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Q1 2017 Balance of Payments Position Posts a Deficit

06.16.2017

The country’s balance of payments (BOP) position posted a deficit of US$994 million in Q1 2017, higher than the US$210 million deficit recorded in Q1 2016. The current account reversed to a deficit of US$318 million in Q1 2017 from a US$730 million surplus in Q1 2016, as the trade-in-goods deficit widened on the back of the faster growth in imports. Meanwhile, the financial account improved, yielding lower net outflows of US$579 million due to net inflows in the other investment, direct investment, and financial derivatives accounts. However, this was partly offset by the higher net outflows in the portfolio investment account. Global economic growth remained uneven with slower expansion in the euro area, India and the ASEAN region even as economic activity continued to pick up pace in the United States (U.S.), Japan and China. The lingering volatility in the external environment continued to affect the country’s external trade and capital flows.
 
 Meanwhile, the country’s gross international reserves (GIR) leveled at US$80.9 billion as of end-March 2017, slightly higher than the US$80.7 billion level in December 2016, but lower than the US$83 billion in March 2016. At this level, reserves could sufficiently cover 8.6 months’ worth of imports of goods and payments of services and income. It is equivalent to 5.4 times the country’s short-term external debt based on original maturity and 4 times based on residual maturity. The quarter-on-quarter increase in reserves was due mainly to the inflows arising from the net foreign currency deposits by the National Government and BSP’s investment income, as well as revaluation adjustments on its gold holdings and foreign currency-denominated reserves. These were offset by net outflows from foreign exchange operations of the BSP and payments made by the National Government (NG) for its maturing foreign exchange obligations.

First Quarter 2017 Developments

Current Account. The current account registered a deficit of US$318 million (equivalent to 0.4 percent of GDP) in Q1 2017, a reversal from the US$730 million surplus (1.1 percent of GDP) posted in Q1 2016. This development emanated from the widening of the trade-in-goods deficit as the growth in imports of goods outpaced that of exports of goods. Meanwhile, higher net receipts in the secondary income, services, and primary income accounts helped offset the increase in the trade-in-goods deficit.

The trade-in-goods deficit increased to US$9.8 billion in Q1 2017 from US$7.8 billion in Q1 2016 due to the faster expansion in imports of goods at 19.2 percent relative to the 14.1 percent growth in exports. Exports of goods rose to US$11.6 billion in Q1 2017, higher than the US$10.2 billion in Q1 2016, indicating improved external demand from major trading partners, notably the U.S., Asia (i.e., China, Hong Kong, Singapore, South Korea) and in the European Union during the quarter. Stronger export performance was attributed mainly to increased shipments of manufactures (by 9.2 percent), particularly machinery and transport equipment and garments. Shipments of other major commodity groups, notably coconut and mineral products, likewise increased markedly by 132.3 percent and 55.4 percent, respectively, during the quarter fueled by the upturn in global prices of coconut oil and copper metal. Meanwhile, imports of goods amounted to US$21.5 billion in Q1 2017, posting a 19.2 percent increment relative to the US$18 billion imports in Q1 2016. This developed on account of increased importation across all major commodity groups. Growth in total imports was boosted primarily by raw materials and intermediate goods which grew by 25.7 percent to US$8.3 billion. Imports of consumer goods went up by 15.9 percent, buoyed by growth in durables and non-durables. Capital goods imports rose by 6.9 percent to US$5.1 billion, following increased purchases of power generating and specialized machines and land transport equipment, excluding passenger cars and motorized cycle. Meanwhile, imports of petroleum crude oil increased by 56.4 percent to US$1.1 billion, buoyed by the recent hike in global oil prices.

Net receipts in trade-in-services rose to US$2.4 billion in Q1 2017, exceeding the US$2 billion net receipts registered during the same quarter a year ago. The 19 percent expansion was driven largely by higher net receipts in technical, trade-related and other business services (by 17.0 percent), manufacturing services on physical inputs owned by others (by 30.9 percent), and computer services (by 4.4 percent)  combined with the reversal of financial services from net payments to net receipts during the quarter. Export revenues in business process outsourcing (BPO) services totaled US$5.5 billion in Q1 2017, or a growth of 9.9 percent from the US$5 billion earnings in the same quarter last year.

The primary income account recorded net receipts of US$678 million in Q1 2017, 5.7 percent higher than the US$642 million net receipts in Q1 2016. The improvement was due mainly to the decline in net payments of investment income (by 6.3 percent) brought about by: a) lower dividends paid to foreign direct investors on their equity and investment fund shares in resident enterprises (by 33.1 percent); b) lower net payments of interest on short-term and long-term investments in debt securities (by 17.6 percent); and c) lower net payments of interest on other investments by local corporations. Increased interest receipts on reserve assets (by 20.1 percent) also contributed to the growth in the primary income account. However, these gains were partially offset by the 1.9 percent decline in compensation inflows from resident overseas Filipino (OF) workers.

Net receipts in the secondary income account reached US$6.5 billion in Q1 2017, higher by 9.5 percent than the US$5.9 billion net receipts in Q1 2016. Growth was driven mainly by receipts of personal transfers, which increased by 10.9 percent to reach US$6.2 billion during the quarter. The bulk of these personal transfers (about 98 percent) were non-resident OF workers' remittances.

Capital Account. Net receipts in the capital account declined substantially to US$9 million in Q1 2017 from US$24 million in Q1 2016. This developed following the reversal to US$10 million net payment of the other capital transfers of financial corporations, non-financial corporations, households, and non-profit institutions serving households (NPISHs) in Q1 2017 from US$1 million net receipts in Q1 2016.

Financial Account.  The financial account registered net outflows of US$579 million during the period in review, 39.4 percent lower than the US$955 million net outflows in Q1 2016. This resulted as the other investment account reversed to net inflows during the quarter from net outflows in the same period last year, and following increases in net inflows in the financial derivatives and direct investment accounts. Meanwhile, portfolio investments posted higher net outflows during the quarter. 
    
Direct investments continued to record net inflows in Q1 2017 amounting to US$1.1 billion from US$1 billion in Q1 2016. This developed as the rise in residents’ net incurrence of liabilities (foreign direct investments in the Philippines or FDI) more than compensated for the increase in their net acquisition of financial assets. In particular, FDI expanded by 16.6 percent to US$1.6 billion, reflective of investors’ sustained confidence in the Philippine economy due to its strong macroeconomic fundamentals. In particular, investments in debt instruments (i.e., lending by parent companies abroad to their local affiliates to fund existing operations and business expansion) more than doubled to reach US$1.3 billion from US$606 million in the same quarter last year. Reinvestment of earnings also increased by 6.7 percent to US$193 million. However, investments in equity capital registered lower net inflows of US$101 million compared to last year’s US$550 million Meanwhile, residents’ net acquisition of financial assets rose by 45.1 percent to US$417 million driven mainly by the expansion in net placements of equity capital by more than eightfold to US$345 million from the level posted in same quarter last year. 

Portfolio investments posted net outflows of US$3.2 billion in Q1 2017, more than twice the US$1.4 billion net outflows registered in Q1 2016. This resulted from residents’ higher net repayment of liabilities amounting to US$2.6 billion during the quarter coupled with an increase in their net acquisition of financial assets, which reached US$564 million.  Residents’ net repayment of liabilities consisted largely of net redemption of non-residents’ holdings of debt securities, particularly those issued by the National Government (US$1.5 billion), local banks (US$472 million), and local corporates (US$281 million). Non-residents’ net withdrawal of placements in equity securities reached US$349 million during the quarter, reversing their net placements of US$77 million in the same quarter last year.  Meanwhile, residents’ net acquisition of financial assets consisted mainly of net placements in non-residents’ debt securities, particularly by local corporates (US$352 million) and local banks (US$185 million).

The other investment account reversed to a net inflow of US$1.3 billion in Q1 2017 from net outflow of US$562 million a year ago. On the liability side,  net inflows increased by more than threefold due largely to residents’ net availment of loans from non-residents totalling US$359 million, a turnaround from the net repayments of US$1.3 billion recorded during the comparable quarter last year. Trade credit and advances extended by non-residents to residents, which more than doubled to reach US$1.1 billion during the quarter, likewise contributed to the increase in net inflows. On the asset side, residents’ other investments abroad dipped by 44.4 percent to US$592 million on account of their net withdrawal of currency and deposits held abroad (US$309 million).   

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