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Q4 2017 BOP Reverses to Surplus as Financial Account Posts Net Inflows

03.16.2018

The country’s balance of payments position (BOP) rebounded in Q4 2017, yielding a surplus of US$505 million, after recording a deficit of US$662 million in Q3 2017. The surplus in Q4 2017 was also a reversal from the US$2.1 billion deficit registered in the same quarter a year ago. This positive outcome was a result primarily of the net inflows (or net borrowing by residents from the rest of the world) in the financial account even as the current account posted a deficit. In particular, the financial account balance reversed to net inflows of US$2 billion from net outflows of US$1.1 billion due to net inflows of direct and portfolio investments which more than offset the net outflows recorded in the other investment account. By contrast, the current account registered a higher deficit of US$3.3 billion due to the widening trade-in-goods deficit. Economic activity continued to strengthen on both global and domestic fronts leading to upbeat investor sentiment which helped shore up the country’s foreign direct investments. External demand also improved and kept exports of goods on an upward path. Meanwhile, imports of goods continued to expand in support of the government’s big infrastructure projects that reflect robust domestic economic activity.

Despite the positive outcome in Q4 2017, the BOP position for full year 2017 registered a deficit of US$863 million, more than double the US$420 million deficit recorded in 2016. This development was underpinned mainly by the increased deficit in the current account during the year, despite the reversal in the financial account to net inflows from net outflows in the previous year. The current account deficit of US$2.5 billion stemmed mainly from the widening trade-in-goods deficit that was brought about by increased imports of goods that support domestic capital formation and production. The financial account posted US$2.2 billion net inflows on the back of the surge in net inflows of direct investments, which more than compensated for higher net outflows of portfolio investments, even as net outflows of other investments declined significantly during the year.

Notwithstanding the BOP deficit in 2017, the country’s gross international reserves (GIR) increased to US$81.6 billion as of end-December 2017, from US$80.7 billion as of  end-December 2016. At this level, reserves could adequately cover 8 months’ worth of imports of goods and payments of services and income. It was also equivalent to 5.7 times the country’s short-term external debt based on original maturity and 4.1 times based on residual maturity. The year-on-year increase in reserves was due mainly to inflows arising from the NG’s net foreign currency deposits, revaluation adjustments on the BSP’s foreign currency-denominated reserves and gold holdings, as well as its income from investments abroad. These were partially offset by outflows from the BSP’s foreign exchange operations. 

Fourth Quarter 2017 Developments

Current Account. The current account posted a deficit of US$3.3 billion in Q4 2017, significantly higher than the US$566 million deficit recorded in Q4 2016. This developed as the trade-in-goods deficit widened even as higher net receipts were recorded in the trade-in-services, and secondary and primary income accounts.

The trade-in-goods deficit increased to US$13.1 billion in Q4 2017 from US$9.2 billion in the same period in 2016 on account of the higher expansion in imports of goods (by 20.4 percent) than that of exports of goods (by 2 percent). Exports of goods increased by 2 percent to US$11.3 billion in Q4 2017 from US$11.1 billion in Q4 2016. The modest upturn was a result of higher shipments of mineral products, notably copper metal and gold following the rise in export volume along with the increase in their international market prices. Growth in exports of forest, petroleum, and sugar and products was also posted during the quarter. However, negative growth was recorded in manufactures, fruits and vegetables, coconut, and other agro-based products. Imports of goods rose by 20.4 percent in Q4 2017 to reach US$24.5 billion compared to US$20.3 billion in Q4 2016. The double-digit expansion was due to increments registered across all major commodity groups. Leading the growth in imports of goods was raw materials and intermediate goods which grew by 25.6 percent to reach US$9.6 billion during the quarter. Growth was driven by increased purchases of semi-processed raw materials, specifically materials and accessories for the manufacture of non-consigned electronics (by 43.9 percent), and manufactured goods (by 26.1 percent).

Net receipts in trade-in-services amounted to US$2.2 billion in Q4 2017, 47.6 percent higher than the US$1.5 billion net receipts in Q4 2016. The growth in net services receipts was buoyed by the increments registered in other business services, manufacturing services and financial services along with decreased net payments in travel services. The expansion in other business services was spurred by technical, trade-related, and other business services (34.1 percent), mostly business process outsourcing (BPO) related transactions. Export revenues in BPO services totaled US$5.5 billion in Q4 2017, or an increase of 19.3 percent from the US$4.6 billion receipts in Q4 2016.

The primary income account posted net receipts of US$785 million in Q4 2017, higher than the US$710 million net receipts in Q4 2016. The 10.5 percent increase was attributed largely to the 10.9 percent rise in compensation inflows mostly from resident overseas Filipino (OF) workers amounting to US$2 billion during the quarter. Interest receipts on reserve assets also increased during the quarter (24.6 percent).

Net receipts in the secondary income account totaled US$6.8 billion in Q4 2017, higher than the US$6.4 billion net receipts in Q4 2016. The 6 percent improvement emanated from the 5.9 percent increment in net receipts of personal transfers amounting to US$6.4 billion. The bulk of these personal transfers comprised of non-resident OF workers' remittances (about 97 percent), which totaled US$6.3 billion in Q4 2017.

Capital Account. Net receipts in the capital account were steady at US$14 million in Q4 2017, consisting largely of other capital transfers to the National Government (NG).

Financial Account.  The financial account recorded net inflows (or net borrowing of residents from the rest of the world) of US$2 billion in Q4 2017, a turnaround from the US$1.1 billion net outflows in the comparable quarter in the previous year. This resulted mainly from the net inflows of direct and portfolio investments which more than offset the net outflows of other investments.
    
Net inflows of direct investments grew by 79.8 percent to US$2.6 billion in Q4 2017 from the year-ago level of US$1.5 billion. This resulted as foreign direct investments (FDI) expanded by 62.1 percent to US$3.6 billion on the back of the threefold increase in net equity capital investments, which aggregated US$2 billion. FDI net inflows more than offset the 27.5 percent increase in outflows coming from residents’ net acquisition of financial assets during the quarter.

Portfolio investments registered lower net inflows of US$114 million in Q4 2017 from US$279 million in Q4 2016.  This was mainly on account of outflows arising from residents’ net acquisition of financial assets which reached US$1 billion (from US$389 million inflows or net disposal of financial assets), comprising mostly of local non-financial corporations’ investments in long-term debt securities issued by non-residents. Meanwhile, net incurrence of liabilities amounted to US$1.1 billion (from net repayment of US$109 million) as non-residents’ investments in long-term debt securities issued by the NG more than doubled to US$2.2 billion during the quarter.

The other investment account recorded net outflows of US$686 million in Q4 2017, lower by 76.5 percent than US$2.9 billion in the comparable period in 2016.  Outflows from residents’ net acquisition of financial assets dipped by 50.3 percent to US$837 million from US$1.7 billion. This was due mainly to non-residents’ repayment of loans extended by local banks amounting to US$600 million. Meanwhile, residents’ net incurrence of liabilities totaled US$150 million (from net repayment of US$1.2 billion) as residents’ availment of loans reached US$626 million.

January-December  2017 Developments

Current Account. The current account registered a deficit of US$2.5 billion, more than twice the US$1.2 billion deficit recorded in 2016. This developed on account of the widening trade-in-goods deficit which more than offset the increased net receipts in the trade-in-services, and secondary and primary income accounts during the year.

The trade-in-goods deficit for full year 2017 went up by 15.9 percent to US$41.2 billion as the growth in imports of goods of 14.2 percent outpaced that of exports of goods at 12.8 percent. Exports of goods rose to US$48.2 billion in 2017 from US$42.7 billion in 2016 driven by continued demand from the country’s trading partners (i.e., China, Hong Kong, South Korea and some countries in Europe). The expansion in exports of goods was due largely to higher shipments of manufactured goods and mineral products, which registered double-digit growth of 10.3 percent and 72.4 percent, respectively. Imports of goods aggregated US$89.4 billion in 2017 from US$78.3 billion a year ago. The upturn was accounted for mainly by higher imports of raw materials and intermediate goods (16.7 percent), and mineral fuels and lubricant (32.9 percent).

Net receipts in the trade-in-services account amounted to US$9.5 billion in 2017, higher than the US$7 billion net receipts recorded a year ago. The 34.8 percent expansion was accounted for by:  a) increased net receipts in other business services, particularly technical, trade-related, and other business services as well as computer services; b) reversal of financial services to net receipts from net payments; and c) lower net payments for travel and government goods and services. Earnings from BPO services for full year 2017 amounted to US$22.1 billion or a growth of 9.6 percent from 2016.

The primary income account posted net receipts of US$3.1 billion, 20 percent higher than the US$2.6 billion net receipts in 2016. This was due to the expansion in net compensation inflows mostly from resident overseas Filipino (OF) workers (by 5.2 percent) coupled with lower net payments in investment income (by 2.8 percent).

Net receipts in the secondary income account grew by 5.5 percent to US$26.1 billion, boosted by the 4.1 percent increase in remittances of non-resident OF workers amounting to US$24.1 billion.

Capital Account. Net receipts in the capital account totaled US$57 million in 2017, 8.7 percent lower than the US$62 million recorded in 2016. Receipts in other capital transfers of financial corporations, non-financial corporations, households, and non-profit institutions serving households declined during the year.

Financial Account.  The financial account reversed to net inflows (or net borrowing by residents from the rest of the world) of US$2.2 billion in 2017 from net outflows of US$175 million in 2016. This developed mainly on account of the increase in residents’ net incurrence of liabilities to US$8.7 billion even as their net acquisition of financial assets rose to US$6.5 billion.

Net inflows of direct investments surged to US$8.1 billion in 2017. The hefty increase was boosted by the significant inflows of FDI which reached a record high of US$10 billion (21.4 percent growth) during the year. Investor sentiment remained positive on the back of the country’s sound macroeconomic fundamentals and growth prospects. In particular, investments in debt instruments rose by 20.7 percent to US$6 billion.  Moreover, net equity capital investments expanded by 25.9 percent to US$3.3 billion. Gross placements of about US$3.7 billion originated largely from the Netherlands, Singapore, the United States, Japan, and Hong Kong. These were channeled mainly to gas, steam and air-conditioning supply; manufacturing; real estate; construction; and wholesale and retail trade activities.

Net outflows of portfolio investments more than doubled to US$3.9 billion in 2017 as residents’ net acquisition of assets and net repayment of liabilities both increased.  In particular, residents’ net acquisition of financial assets rose by 154.3 percent to US$3.1 billion as residents’ net placements in debt securities issued by non-residents increased markedly to US$2.4 billion. Meanwhile, residents’ net repayment of liabilities was higher at US$796 million from US$264 million in the previous year. This developed due to the increase in local corporates’ prepayment/repayment of long-term debt securities held by non-residents amounting to US$1.3 billion from US$608 million in 2016.

The other investment account posted net outflows of US$2.1 billion in 2017, lower by 55.2 percent than the US$4.6 billion registered in 2016. In particular, outflows from residents’ net acquisition of financial assets fell by 27.1 percent to US$2 billion due mainly to the decline in loans extended by local banks to non-resident borrowers. Meanwhile, outflows stemming from residents’ net repayment of liabilities were lower at US$63 million (from US$1.9 billion) due largely to local corporates’ lower repayment of loans availed from non-residents.

Revised 2016 BOP data

The 2016 BOP data have been revised to reflect updates from various data sources and
post-audit adjustments. The revised 2016 BOP data with accompanying technical notes are posted in the BSP website.

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