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Q2 2016 BOP Yields Surplus; Financial Account Reverses to Net Inflows

09.16.2016

The country’s balance of payments position (BOP) rebounded in Q2 2016, yielding a surplus of US$843 million after posting a deficit in the first quarter of the year. This was also slightly higher than the US$807 million surplus registered in the same quarter last year. The BOP surplus was driven mainly by net inflows (or net borrowing by residents from the rest of the world) in the financial account. The financial account recorded net inflows of US$1.2 billion in Q2 2016, a reversal of the US$1.5 billion net outflows in Q2 2015 due primarily to increased net inflows of direct investments combined with decreased net outflows of portfolio investments. The current account posted a significantly lower surplus of US$65 million on account of the marked increase in the trade-in-goods deficit as a result of the rise in imports coupled with the decline in exports. The marked increase in imports, particularly raw materials and capital goods, indicates increased domestic production activity. Meanwhile, global economic activity continues to be tepid as major economies such as the US and the core euro area registered mild output growth along with the deterioration in China’s manufacturing sector. As a result of the continued weak growth outlook in major emerging markets and the absence of a solid economic recovery among advanced economies, a number of central banks eased their monetary policy settings in order to support economic activity.
  
Second Quarter 2016 Developments

Current Account. The current account registered a surplus of US$65 million (0.1 percent of GDP) in Q2 2016, markedly lower than the US$3.2 billion surplus (4.3 percent of GDP) recorded in Q2 2015. The surplus in the current account was driven by increased net receipts in trade-in-services and primary and secondary income accounts. The substantial widening of the trade-in-goods deficit, however, lowered the current account balance.

The trade-in-goods deficit widened to US$8.6 billion in Q2 2016 from US$4.2 billion in Q2 2015 on account of the rise in imports of goods (by 23.6 percent) combined with the decline in exports of goods (by 6.6 percent). Exports of goods fell by 6.6 percent to US$10.5 billion in Q2 2016 from US$11.2 billion in Q2 2015 as declines were recorded across major commodity groups due to sluggish demand from the country’s major trading partners (i.e., Japan, US, and China). Meanwhile, imports of goods totaled US$19.1 billion in Q2 2016, higher than the US$15.4 billion recorded in Q2 2015 due mainly to increased imports of raw materials and intermediate goods, as well as capital and consumer goods.

Net receipts in trade-in-services expanded to US$1.7 billion in Q2 2016 compared to the US$964 million net receipts in Q2 2015. The 73.6 percent growth was attributed mainly to higher net receipts in computer services (by 46.6 percent) and  technical, trade-related, and other business services (by 3.3 percent), combined with lower net payments in travel services (by 15.6 percent). Export revenues in business process outsourcing services amounted to US$5.2 billion in Q2 2016.

The primary income account posted net receipts of US$738 million in Q2 2016, higher than the US$587 million net receipts in Q2 2015. The 25.8 percent increment was due largely to lower net payments of investment income (by 15.6 percent) arising from lower dividends paid to non-resident investors, coupled with decreased interest payments by the National Government (NG) and public and private corporations on bonds issued abroad.

Net receipts in the secondary income account reached US$6.2 billion in Q2 2016, higher than the US$5.9 billion net receipts in Q2 2015. The 6.5 percent increment resulted mainly from the 8.1 percent growth in personal transfers to reach US$5.9 billion. The bulk of these personal transfers comprised of non-resident OF workers' remittances (about 98 percent), which increased by 8.3 percent to US$5.8 billion.

Capital Account. The capital account yielded higher net receipts amounting to US$41 million in
Q2 2016 from US$28 million in the same quarter in 2015. Inflows arising from the NG’s receipts in other capital transfers increased during the quarter.

Financial Account. The financial account posted net inflows (or net borrowing by residents from the rest of the world) of US$1.2 billion in Q2 2016, a turnaround from the US$1.5 billion net outflows in Q2 2015. This development resulted primarily from the marked increase in net inflows of direct investments combined with the decline in net outflows of portfolio investments.  Meanwhile, the other investment account registered lower net inflows during the quarter.
    
Net inflows of direct investments reached US$1 billion in Q2 2016, more than sevenfold the level in the same quarter last year. Residents’ net incurrence of liabilities (foreign direct investments in the Philippines or FDI) grew at a higher rate of 140.2 percent to US$2.8 billion compared to the 73.9 percent growth in their acquisition of financial assets, which reached US$1.8 billion. All components of FDI registered increases, led by non-residents’ net placements in debt instruments issued by local affiliates (or intercompany borrowings), which more than tripled to US$1.7 billion.

The portfolio investment account registered net outflows of U$640 million in Q2 2016, lower by 81.1 percent than the level posted in the same quarter last year. This developed as residents’ net incurrence of liabilities, or foreign portfolio investments, reversed to net inflows (US$367 million) coupled with a decline in residents’ net acquisition of financial assets (to US$1 billion). On the liability side, foreign portfolio investments in equity and investment fund shares issued by resident banks and other local corporates reversed to net inflows amounting to US$579 million. Net repayment of debt securities issued by residents fell by 86.1 percent to reach US$212 million on account of a decline in net redemption of long-term bonds issued by the NG and other private corporations.

The other investment account posted net inflows of US$895 million, a decline of 47 percent from the level posted in the comparable quarter last year. Sources of net inflows include residents’ net disposal of financial assets (US$640 million), particularly net withdrawal of placements of currency and deposits abroad by local banks (US$574 million) and non-residents’ net repayment of loans extended by local banks (US$121 million).  Inflows from residents’ net incurrence of liabilities emanated mainly from loans availed by local banks from non-residents (US$976 million) and trade credits extended by non-residents to local corporates (US$404 million).

January-June  2016 Developments

Current Account. The current account remained in surplus at US$778 million (0.5 percent of GDP) in the first half of 2016, lower than the US$5.3 billion surplus (3.7 percent of GDP) in the same period in 2015. The decline in the current account surplus stemmed mainly from the widening of the trade-in-goods deficit.

The trade-in-goods deficit for the first half of 2016 increased by 72.1 percent to US$16.4 billion as a result of the contraction in exports of goods (by 5.2 percent) and the expansion in imports of goods (by 18.3 percent). Exports of goods fell to US$20.7 billion in the first six months of 2016 from US$21.8 billion in the same period last year. Except for sugar products, all major commodity groups registered decreased shipments. Imports of goods rose to US$37.1 billion or by 18.3 percent mainly from higher imports of capital goods (by 55.7 percent) and raw materials and intermediate goods (25.7 percent), indicating continued expansion in domestic economic activity.

Net receipts in the trade-in-services account amounted to US$3.6 billion in the first half of 2016, 53.5 percent higher than the US$2.3 billion net receipts posted in the comparable period last year. The improvement was on account largely of increased net receipts from computer, and technical, trade-related and other business services combined with lower net payments for travel, charges for use of intellectual property, and the reversal of personal, cultural and recreational services to net receipts from net payments.

The primary income account recorded net receipts of US$1.4 billion, 65.6 percent higher than the US$851 million net receipts in  the first half of 2015. This positive outcome stemmed mainly from the decrease in net payments in investment income (by 20 percent) as a result of: a) lower net outlays for dividends on both direct and portfolio investments; b) reduced net interest payments on portfolio investments; and c) increased interest receipts on reserve assets.

Net receipts in the secondary income account grew by 5 percent to US$12.2 billion, buoyed mainly by the 6 percent increase in remittances of non-resident OF workers amounting to US$11.3 billion.

Capital Account.  Cumulative net receipts of the capital account for the first semester reached US$80 million. This was higher by 54.1 percent than the US$52 million recorded in the same period in 2015, due mainly to the increase in capital transfers to the NG.

Financial Account.  The financial account yielded net inflows (or net borrowing by residents from the rest of the world) of US$160 million in the first semester of 2016, a reversal of the US$1.5 billion net outflows recorded in the same period last year. This development was attributed mainly to the reversal of the direct investment account to net inflows and lower net outflows in the portfolio investment account.

The direct investment account recorded net inflows of US$2.1 billion, reversing the US$103 million net outflows posted in the same period last year. This was brought about by the 94.9 percent increase in resident’s net incurrence of liabilities to US$4.2 billion coupled with the 9.4 percent decline their net acquisition of financial assets. FDI rose as non-residents’ placements in debt instruments issued by local subsidiaries/affiliates (intercompany borrowing) and equity capital more than doubled to reach US$2.4 billion and US$1.4 billion, respectively.  Equity capital placements were sourced mainly from Japan, Singapore, Hong Kong, the United States, and Taiwan.  The sectors that benefitted from the investments were the financial and insurance; real estate; manufacturing; construction; and accommodation and food services.

Net outflows of portfolio investments fell by 27.9 percent in the first six months of the year to settle at US$2.1 billion on account of lower net acquisition of financial assets by residents (US$1.5 billion) coupled with lower net repayment of their liabilities (US$590 million). The bulk of residents’ net acquisition of financial assets consisted largely of net placements by local banks in debt securities (US$1.4 billion) issued by non-residents. Net repayment of liabilities comprised mainly of net redemption of debt securities issued by the NG (US$881 million) and by local corporations (US$321 million) that were held by non-residents.

The other investment account recorded net inflows of US$170 million during the review period, significantly lower than the US$1.4 billion posted in the same period in 2015. On the liabilities side, net inflows emanated from non-residents’ extension of trade credit and advances to local corporates (US$916 million) and their net placements of currency and deposits in local banks (US$782 million). These inflows were partly mitigated by net outflows on the asset side, particularly local banks’ net placements of currency and deposit in foreign banks (US$367 million).

Revised 2015 BOP data

The 2015 BOP data have been revised to reflect updates from various data sources and post-audit adjustments. The revised 2015 BOP data with accompanying technical notes are posted in the BSP website.

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