13.2 percent) and portfolio investment income attributed mainly to increased net income receipts from holdings of foreign debt securities by the monetary authorities (33.1 percent) and private corporations (27.3 percent).  The trade-in-goods deficit rose by 20.5 percent to reach US$7.2 billion as the growth in imports at 7.7 percent outpaced that of exports at 4.4 percent. Increases in purchases of raw materials and intermediate goods (by 11.4 percent) and mineral fuels and lubricant   (by 24.5 percent) were recorded in the first six months of the year, suggesting continued growth of domestic economic activity. On the other hand, except for exports of manufactured goods, higher shipments were recorded across all major commodity groups. Meanwhile, the surplus in the services account rose by 10.0 percent to  US$1.7 billion during the first semester, due mainly to higher net inflows in computer and information (26.4 percent), and other business services (3.8 percent), and lower net outflows registered in travel services (22.7 percent). These gains were, however, negated by higher net outflows in transportation, insurance, financial, construction, government, and personal, cultural and recreational services, as well as lower net inflows in communication services.

Capital and Financial Account.  The capital and financial account balance improved markedly in the first six months of 2011, posting higher net inflows of   US$3.0 billion compared to US$309 million in the same period in 2010. This development was due to the rebound in the portfolio investment account to a net inflow from a net outflow last year and the higher net inflows registered in the direct investment account. These trends more than offset the reversal of the other investment account to a net outflow from a net inflow in the previous year. The direct investment account recorded net inflows of US$838 million, more than twice the net inflows realized a year ago. In particular, net placements by non-residents of equity capital rose to US$193 million during the review period from US$106 million in the previous year. Moreover, the other capital investments by non-residents improved to a net inflow of US$363 million from US$331 million last year. Inflows of US$194 million arising from advances to the resident parent company by its affiliate abroad also contributed to the improvement in the direct investment account. Meanwhile, moderately lower reinvested earnings were recorded for the review period at US$223 million, from US$232 million in the first semester last year. The portfolio investment account posted net inflows of US$4.3 billion during the review period, a turnaround from the US$662 million net outflows in the previous year. The favorable performance of portfolio investments mainly reflected investors' preference for higher yields as well as the buoyant growth prospects of the Philippine economy. Major inflows in the first semester included the following: i) subscription by non-residents to the bonds flotation of the National Government (US$2.7 billion); ii) non-residents' net placements in peso-denominated government securities (US$1.4 billion); iii) non-residents' net placements in bonds/notes issued by local banks (US$1.1 million); iv) subscription by non-residents to the bonds flotation of local private corporations (US$875 million); v) non-residents' net placements in equity securities (US$363 million); and vi) resident banks' maturing bonds/notes placements abroad (US$1.1 billion). On the other hand, the other investment account yielded net outflows of US$3.2 billion, a turnaround from the US$654 million net inflows recorded a year ago, on account of the following factors: i) accounts receivable by local banks from non-residents (US$3.2 billion); ii) net repayments of loans to non-resident creditors by the NG (US$375 million) as well as by public and private corporations (US$182 million);  iii) net withdrawal by non-residents of currency and deposits in local banks (US$349 million); and iv) net repayment by residents of accounts payable to non-residents (US$153 million).

Revised 2010 BOP

The BSP will also release the revised BOP statistics for 2010 accompanied by technical notes. The revisions pertain mainly to updates in data estimates, late reports, post-audit adjustments and final data from various sources.

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