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Current Account Reverses to Deficit in Q4 2016, But Full Year 2016 Current Account Remains in Surplus

03.17.2017

The country’s balance of payments position registered a deficit of US$2.1 billion in Q4 2016, a reversal of the US$809 million surplus posted in Q4 2015. This developed as the current account reversed to a deficit during the quarter even as the financial account registered lower net outflows (or net lending by residents to the rest of the world). The deficit in the current account was due mainly to the higher deficit in trade-in-goods, combined with lower net receipts of services and primary income. Meanwhile, the reduced net outflows in the financial account was a result of the substantial increase in net inflows of direct investments as well as the reversal of  portfolio investments to net inflows from net outflows, which more than compensated for the higher net outflows in the other investment account. Economic recovery in China remained subdued and growth prospects for ASEAN countries weakened due to slower manufacturing activity across the region. Meanwhile, economic activity in the US and euro area remained steady and favorable business sentiment supported the continued improvement of the Japanese economy. Lingering uncertainties arising from the uneven pace of economic growth continued to factor into the country’s external transactions, particularly the trade-in-goods account.

As a result of these developments, the balance of payments position for full year 2016 yielded a deficit of US$420 million, a reversal of the US$2.6 billion surplus registered in 2015. This development was underpinned by the decline in the current account surplus as a result mainly of the increase in trade-in-goods deficit which more than offset the upturn in net receipts of secondary income, trade-in-services and primary income. Meanwhile, the financial account recorded lower net outflows attributed mainly to the marked increase in net inflows of direct investments along with reduced net outflows in portfolio investments.

With the deficit recorded in the Philippine balance of payments, the country’s gross international reserves (GIR) reached US$80.7 billion as of end-December 2016, significantly lower than the US$86.1 billion level as of end-September 2016, but slightly higher than the end-December 2015 level. At this level, reserves can sufficiently cover 8.9 months’ worth of imports of goods and payments of services and primary income. It is also equivalent to 5.6 times the country’s short-term external debt based on original maturity and 4 times based on residual maturity.

Fourth Quarter 2016 Developments

Current Account. The current account registered a deficit of US$1 billion in Q4 2016 (equivalent to 1.2 percent of GDP), a reversal of the US$1.4 billion surplus posted in Q4 2015. This resulted primarily from the widening trade-in-goods deficit along with the decline in net receipts in the trade-in-services and primary income accounts.

The trade-in-goods deficit increased to US$10 billion in Q4 2016 from US$7.5 billion in Q4 2015 as the growth in imports of goods outpaced that of exports by more than four times. Exports of goods grew moderately at 3.8 percent in Q4 2016 to US$10.6 billion from US$10.2 billion in Q4 2015. Increments in exports of coconut, mineral products, fruits and vegetables, and other agro-based products were posted during the quarter. These gains, however, were partly offset by lower shipments of manufactures and petroleum products. Imports of goods expanded by 16.5 percent to reach US$20.6 billion in Q4 2016 from US$17.7 billion in Q4 2015. Except for mineral fuels and lubricants, higher imports were recorded in all major commodity groups during the quarter.

Net receipts in trade-in-services amounted to US$1.7 billion in Q4 2016, lower by 16.7 percent than the US$2.1 billion net receipts in the comparable quarter a year ago. The decline was due largely to lower net receipts in technical, trade-related, and other business services (by 16.4 percent), coupled with higher net payments in travel and transport services. Export revenues from BPO services totaled US$4.6 billion in Q4 2016, 3.1 percent lower than the US$4.7 billion receipts in Q4 2015.

The primary income account posted net receipts of US$721 million in Q4 2016, 21.6 percent lower than US$920 million net receipts in Q4 2015. This was due largely to the decline in compensation inflows from resident overseas Filipino (OF) workers (by 6.8 percent), specifically from sea-based workers and increased net payments of investment income (by 6.6 percent) on account of higher dividends paid to foreign direct and portfolio investors. Compensation inflows from resident OF workers amounted to US$1.8 billion during the quarter.

Net receipts in the secondary income account increased by 10.1 percent to US$6.5 billion in Q4 2016 from US$5.9 billion in Q4 2015. Personal transfers grew by 9 percent to reach US$6.1 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$6 billion.

Capital Account. Net receipts in the capital account were marginally higher in Q4 2016 at US$24 million. Receipts from other capital transfers to the National Government (NG) increased during the quarter.

Financial Account.  The financial account registered net outflows (or net lending by residents to the rest of the world) of US$54 million in Q4 2016, 94.2 percent lower than the US$926 million net outflows in Q4 2015. The lower net outflows resulted mainly from higher net inflows of direct investments which more than offset the increase in net outflows of other investments.

Net inflows of direct investments reached US$1.8 billion in Q4 2016, twenty-two times the US$83 million net inflows in the comparable quarter a year ago. This positive development was on account of a marked reduction in residents’ net acquisition of financial assets. Meanwhile, residents’ net incurrence of liabilities (foreign direct investments in the Philippines or FDI) rose by 82.6 percent to US$2.1 billion, driven largely by the 149.7 percent increase in non-residents’ net placements in debt instruments  issued by their local affiliates/subsidiaries (or intercompany borrowings) to reach US$1.5 billion.

The portfolio investment account registered net inflows totaling US$309 million in Q4 2016, a turnaround from US$256 million net outflows in the comparable quarter of the previous year. This resulted mainly from residents’ net disposal of financial assets (amounting to US$418 million), particularly net redemption of local banks’ holdings of short-term debt securities issued by
non-residents amounting to US$1.1 billion. Meanwhile, residents’ net repayment of liabilities reached US$109 million. These repayments include non-residents’ net withdrawal of placements in equity securities issued by local non-bank corporations (US$435 million) and banks (US$218 million), as well as in debt securities issued by local corporates (US$363 million).

The other investment account yielded US$2.3 billion net outflows in Q4 2016, more than threefold the level posted in Q4 2015. Residents’ net acquisition of financial assets reached US$2 billion, coming mostly from local banks’ short-term net lending to non-residents (US$1 billion) and their placements of currency and deposits in foreign banks (US$541 million). Meanwhile, residents’ net repayment of liabilities reached US$307 million, a reversal of the US$11 million net incurrence of liabilities in the same quarter of the previous year. The primary sources of net outflows from the liabilities side were net repayment of loans availed by local corporates from non-resident creditors (US$477 million), non-residents’ net withdrawal of currency and deposits in local banks (US$403 million), and residents’ net settlement of trade credit and advances extended by non-residents (US$311 million).

January-December 2016 Developments

Current Account. For the 14th consecutive year, the current account recorded a surplus. The US$601 million surplus in 2016 (representing 0.2 percent of GDP), however, was 91.7 percent lower than the US$7.3 billion (2.5 percent of GDP) surplus in 2015. The decline in the current account surplus was due primarily to the widening deficit in the trade-in-goods account.

The trade-in-goods deficit for full year 2016 widened to US$34.1 billion. This was 46.2 percent higher than the US$23.3 billion deficit in 2015. Imports recorded double-digit growth (at 16.6 percent) while exports grew marginally by 0.6 percent. Exports of goods totaled US$43.4 billion, a modest increase from the US$43.2 billion recorded in 2015. This developed as the decline in shipments of manufactured goods and mineral products negated the growth in exports of sugar products, fruits and vegetables and coconut products. Imports of goods increased to US$77.5 billion in 2016 from the year-ago level of US$66.5 billion. The expansion in total imports was driven mainly by increases in purchases of capital goods (by 41.6 percent) and raw materials and intermediate goods (by 16.8 percent). These accounted for 15.5 percentage points of the 16.6 percent aggregate growth in imports, pointing to the continued expansion in the domestic economy’s capital formation and production.

Net receipts in the trade-in-services account grew by 30.6 percent to US$7.1 billion in 2016, compared to the US$5.5 billion net receipts recorded in 2015. Higher net receipts were posted in computer, and technical, trade-related and other business services, which more than offset the higher net payments for insurance and pension, transport, financial, and government goods and services. Export earnings in business process outsourcing services amounted to US$20.2 billion in 2016, higher by 12.8 percent than the US$17.9 billion recorded in 2015.

The primary income account registered net receipts of US$2.6 billion, higher than the US$1.9 billion net receipts posted in 2015. The 39.7 percent increment stemmed from reduced net payments of investment income (by 17.8 percent), notably dividend payments to foreign direct and portfolio investors on their equity and investment fund shares in resident enterprises (by 15.6 percent and 12.6 percent, respectively). Residents’ interest payments on foreign portfolio investments also declined, particularly on bonds held by non-residents which were issued by the local corporates (by 23.2 percent) and the NG (by 7.7 percent). Interest receipts on reserve assets which rose by 21.5 percent, also contributed to the upturn in primary income net receipts.

Net receipts in the secondary income account rose by 7.3 percent to US$25 billion, boosted mainly by the 7.6 percent increase in remittances by non-resident OF workers amounting to US$23.2 billion.

Capital Account.  Cumulative net receipts in the capital account reached US$102 million in 2016. This was 21.4 percent higher than the US$84 million posted in 2015 due to the increase in capital transfers to financial and nonfinancial corporations, households, non-profit institutions serving households  and the NG.

Financial Account.  The financial account registered net outflows (or net lending by residents to the rest of the world) of US$949 million in 2016, a decline of 58.8 percent from the US$2.3 billion net outflows in 2015.  This was on account of lower net outflows of portfolio investments and higher net inflows of direct investments during the year. These more than compensated for the reversal of other investments account to net outflows from net inflows in the previous year.

Net inflows of direct investments increased markedly to US$4.2 billion in 2016 from US$100 million in 2015. The higher FDI, coupled with lower net acquisition of financial assets by residents, contributed to higher net inflows during the period. In particular, net FDI posted a 40.7 percent growth to reach US$7.9 billion, buoyed by the 68.6 percent rise in non-residents’ placements in debt instruments issued by local subsidiaries/affiliates (or intercompany borrowing), which amounted to US$5.2 billion. Similarly, net investments in equity capital grew by 12.1 percent to US$2 billion, with gross placements coming mostly from Japan, Singapore, US, and Taiwan. These capital placements were channeled to the following sectors: financial and insurance; arts, entertainment and recreation; manufacturing; and construction.

The portfolio investment account yielded net outflows of US$1.4 billion in 2016, significantly lower than US$5.5 billion in the previous year. This was brought about by the 66.5 percent decline in residents’ net acquisition of financial assets (to US$1.1 billion) combined with the 87.6 percent decline in their net repayment of liabilities (to US$264 million). Residents’ net acquisition of financial assets which were largely in the form of net placements in debt securities issued by non-residents decreased to US$915 million from US$2.8 billion in 2015. Meanwhile, residents’ net repayment of liabilities were mainly from the local corporates’ net redemption of long-term bonds held by non-residents amounting to US$608 million.

The other investment account recorded US$3.8 billion net outflows in 2016, a reversal from the US$3.1 billion net inflows in 2015. Residents’ net acquisition of financial assets during the year amounted to US$2.9 billion, comprised mainly of non-residents’ net availment of loans from local banks (US$1.5 billion) and residents’ placements of currency and deposits in banks abroad (US$1.3 billion). Meanwhile, residents’ net repayment of liabilities reached US$886 million, with net outflows stemming largely from repayment of loans availed by local corporates from non-resident creditors (US$1.5 billion).

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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