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BOP Sustains Surplus in Q3 2015 Supported by Positive Current Account Balance

12.18.2015

The country’s balance of payments position yielded a surplus of US$124 million in Q3 2015, lower than the US$712 million surplus registered in the comparable quarter a year ago. This development was a result of the marked decrease in the current account surplus coupled with the net outflows (or net lending by residents to the rest of the world) in the financial account. The surplus in the current account dropped as the trade-in-goods deficit further widened and the trade-in-services surplus declined. Meanwhile, the net outflows in the financial account emanated mainly from the reversal of portfolio investments to net outflows in Q3 2015 from net inflows in Q3 2014. External headwinds emanating from the slowdown in the Chinese economy and the modest growth in Japan have affected the country’s external trade. Likewise, expectations on the US Federal Reserve rate lift-off led to volatile capital flows. 

As a result of these developments, the cumulative BOP position through September yielded a surplus of US$1.8 billion, a reversal of the US$3.4 billion deficit posted a year ago, due mainly to lower net outflows in the financial account even as the current account surplus decreased. The current account has been in surplus since 2003 boosted by inflows from overseas Filipino remittances and business process outsourcing (BPO) services. However, the current account surplus declined for the first three quarters of 2015 given the further widening of trade-in-goods deficit. This developed as the drop in exports of goods exceeded that of imports of goods. The decrease in imports of goods was moderated by the growth in imports of capital goods, and raw materials and intermediate goods that support domestic economic activities and export growth. Similarly, the services account continued to grow due to the rise in export revenues from manufacturing services and BPOs. Furthermore, sustained inflows from OF remittances were recorded during the period, albeit at a slower rate due to global de-risking activities adopted by banks, and depreciation of most currencies of countries where overseas Filipino workers are deployed.     
 
The country’s gross international reserves (GIR) slightly decreased to US$80.55 billion as of end-September 2015 from the US$80.64 billion level as of end-June 2015. At this level, reserves could still sufficiently cover 10.3 months’ worth of imports of goods and payments of services and income. It was also equivalent to 5.5 times the country’s short-term external debt based on original maturity and 4.2 times based on residual maturity. The slight decrease in the country’s GIR was due to payments by the National Government (NG) for its maturing foreign exchange obligations.

Third Quarter 2015 Developments

Current Account. The current account posted a surplus of US$658 million (equivalent to 1 percent of GDP) in Q3 2015. This was, however, 77.5 percent lower than the US$2.9 billion surplus (4.2 percent of GDP) recorded in the same quarter in 2014 on account primarily of the increased deficit in the trade-in-goods account along with the decreased net receipts from trade-in-services. The primary and secondary income accounts likewise posted lower net receipts during the quarter.

The trade-in-goods deficit widened to US$5.8 billion in Q3 2015 from US$3.9 billion in Q3 2014 as exports of goods contracted by 20.5 percent, which outpaced the decline in imports of goods. Exports of goods totaled US$10.8 billion in Q3 2015 compared to US$13.6 billion posted in the same quarter a year ago. The 20.5 percent decline was on account largely of the contraction in shipments to the country’s major trading partners such as Japan, the US, China, Hong Kong, and Singapore. Declines were registered across all major commodity groups, except for petroleum products. Imports of goods amounted to US$16.6 billion in Q3 2015, lower by 5 percent than the US$17.4 billion registered in the same quarter the previous year. Decreased imports of mineral fuels and lubricants (by 51.9 percent) contributed mainly to the decline in total imports.

The trade-in-services account registered net receipts amounting to US$540 million in Q3 2015, 28.8 percent lower than the US$759 million net receipts in Q3 2014. The decrease stemmed largely from higher net payments recorded in travel, and government goods and services combined with lower net receipts from computer services. Meanwhile, higher net receipts were posted in other business services (by 6.7 percent), the bulk of which were technical, trade-related and other business services amounting to US$2.9 billion. Export revenues from business process outsourcing services grew by 6.1 percent to reach US$4.2 billion in Q3 2015 from US$ 4 billion in Q3 2014. Growth in net receipts was also recorded in financial, and personal, cultural, and recreational services while lower net payments were posted in transport services.

The primary income account posted net receipts of US$194 million in Q3 2015, lower compared to the US$271 million net receipts in Q3 2014. The 28.3 percent decline was due mainly to increased net payments of investment income (by 7.9 percent), particularly dividends and reinvested earnings on foreign direct investments. Meanwhile, compensation inflows from resident overseas Filipino (OF) workers, which amounted to US$2 billion during the quarter, grew by 2.6 percent. Higher interest receipts on reserve assets (by 19.7 percent) were also recorded.

Net receipts in the secondary income account, amounting to US$5.7 billion in Q3 2015, slightly dropped from the US$5.8 billion net receipts in the same quarter a year ago. The 1.1 percent decline emanated mainly from lower net receipts in other current transfers (by 45.6 percent), mainly gifts and donations. Meanwhile, personal transfers registered a modest growth of 1 percent to reach US$5.4 billion in Q3 2015. The bulk of these personal transfers came from non-resident OF workers' remittances (about 98 percent), which rose by 1.1 percent to US$5.3 billion.

Capital Account. Net receipts in the capital account fell slightly to US$21 million in Q3 2015. These consisted largely of other capital transfers to the National Government (NG).

Financial Account.  The financial account yielded net outflows (or net lending by residents to the rest of the world) of US$858 million in Q3 2015, slightly lower by 3.6 percent than the US$891 million net outflows in the same quarter in 2014. The decline in net outflows resulted from the reversal of direct investments, other investments, and financial derivatives to net inflows from net outflows in Q3 last year. Meanwhile, the portfolio investment account registered net outflows during the quarter, which more than offset the net inflows posted in the other financial accounts.

The direct investment account registered net inflows of US$118 million in Q3 2015 from US$904 million net outflows in the comparable quarter last year. Residents’ net incurrence of liabilities (foreign direct investments in the Philippines or FDI) totaled US$2.5 billion, which was more than their net acquisition of financial assets of US$2.4 billion. FDI during the quarter grew by 74.7 percent to reach US$2.5 billion as all components posted increases during the quarter. In particular, non-residents’ net placements in debt instruments (or intercompany borrowings) and equity capital rose significantly by 89.5 percent (to US$1.5 billion) and 76.1 percent (to US$785 million), respectively. Reinvestment of earnings likewise grew by 5.6 percent to reach US$191 million.

The portfolio investment account recorded net outflows of US$3.2 billion in Q3 2015, a reversal of the US$885 million net inflows in the same quarter last year. This development was driven by residents’ net repayment of liabilities of US$2.3 billion (from net incurrence of US$659 million) coupled with residents’ net acquisition of financial assets amounting to US$894 million (from net disposal of US$226 million).

The other investment account recorded net inflows of US$2.2 billion in Q3 2015, a turnaround from the US$863 million net outflows in the same quarter in 2014. The inflows emanated from the combined effect of residents’ net disposal of financial assets acquired from non-residents (US$1.2 billion) and net incurrence of liabilities (US$1.1 billion) during the quarter. Residents’ net incurrence of liabilities was mainly on account of loans availed by local banks from non-resident creditors (US$793 million).  Meanwhile, the higher net disposal of financial assets was due to non-residents’ repayment of debt extended by local banks (US$617 million) and residents’ net withdrawals of currency and deposit placements abroad (US$520 million).

January-September  2015 Developments

Current Account. The current account remained in surplus at US$5.6 billion (2.6 percent of GDP) in the first three quarters of 2015, albeit lower compared to US$6.8 billion (3.3 percent of GDP) in the same period last year. The 18.7 percent contraction in the current account surplus was on account mainly of the widening of the trade-in-goods deficit.

The trade-in-goods deficit in the first nine months of 2015 widened by 20.9 percent as the decrease in exports of goods (by 15.6 percent) surpassed the contraction in imports of goods (by 7.1 percent). Exports of goods in the first nine months of 2015 at US$31.9 billion were lower compared to US$37.8 billion in the same period in 2014 as all major commodity groups registered declines. Imports of goods declined to US$45.7 billion in the first three quarters of the year from US$49.2 billion in the same period in 2014 as a result primarily of the 42.8 percent decline in imports of mineral fuel and lubricants following the continued fall in international market prices of crude oil.

Net receipts in the trade-in-services account expanded by 16 percent to US$1.6 billion in the first nine months of 2015. This developed on account mainly of increased net receipts from technical, trade-related and other business services (by 5.1 percent) combined with decreased net payments for financial, construction, maintenance and repair, and transport services. These gains were mitigated by higher net payments for travel, insurance and pension, charges for use of intellectual property, government goods and services, and the reversal of the personal, cultural and recreational services to net payments from net receipts.

The primary income account registered net receipts of US$1.2 billion, more than twice the US$559 million net receipts in the same period last year. This was due primarily to lower net payments in investment income (by 8.1 percent). Higher net interest receipts from intercompany borrowings as well as lower net outlays for reinvested earnings on direct investments were recorded during the period. The improvement in the primary income account was also boosted by the 3.6 percent increase in earnings of resident OF workers at US$5.7 billion in January-September 2015 from US$5.5 billion in the same period in 2014.

Net receipts in the secondary income account recorded a modest growth of 1.8 percent to US$16.6 billion, buoyed mainly by the 4 percent increment in remittances of non-resident OF workers amounting to almost US$15.3 billion.

Capital Account.  The capital account registered net receipts of US$59 million in the first three quarters of the year, lower by 19.5 percent than the US$74 million recorded in the same period last year. This resulted from lower net capital transfers to the NG.

Financial Account.  The financial account posted net outflows (or net lending of residents to the rest of the world) of US$3.1 billion in January-September 2015, a decline of 45.9 percent from the US$5.8 billion net outflows posted in the same period last year. The decline in net outflows was largely on account of the reversal of the other investment account to net inflows and higher net inflows of direct investments.

Net inflows of direct investments rose to US$160 million in the first three quarters of 2015 from only US$5 million in the same period last year.  The higher net inflows were due mainly to the 8.8 percent decline in residents’ net acquisition of financial assets which reached US$4.4 billion during the period.  In particular, residents’ placements of equity capital abroad dropped by 34.4 percent to settle at US$959 million.  Meanwhile, FDI was moderately lower by 5.5 percent at US$4.5 billion in January-September 2015 compared to the same period last year. This was largely on account of the 16.2 percent drop in non-residents’ investments in debt instruments issued by local affiliates (or intercompany borrowings) which settled at US$2.5 billion.

Net outflows of portfolio investments increased more than fivefold to reach US$6.7 billion in the first three quarters of 2015. This was due mainly to the increase in residents’ net acquisition of financial assets amounting to US$3.4 billion combined with residents’ net repayment of liabilities of US$3.2 billion. Residents’ net acquisition of financial assets consisted largely of net placements by domestic deposit-taking corporations in debt securities (US$2.3 billion) and by non-bank corporations in equity securities (US$660 million) issued by non-residents. Meanwhile, net repayment of liabilities was accounted for by the NG’s net redemption of government securities (US$1.8 billion) and by local corporations’ net redemption of debt securities (US$685 million) held by non-residents.

The other investment account yielded net inflows of US$3.3 billion, a reversal of the US$4.6 billion net outflows recorded during the same period in the previous year. Contributing largely to this reversal were the following: a) local banks’ net withdrawal of currency and deposit placements in foreign banks (US$1.8 billion, from net placements amounting to US$1.2 billion), b) non-residents’ net repayment of loans extended by local banks (US$2 billion, from net availment of US$1.3 billion), and c) significant decline in residents’ net repayment of loans owed to non-resident creditors (US$274 million, from US$1.9 billion).

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