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Third Quarter 2011 BOP Registers a Higher Surplus; BOP Level for First Three Quarters Rises to US$9.7 Billion

12.19.2011

The balance of payments (BOP) surplus increased to US$4.7 billion in the third quarter of 2011, reflecting a 42.3 percent increment from the surplus during the same quarter a year ago of US$3.3 billion. The considerable improvement in the country’s external payments position was due mainly to higher net inflows in the capital and financial account. The current account also remained in surplus, buoyed primarily by gains registered in current transfers, services and income, which mitigated the widening of the trade-in-goods deficit. Despite the prevailing uncertainties in the global economic environment and greater risk aversion following intensified financial strains in the Euro Zone and the continuing weak U.S. economic performance, activity in the Asian region remained solid, even as it has moderated. As economic worries continue to beset advanced economies, the attractiveness of capital flows to emerging economies with brighter growth prospects, including the Philippines, has continued. Strong capital flows along with sustained inflows from remittances and business process outsourcing (BPO) receipts compensated for the trade-channel effects resulting from the weak demand in advanced that led to broad-based decline in industrial production and export growth across Asia.

As result of these favorable developments, the BOP position yielded a surplus of US$9.7 billion in the first three quarters of 2011, expanding by more than 50.0 percent compared to the surplus of US$6.4 billion in the same period a year ago. This positive development was underpinned by the surge in net inflows in the capital and financial account, which cushioned the lower surplus in the current account. Notwithstanding the highly uncertain environment dominated by tensions from the Euro Zone interlocking sovereign debt and banking concerns and heightened risks to global growth, the influx of capital to emerging economies remained sizeable as the expected healthy economic expansion and favorable interest rate differentials in Asia continued to boost investor interest in many Asian economies, including the Philippines.

Given the country’s healthy external payments position, the country’s gross international reserves (GIR) reached US$75.2 billion as of end-September 2011, reflecting a 40.0 percent accumulation from the year-ago level of US$53.8 billion. At this level, reserves could sufficiently cover 11.1 months’ worth of imports of goods and payments of services and income. It was also equivalent to 10.5 times the country’s short-term external debt based on original maturity and 6.3 times based on residual maturity.

Third Quarter 2011 Developments

Current Account.  The current account remained in surplus at US$2.0 billion, equivalent to 3.7 percent of GDP. This was, however, 40.1 percent lower than the surplus of US$3.4 billion in the comparable quarter in 2010. The sustained current account surplus was supported by increased net receipts in current transfers, services and income, which mitigated the widening of the trade-in-goods deficit.

The trade-in-goods deficit at US$3.5 billion was more than twofold the US$1.7 billion deficit posted a year ago as exports of goods declined faster (by 15.5 percent) than imports of goods (by 2.2 percent). Weak external demand in advanced economies following the worsening stresses in foreign financial markets led to the moderation in trading activity.

Net receipts from trade-in-services rose by 15.5 percent to US$961 million in Q3 2011 from US$832 million in the comparable quarter last year. Growth was mainly driven by the receipts from business process outsourcing (BPO)-related transactions which led to the 14.4 percent expansion in miscellaneous business, professional, and technical services during the quarter in review. Also supporting the improvement of the services account were communication (by 5.3 percent) and insurance services (by 8.9 percent).

Net receipts in the income account increased to US$176 million in Q3 2011 compared to US$93 million a year ago. The 89.2 percent expansion was due to higher earnings of resident overseas Filipino (OF) workers amounting to US$1.5 billion, up by 12.1 percent from the year-ago level. This favorable outcome more than compensated for the increased net payments in the investment income account (by 6.3 percent) at US$1.3 billion during the quarter. This was brought about by higher net payments of: a) dividends to equity portfolio investors abroad (by 48.9 percent) by resident corporations; and b) interest on bonds issued by corporations (18.6 percent) and by banks (166.7 percent). Meanwhile, reinvested earnings and undistributed branch profits also recorded higher net payments (by 332.3 percent) to US$134 million during the quarter.

Net current transfers reached US$4.4 billion, representing a 7.5 percent increment from the previous year’s level of US$4.1 billion. Robust inflows of remittances from non-resident OFs amounting to US$4.4 billion provided stable support to the expansion in current transfers during the quarter.

Capital and Financial Account.  The capital and financial account posted net inflows of US$2.3 billion in the third quarter of 2011, considerably higher than the US$1.7 billion net inflows recorded in the same period last year. Strong macroeconomic fundamentals and positive developments in the country continued to encourage inflows into the country. Net inflows of other investments, increasing threefold during the quarter compared to last year’s level, drove the growth in the capital and financial account.

Direct investments registered net outflows of US$94 million in Q3 2011, a reversal of the US$281 million net inflows recorded in the same quarter last year. Foreign direct investments registered net outflows of US$63 million due to negative balances posted in the equity and other capital accounts. Non-residents’ net equity capital investments registered net outflows of US$120 million, largely on account of a sizeable purchase of a non-resident corporation’s shares in a local mining company by its local partner. On a gross basis, equity capital placements reached US$232 million during the review quarter, which were channeled largely to the banking, real estate, and manufacturing sectors. 

Net inflows of portfolio investments reached US$715 million in the third quarter of 2011, 34.1 percent lower than the US$1.1 billion net inflows registered in the same quarter a year ago. Portfolio investment flows into the country slowed down from the quarter- and year-ago levels following heightened global risk aversion amid fears of Europe’s deepening debt crisis and decelerating world GDP growth. Significant inflows during the review quarter included: i) non-residents’ net placements in peso-denominated government securities (US$760 million); ii) non-residents’ net placements in bonds/notes issued by local banks (US$322 million); iii) net purchase by non-residents through secondary market trading of Philippine debt papers originally issued abroad by the NG (US$311 million); and iv) resident banks’ maturing placements in money market instruments abroad   (US$100 million).

The other investment account realized net inflows amounting to US$1.6 billion in the third quarter, more than three times higher than the US$437 million net inflows in the same quarter last year. The following transactions accounted for the net inflows during the quarter: i) net placements by non-residents of currencies and deposits in local banks (US$2.0 billion); ii) net loan availments by residents from non-residents (US$282 million); and iii) net loan repayments by non-residents to local banks  (US$374 million).

January-September 2011 Developments

Current Account. The current account posted a surplus in the first nine months of the year but the balance dropped to US$5.1 billion (3.1 percent of GDP) compared to    US$6.7 billion (4.7 percent of GDP) a year ago. The 25.0 percent decline was caused mainly by the widening of the trade-in-goods deficit, which negated the gains recorded in services, income and current transfers.

Net current transfers receipts grew year-on-year by 5.2 percent, on account primarily of the 5.4 percent rise in remittances of non-resident OFs, which reached    US$12.6 billion in the first three quarters of 2011.

The income account registered net receipts of US$363 million, a reversal of the US$185 million net payments posted in the same period last year. The reversal was due mainly to the 13.8 percent uptrend in gross earnings of resident OFWs which reached US$4.3 billion. The lower deficit in investment income (0.8 percent) also helped to improve the income account. This was traced to lower net payments of dividends and distributed branch profits (8.2 percent) and increased net income receipts from holdings of foreign debt securities by the monetary authorities (33.0 percent). 

The surplus in the services account increased by 10.2 percent to US$2.6 billion during the first nine months of 2011, due mainly to higher net receipts in computer and information (9.8 percent) and other business services (6.9 percent), as well as lower net payments registered in travel services (12.4 percent). ). Export receipts from BPO-related transactions totaled US$7.9 billion in the first nine months of 2011, of which US$1.2 billion were receipts from computer and information services and US$6.7 billion from miscellaneous business, professional and technical services.

The trade-in-goods deficit went up by 40.8 percent to reach US$10.7 billion due mainly to the decline in exports of goods by 3.2 percent combined with the higher growth in imports by  4.2 percent. Notwithstanding the higher shipments recorded across all major export commodity groups in the first nine months of the year, the decline in exports of manufactured goods dragged total exports to the negative growth territory. Total manufactured goods exports in the first three quarters of the year dropped to US$30.9 billion compared to US$34.0 billion in the same period last year. The 9.2 percent contraction was due to lower shipments of electronic products which decreased by 19.5 percent to US$19.8 billion. In particular, lower demand from major export destinations such as Singapore, Japan and Malaysia was registered for the period January-September 2011. On the other hand, higher purchases of mineral fuels & lubricants (by 32.8 percent) and capital goods (by 5.9 percent) more than offset the reduced importations of raw materials and intermediate goods (by 1.2 percent) and consumer goods (by 7.4 percent). Sluggish external demand for electronics exports resulted in the 19.7 percent decline in the procurement of raw material inputs for the manufacture of electronic products to US$12.1 billion from US$15.0 billion last year.

Capital and Financial Account.  The capital and financial account balance improved markedly in the first three quarters of 2011, as net inflows more than doubled to reach US$5.1 billion from US$2.0 billion in the comparable period in 2010. This development was due to the considerable growth in net inflows of portfolio investments and the rebound in financial derivatives trading to a net gain from a net loss last year. 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 in the first nine months of 2011 recorded net inflows of US$699 million, 14.0 percent higher than the US$613 million net inflows realized a year ago. This development was due largely to net inflows of residents’ investments abroad on account of the US$194 million inflows arising from advances to the resident parent company by its affiliate abroad. Meanwhile, net inflows of non-residents’ investments in the country declined by 32.9 percent to settle at US$671 million during the review quarter from US$1.0 billion last year. In particular, net placements by non-residents of equity capital were lower at US$73 million during the review period from US$185 million in the previous year. 

The portfolio investment account posted net inflows of  US$5.6 billion during the review period, more than 13 times the US$423 million net inflows in the previous year. Major inflows in the first three quarters included the following: i) subscription by non-residents to the bonds flotation of the National Government (US$2.7 billion) and local private corporations (US$1.5 billion); ii) non-residents’ net placements in peso-denominated government securities (US$2.2 billion); iii) non-residents’ net placements in bonds/notes issued by local banks (US$1.4 billion); iv) resident banks’ maturing bonds/notes placements abroad (US$1.0 billion); and v) non-residents’ net placements in equity securities issued by banks and corporates (US$360 million).

The other investment account yielded net outflows of US$2.3 billion in the first nine months of 2011, a reversal of the US$1.1 billion net inflows recorded a year ago, on account of the following factors: i) residents’ net placements of currency and deposits abroad (US$2.2 billion); ii) accounts receivable of local banks from non-residents (US$1.5 billion); iii) repayment of trade credits extended by non-residents to local private corporations (US$304 million); iv) net repayments of loans to non-resident creditors by the NG (US$182 million); and v) settlement of accounts payable by local banks to non-residents (US$174 million).

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