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BOP Sustains Surplus in First Nine Months of 2012 at US$5.8 Billion

12.21.2012

The country’s balance of payments in Q3 2012 sustained a surplus of US$4.5 billion. This level was slightly lower, however, compared to the US$4.7 billion surplus recorded in the same period in 2011. This developed due to the lower balance in the capital and financial account, as portfolio investments weakened due to uncertainties in global financial markets and concerns about the strength of the global economic recovery. Nonetheless, the current account recorded a higher surplus on the back of resilient remittances and the slight rebound in merchandise trade exports. As a result of these developments, the BOP position in the first three quarters of 2012 yielded a surplus of US$5.8 billion. This was, however,    40 percent lower than the surplus of US$9.7 billion in the comparable period last year. The lower external payments surplus was caused by the sharp decline in net inflows in the capital and financial account which more than offset the higher surplus in the current account. Renewed setbacks to the recovery of the global economy weighed heavily on investor confidence, contributing to the decline in net inflows of portfolio and other investments. The global economy deteriorated further due mainly to the intensified crisis in the Euro area, as well as the continued weaknesses in output and employment in the U.S. These impediments combined with the slowing growth momentum in Asia and Latin America have contributed to continued risk aversion resulting in more volatile capital flows. Meanwhile, the current account surplus was shored up largely by the gains posted in merchandise trade, current transfers and services 
 
Given the continued surplus in the BOP, the country’s gross international reserves (GIR) rose to US$82 billion as of end-September 2012, reflecting a 9.1 percent accumulation from last year’s comparative GIR level of US$75.2 billion. At this level, reserves could adequately cover 11.9 months’ worth of imports of goods and payments of services and income. It was also equivalent to 11.7 times the country’s short-term external debt based on original maturity and 6.5 times based on residual maturity.

Third Quarter 2012 Developments

Current Account.  The current account surplus increased to US$3.1 billion (representing 5 percent of GDP) in the third quarter of 2012, from US$2.3 billion (equivalent to 4.2 percent of GDP) in the comparable period in 2011. The 33.6 percent expansion in the current account surplus was underpinned primarily by the narrowing of the deficit in the trade-in-goods account combined with higher net receipts of current transfers. The improved performance of these current account components more than offset the weaker performance of the services and income accounts.

The trade-in-goods account posted a lower deficit of US$2.6 billion in Q3 2012 compared to the US$3.6 billion deficit registered in the comparable quarter last year, as exports of goods posted a respectable 7.3 percent growth, in contrast with the 0.7 percent decline in imports of goods. Exports of goods continued to increase in Q3 2012, reaching US$13.2 billion compared to last year’s level of US$12.3 billion. The 7.3 percent increment was attributed to higher shipments of manufactured goods such as machinery and transport equipment, wood manufactures, and processed food and beverages. The sustained favorable export performance was supported by the continued demand particularly from export markets in Asia (i.e., Japan, Hong Kong and Singapore), the U.K. and Canada. Imports of goods slightly decreased (by 0.7 percent) to US$15.8 billion in Q3 2012 as the declines posted in raw materials and intermediate goods and capital goods more than offset the increments recorded in imports of mineral fuels & lubricant and consumer goods.

Net services receipts reached US$1.2 billion in Q3 2012, reflecting a modest drop from the level recorded in the comparable quarter last year. The 2 percent decline can be traced to increased net payments in transportation, travel, and insurance services which mitigated the gains registered in business process outsourcing (BPO)-related transactions, particularly computer and information services (16 percent), miscellaneous business, professional, and technical services (6.4 percent), as well as communication (30.2 percent), construction (520 percent), and personal, cultural and recreational services (100 percent). Net payments were also recorded in royalties and license fees, financial, and government services.

The income account recorded net payments in Q3 2012 amounting to US$84 million, a reversal of the US$244 million net receipts registered in the comparable quarter a year ago. This developed due to higher net payments in investment income by 40.2 percent in   Q3 2012, arising mainly from: a) net dividends to foreign direct investors (141.2 percent);    b) net interest payments on bonds issued abroad by the National Government (NG) (11.9 percent) and banks (75 percent); and c) net interest payments on foreign loans availed of by local banks (100 percent) and public and private corporations (by 9.2 percent). These outflows were partially offset by earnings of resident OF workers which increased by 11.7 percent to US$1.7 billion during the quarter in review from the year-ago level of US$1.5 billion.
Net receipts in current transfers rose by 2.6 percent to reach US$4.6 billion compared to the year-ago level of US$4.5 billion. Growth in current transfers was sustained in Q3 this year by the resilience of remittances from non-resident OFs which expanded by 4.8 percent to US$4.6 billion. This developed on the back of sustained foreign demand for skilled Filipino manpower and continued financial service innovations of banks and other financial institutions to address the remittance needs of overseas Filipinos and their beneficiaries.

Capital and Financial Account.  The capital and financial account yielded net inflows of US$2 billion in the third quarter of 2012. This was lower by 21 percent than the US$2.5 billion net inflows recorded in the same period last year. Capital flows into the country continued notwithstanding fragile global financial conditions arising from the ongoing crisis in the euro area.

Direct investments posted net inflows of US$90 million in Q3 2012, a turnaround from the US$78 million net outflows in the comparable quarter a year ago.  This came about due to the reversal of non-residents’ investments in the country to net inflows of US$176 million during the quarter from net outflows of US$47 million last year.  Investor confidence was buoyed by the credit rating upgrade by Standard and Poor’s on 4 July 2012 to one notch below investment grade, as well as the policy rate reduction by the BSP that investors considered as helping to mitigate risks associated with weaker external demand. Net inflows of foreign equity capital reached US$130 million during the year, reversing the US$110 million net outflows posted in the same quarter a year ago. 
  
Notwithstanding favorable developments in the domestic front, portfolio investment trends continued to indicate cautiousness in the market amid global uncertainties. In particular, net inflows of portfolio investments declined to US$349 million in Q3 2012 compared to US$722 million in the same quarter last year. The following were the sources of inflows during the period: a) net placements by non-residents in peso-denominated government securities issued by the NG (US$740 million); and b) non-residents’ net placements in equity securities issued by domestic banks (US$291 million) and non-bank corporations (US$582 million).

Net inflows of other investments reached US$1.5 billion in the third quarter of 2012, lower by 17.4 percent than the level posted in the same quarter last year. The following transactions accounted for the inflows during the quarter: a) non-residents’ net placements of currency and deposits in domestic banks and corporations (US$1.5 billion); b) accrual of accounts payable to non-residents by local banks (US$379 million); c) net availment of foreign loans by domestic banks (US$377 million); d) trade credits extended by non-residents to local corporations (US$308 million); and e) local banks’ net withdrawal of currency and deposits in foreign banks and corporations (US$130 million).

January-September 2012 Developments

Current Account. The current account registered a higher surplus of US$7.2 billion (4 percent of GDP) in the first nine months of 2012 compared to US$5.1 billion (3.2 percent of GDP) a year ago. The improved surplus was on account of the narrowing of the deficit in the trade-in-goods account and higher net receipts in the current transfers and services accounts which more than compensated for the decline in net receipts in the income account. Merchandise trade favorably held up in the first three quarters of 2012 with both exports and imports’ growth in the positive territory. Expansion in goods exports at 7.9 percent surpassed that of goods imports at 2.2 percent, resulting in the 17 percent reduction in the trade-in-goods deficit during the nine-month period. Total exports of goods during the first nine months of the year reached US$39.7 billion, driven mainly by higher growth in exports of manufactured products, fruits and vegetables, and forest products. The increments recorded in these commodity groups compensated for the lackluster performance of mineral, coconut, petroleum, and sugar and products exports. On the other hand, imports of goods totaled US$48.7 billion in the first nine months of 2012, boosted by higher purchases of mineral fuels & lubricants (by 13.7 percent), capital goods (by 15.8 percent), and consumer goods (by 6.1 percent) which more than made up for the reduced procurement of raw materials and intermediate goods (by 7.2 percent). The services account recorded a surplus of US$3 billion in the first nine months of 2012, buoyed primarily by higher net receipts in other business services (by 2.7 percent) and computer and information services (by 11.6 percent), which comprised largely of BPO-related transactions. In the first nine months of the year, revenues from BPO services reached US$8.2 billion. The 13.7 percent improvement in the services account was supported by increments registered in net receipts from communication, construction, and personal, cultural and recreational services. Also contributing to the favorable outcome in the services account were the cutbacks in net payments posted in travel, financial, royalties and license fees, and government services, which more than offset the higher net outflows in transportation and insurance services. Net current transfers receipts increased by 2.5 percent, supported mainly by the 3.4 percent upturn in remittances of non-resident OFs, which reached US$13 billion in the first three quarters of the year. Net income receipts dropped to US$55 million in January-September this year compared to US$541 million in the same period last year. The 89.8 percent contraction was due mainly to higher net payments in investment income which offset the 13 percent increment in gross earnings of resident OFWs aggregating US$4.8 billion. The uptrend in various outlays in investment income were traced to: a) net dividends and distributed branch profits to foreign direct investors (by 85.7 percent); b) net interest payments on bonds issued abroad by the NG (by 9.9 percent) and banks (by 47.2 percent); and c) net interest payments on foreign loans availed by local banks (by 123.8 percent), and public and private corporations (by 11.4 percent).

Capital and Financial Account.  The capital and financial account recorded net inflows of US$395 million in the first three quarters of 2012. However, this was significantly lower than the US$6.2 billion net inflows realized in the comparable period in 2011. Notwithstanding the favorable growth outlook in the country, capital flows remained volatile on account of fragile investor confidence as risks stemming from the euro crisis persisted. The direct investment account registered net inflows of US$423 million in the first three quarters of the year, nearly half the level posted in the comparable period in 2011. The reversal of residents’ investments abroad to net inflows of US$670 million from the US$10 million net outflows in the previous year dragged the direct investment account even as foreign direct investments improved by 39.8 percent. Meanwhile, net foreign direct investments reached US$1.1 billion buoyed by the country’s strong fundamentals, healthy external payments position, and improved governance. The positive development in FDI was mainly driven by net infusion of equity capital amounting to US$1.2 billion, eightfold the level in the same period last year. The portfolio investment account continued to be volatile in the first nine months of the year, with net inflows reaching US$2.2 billion from US$5.6 billion in the same period last year. Amid global uncertainties arising from the euro area crisis, residents’ investments abroad increased as some investors continued their search for safe-haven assets while  non-residents’ investments in the country fell. Major sources of inflows were the following transactions: a) net subscription by non-residents to the bonds flotation of the NG (US$1.5 billion), banks (US$798 million), and local private corporations (US$106 million); b) non-residents’ net placements in equity securities issued by domestic corporations (US$1.3 billion) and banks (US$486 million); and c) issuance of peso-denominated government securities by the NG (US$513 million) to non-residents. The other investment account  posted net outflows in the first three quarters of 2012 amounting to US$2.4 billion, double the US$1.2 billion net outflows in the same period last year.  Significant outflows during the period included the following: a) residents’ net placements of currency and deposits abroad (US$3.3 billion); b) net availment of loans by non-residents from local banks (US$427 million); c) net repayment of foreign loans by domestic corporations (US$556 million), banks (US$187 million), and the NG (US$452 million); and d) accrual of accounts payable to non-residents by local banks (US$346 million).

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