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Q3 2016 BOP Yields Higher Surplus Due to Continued Current Account Surplus

12.16.2016

The country’s balance of payments position registered a surplus of US$1 billion in Q3 2016, significantly higher than the US$124 million surplus recorded in Q3 2015. This positive development stemmed from the increased surplus in the current account even as the financial account reversed to net outflows (or net lending by residents to the rest of the world). The current account registered a surplus of US$979 million, buoyed by increased net receipts in trade-in-services, and primary and secondary income accounts. Meanwhile, the financial account recorded net outflows during the quarter due mainly to the reversal of other investment account to net outflows. Global economic activity remains tepid as a result of the continued sluggish economic activity in the euro area and Japan even as growth in the US economy remained firm and China showed marginal economic recovery. These uncertainties in the external front remained key downside risks affecting the country’s external trade and capital flows. 
 
As a result of these developments, the balance of payments position for the first nine months of 2016 yielded a surplus of US$1.6 billion. However, this was lower than the US$1.8 billion surplus recorded in the same period in 2015. This developed as the current account declined but remained in surplus territory as the widening trade-in-goods deficit was more than offset by higher net receipts in trade-in-services, and secondary and primary income accounts. Meanwhile, the financial account posted lower net outflows stemming mainly from the reduced net outflows in portfolio investments combined with the increased net inflows in direct investments.

The country’s gross international reserves (GIR) amounted to US$86.1 billion as of end-September 2016, higher than the US$85.3 billion level as of end-June 2016 and US$80.6 billion as of end-September 2015. At this level, reserves can sufficiently cover 9.8 months’ worth of imports of goods and payments of services and income. It is also equivalent to 6.1 times the country’s short-term external debt based on original maturity and 4.4 times based on residual maturity.

 

Third Quarter 2016 Developments

Current Account. The current account recorded a surplus of US$979 million in Q3 2016 (equivalent to 1.3 percent of GDP), slightly higher than the US$969 million surplus posted in the comparable quarter in 2015. The modest upturn in the current account was attributed to increased net receipts in trade-in-services, and primary and secondary income, which tempered the widening
trade-in-goods deficit.

The trade-in-goods deficit widened to US$7.9 billion in Q3 2016 from US$6.3 billion in Q3 2015 as the growth in imports of goods exceeded the expansion in exports of goods. Exports of goods rebounded in Q3 2016, posting a 6.8 percent growth after recording consecutive declines in the first two quarters of the year. Exports of goods totaled US$11.9 billion in Q3 2016 compared to US$11.2 billion in the same quarter a year ago. Higher exports of coconut, other agro-based products and fruits and vegetables were recorded during the quarter following improved demand from the country’s major trading partners (i.e., China, Hong Kong, Taiwan, and some countries in Europe). Meanwhile, imports of goods amounted to US$19.9 billion in Q3 2016, 13.6 percent higher than the US$17.5 billion registered in Q3 2015. Increased imports were recorded across all major commodity groups during the quarter, except mineral fuels and lubricants.

Net receipts in trade-in-services totaled US$1.9 billion in Q3 2016, 50.1 percent higher than the US$1.3 billion net receipts in Q3 2015. Growth was boosted mainly by increased net receipts in technical, trade-related, and other business services (by 32.8 percent), and  computer services (by 62.1 percent) which more than compensated for the higher net payments notably in travel services (by 25.5 percent), transport (by 36.8 percent), and insurance and pension services (by 79.6 percent),  percent). Export revenues in business process outsourcing services amounted to US$5.5 billion in Q3 2016.

The primary income account recorded net receipts of US$601 million in Q3 2016, markedly higher than the US$86 million net receipts in the same quarter a year ago. The sixfold increment was attributed mainly to decreased net payments of investment income (by 34.7 percent), arising from lower dividend payments to foreign direct investors.

Net receipts in the secondary income account amounted to US$6.4 billion in Q3 2016, 8.1 percent higher than the US$6 billion net receipts in Q3 2015. The upturn was on account mainly of the 8.8 percent increase in personal transfers to reach US$6 billion. The bulk of these personal transfers comprised of non-resident OF workers' remittances (about 98 percent), which increased by 9.2 percent to US$5.9 billion.

Capital Account. The capital account recorded higher net receipts amounting to US$30 million in Q3 2016 compared to the US$28 million net receipts in Q3 2015. Receipts in other capital transfers of financial corporations, nonfinancial corporations, households, and non-profit institutions serving households were higher during the quarter.

Financial Account.  The financial account realized net outflows (or net lending by residents to the rest of the world) of US$308 million in the third quarter of 2016, a turnaround from the
US$205 million net inflows in Q3 2015. This resulted mainly from the reversal of the other investment account to net outflows during the quarter. These outflows more than compensated for the net inflows in the direct and portfolio investment accounts.
    
Net inflows of direct investments reached US$498 million in Q3 2016, more than threefold the US$147 million net inflows in the comparable quarter last year. This developed as outflows from residents’ net acquisition of financial assets dropped by more than half to settle at US$1.2 billion following a 77.2 percent decline in net placements by residents in debt instruments issued by foreign subsidiaries/affiliates. Meanwhile, residents’ net incurrence of liabilities (foreign direct investments in the Philippines or FDI) decreased by almost a third to US$1.7 billion. By component,
non-residents’ net placements of equity capital in local affiliates fell by 78.7 percent to
US$169 million. Non-residents’ net placements in debt instruments (or intercompany borrowings) also decreased by 13.1 percent to US$1.3 billion.

The portfolio investment account reversed to net inflows totaling US$843 million in the third quarter of 2016 from net outflows of US$2.5 billion in the previous year. This developed as a result of inflows arising from residents’ net disposal of financial assets and their net incurrence of liabilities during the quarter (amounting to US$407 million and US$436 million, respectively) from net outflows last year. On the asset side, net redemption of debt securities issued by non-residents that were held by local banks reached US$544 million during the quarter. On the liability side, non-residents’ net placements in equity securities issued by local corporations reached US$251 million, while those in bonds issued by the National Government (NG) totaled US$184 million.

The other investment account recorded US$1.7 billion net outflows in Q3 2016, reversing the US$2.5 billion net inflows posted in the same quarter a year ago. The outflows stemmed mainly from residents’ net repayment of liabilities which totaled US$1.4 billion, a reversal of the US$1.7 billion net incurrence of liabilities in the previous year. This was due mainly to the net repayment of loans by residents totaling US$1 billion during the quarter from net availment of US$1.1 billion in Q3 2015. Outflows from residents’ net acquisition of financial assets were likewise registered totaling US$276 million, driven largely by non-residents’ net availment of short-term loans from local banks amounting to US$468 million.

January-September 2016 Developments

Current Account. The current account recorded a surplus of US$1.6 billion (0.7 percent of GDP) in the first nine months of 2016, lower than the US$6.2 billion (2.9 percent of GDP) in the same period a year ago. The decline in the current account surplus resulted primarily from the increased
deficit in the trade-in-goods account.

The trade-in-goods deficit for January-September 2016 went up by 52.1 percent to US$24.1 billion on account of the rise in imports of goods (by 16.6 percent) along with the modest decline in exports of goods. Exports of goods in the first nine months of 2016 amounted to US$32.8 billion, slightly lower than US$33 billion recorded in the same period last year. Except for sugar products which increased by 183.5 percent, shipments of all major commodity groups dropped. Imports of goods rose by 16.6 percent to US$56.9 billion in the first nine months of 2016 from the year-ago level. The upturn was due mainly to the increments in imports of capital goods, raw materials and intermediate goods, and consumer goods.

Net receipts in the trade-in-services account rose to US$5.2 billion in the first three quarters of 2016, higher than the US$3.6 billion net receipts registered in the comparable period in 2015. The 44.9 percent expansion was attributed mainly to higher net receipts from computer, and technical, trade-related and other business services coupled 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. Export earnings in business process outsourcing services amounted to US$15.5 billion in the first nine months of 2016.

The primary income account posted net receipts of US$1.9 billion, more than twice the US$937 million net receipts recorded during the first three quarters of 2015. This positive outcome was attributed to the contraction in net payments in investment income (by 23.9 percent) on account largely of lower dividends paid to non-resident investors and increased interest receipts on reserve assets.

Net receipts in the secondary income account rose by 6.1 percent to US$18.6 billion, driven mainly by the 7.1 percent increase in remittances of non-resident OF workers amounting to US$17.2 billion.

Capital Account.  On a year-to-date basis, net receipts in the capital account reached US$110 million in the first three quarters of 2016. This was higher by 36.7 percent than the US$80 million recorded in the same period last year, due mainly to the increase in capital transfers to the NG.

Financial Account.  The financial account registered net outflows (or net lending of residents to the rest of the world) of US$265 million in the first three quarters of 2016, significantly lower by 80.2 percent than the US$1.3 billion net outflows in the comparable period last year. This development was attributed to the decline in net outflows of portfolio investments and the substantial increase in net inflows in the direct investment account. These tempered the reversal of other investments to net outflows from net inflows in the previous year.

Net inflows of direct investments surged to US$2.6 billion in the first three quarters of 2016 from US$43 million in the same period last year.  This was on account of higher FDI and lower net acquisition of financial assets by residents during the period.  In particular, net FDI rose by 25.3 percent to US$5.9 billion boosted by the 40.8 percent increase in non-residents’ placements in debt instruments issued by local subsidiaries/affiliates (or intercompany borrowing), which amounted to US$3.7 billion. Net placements of equity capital also rose by 9.3 percent to US$1.6 billion, with fresh capital infusions from Japan, Singapore, US, Hong Kong, and Taiwan. Meanwhile, residents’ net acquisition of financial assets fell by 30.5 percent to US$3.2 billion as net placements in equity capital and debt instruments of foreign subsidiaries/affiliates declined by 20.8 percent and 34.2 percent, respectively.

 
 The portfolio investment account posted net outflows of US$1.5 billion in January to September 2016, lower by 71.7 percent from the previous year’s level.  Residents’ net repayment of liabilities dropped significantly by 93.5 percent to US$155 million. Net repayment transactions consisted largely of net redemption of debt securities issued by the NG (US$697 million) and by local corporations (US$227 million) that were held by non-residents.  Likewise, residents’ net acquisition of financial assets fell by 54.2 percent to US$1.4 billion, the bulk of which consisted of net placements by domestic banks (US$830 million) and other local corporations (US$386 million) in debt securities issued by non-residents.

The other investment account yielded net outflows of US$1.3 billion, a turnaround from the US$4.0 billion net inflows in the first three quarters of 2015. On the asset side, net outflows came mainly from loans extended by local banks to non-resident borrowers (US$446 million) and residents’ net placements of currency and deposits in foreign banks (US$115 million). On the liabilities side, net outflows stemmed from net loan repayments by local banks (US$1.1 billion) and domestic private corporations (US$1.1 billion) to non-resident creditors.

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