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Robust Current Account Drives Higher BOP Surplus in Q1 2013

06.21.2013

The country’s external payments position in Q1 2013 sustained the surplus recorded since 2005 on the back of strong current account. For the first three months of 2013, the balance of payments (BOP) position surplus rose by 23.5 percent to US$1.5 billion—equivalent to 2.4 percent of the country’s Gross Domestic Product (GDP)—from US$1.2 billion in the comparable period a year ago.

Robust performance of the current account underpinned the continued strength of the BOP position in Q1 2013. For the January-March 2013 period, the current account—in surplus since 2003—surged by more than eightfold compared to the same period in 2012 due to improved external demand for Philippine-made goods from the country’s major trading partners which showed signs of economic recovery, continued growth of the business process outsourcing (BPO) industry, and sustained demand for skilled Filipino workers overseas. Meanwhile, the Philippines continued to be a net recipient of funds from the rest of the world as the financial account recorded net inflows of investments from non-residents in Q1 2013.  In particular, direct investments continued to post net inflows, albeit lower relative to the comparable period a year ago. Moreover, portfolio investments recorded higher net inflows amid sustained investor confidence over the country’s favorable economic prospects. On the other hand, net receipts in the capital account decreased moderately as capital transfers to the National Government declined during the period.
 
The sustained BOP surplus allowed the accumulation of higher gross international reserves (GIR) of US$84 billion as of end-March 2013, expanding by 10.3 percent (US$7.8 billion) from the year-ago level of US$76.1 billion. At this level, reserves could sufficiently cover 11.9 months worth of imports of goods and payments of services and income. It was also equivalent to 9.9 times the country’s short-term external debt based on original maturity and 6.3 times based on residual maturity.

First Quarter 2013 Developments

Current Account.  The current account recorded a surplus of US$3.4 billion (equivalent to 5.3 percent of GDP) in Q1 2013, rising by more than eightfold compared to the US$393 million surplus in the same period a year ago. This appreciable uptrend was mainly due to higher net receipts in the secondary income and services accounts, combined with the reduced deficit in trade-in-goods and the lower net payments of primary income.

The trade-in-goods deficit in Q1 2013 narrowed by 42.9 percent to US$2.7 billion compared to the US$4.8 billion deficit registered in the same quarter a year ago. The continued improvement in the trade-in-goods deficit was a result of the 7.9 percent expansion in goods exports and the contraction in goods imports by 8.2 percent. The growth in exports of goods from US$10.3 billion in the same quarter in 2012 to US$11.2 billion was supported by strengthening external demand in the country’s major trading partners, following encouraging signs of economic recovery in the U.S. and Japan and the fairly robust growth in emerging countries. Higher shipments were noted across all major commodity groups.

Net services receipts totaled US$1.8 billion in the first quarter of 2013, higher than the US$1.5 billion net receipts posted in the comparable quarter a year ago. The 18.8 percent increment was due mainly to increased net receipts registered in telecommunications, computer, information, travel, and personal, cultural, and recreational services along with decreased net payments in transport services (particularly due to lower outlays for freight as a result of lower imports of goods), charges for the use of intellectual   property, insurance and pension, financial, and government goods and services. In particular, net receipts in technical, trade-related, and other business services, which comprised the bulk of BPO-related transactions, continued to boost the performance of the services account, with net receipts amounting to US$2 billion.

Net payments in the primary income account of US$103 million in Q1 2013 were lower compared to US$657 million recorded in Q1 2012. The considerable reduction in the net payments in primary income (by 84.3 percent) stemmed mainly from lower net outlays in investment income together with higher net earnings of resident overseas Filipinos (OF) workers which rose by 5.7 percent to reach US$1.6 billion. In particular, net dividends to foreign direct and portfolio investors declined by 28.2 percent and 23.9 percent, respectively. Also contributing to the improvement in the net payments in the primary income account were lower net interest payments on portfolio investments (by 3.4 percent) and other investments (by 51 percent). As a result of the decline in global interest rates, net interest payments by the National Government (NG), and by private and public corporations on bonds issued abroad declined by 6.8 percent and 38.5 percent, respectively. Similarly, net interest payments on foreign loans contracted by 30.6 percent and 51.1 percent, respectively. 
 
Net receipts in the secondary income account expanded by 3.5 percent to reach US$4.5 billion compared to the year-ago level of US$4.3 billion. This was due to the 4.2 percent   uptrend in   personal   transfers to US$4.2 billion during the quarter. Comprising about 98 percent of personal transfers, non-resident OF workers’ remittances climbed by 3.4 percent from the level in Q1 2012 to reach US$4.1 billion. The expanding operations of remittance service providers across the globe facilitated a broader capture of remittances through the formal channels.

Capital Account.  The capital account registered US$23 million net receipts in Q1 2013, slightly lower than the US$25 million posted in the same quarter a year ago. This developed as net receipts arising from capital transfers to the NG declined during the period.

Financial Account.  The financial account yielded net borrowings (net inflows) by residents of US$1.5 billion in Q1 2013, lower by 69.1 percent than the US$4.8 billion recorded in the same period in 2012.  This developed as residents’ net incurrence of liabilities (US$2.2 billion) exceeded their net acquisition of financial assets (US$721 million). In particular, direct investments registered lower net borrowing reflecting renewed concerns over the weak recovery in the eurozone following the financial difficulties faced by Cyprus. Meanwhile, net borrowing in the portfolio investment account increased in Q1 2013 compared to the same period last year on the back of sustained investor confidence over the country’s favorable economic prospects. Other investments reversed to net lending in Q1 2013 from a net borrowing position in Q1 2012.
 
The direct investment account posted US$814 million net borrowings by residents from the rest of the world in Q1 2013, lower by 9.4 percent than the level recorded in Q1 2012. The lower net borrowing was driven mainly by the 8.5 percent decline in residents’ net incurrence of liabilities (or net inflows of foreign direct investments). In particular, non-residents’ net equity capital investments during the quarter reached US$729 million, lower by 22.2 percent than the Q1 2012 level.  On a gross basis, equity capital placements were sourced primarily from Mexico, Japan, Malaysia and the U.S. and channeled to the following sectors: a) manufacturing; b) water supply, sewerage, waste management and remediation activities; c) financial and insurance activities; d) arts, entertainment and recreation; and e) real estate. 
 
Net borrowings in the portfolio investment account reached US$3.1 billion in January-March 2013, more than double the US$1.2 billion posted in the same period last year.  In particular, residents’ net withdrawal of financial assets yielded US$771 million, a reversal of the US$786 million net acquisition of financial assets in Q1 2012.  Meanwhile, residents’ net incurrence of liabilities reached US$2.4 billion during the quarter, higher by 15.6 percent.
 
The other investment account registered net lending (net outflows, i.e., net acquisition of financial assets are greater than net incurrence of liabilities) by residents to the rest of the world amounting to US$2.4 billion in Q1 2013, a turnaround from the US$2.6 billion net borrowing recorded in the same quarter last year.

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