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Q2 2018 BOP Position Reverses to a Deficit

09.14.2018

The country’s balance of payments position (BOP) posted a higher deficit of US$2 billion in Q2 2018 compared to the US$1.2 billion deficit in the previous quarter. This level was also a reversal of the US$289 million surplus  recorded in Q2 2017. This development stemmed mainly from the current account, which reversed to a deficit of US$2.9 billion as the trade-in-goods deficit widened and the net receipts in the primary income account declined. Imports of goods continued to expand driven primarily by increasing domestic production and consumption brought about by the country’s solid growth dynamics. Meanwhile, the financial account posted net inflows (or net borrowing by residents from the rest of the world), albeit lower than the level posted in the same quarter last year. Net inflows of direct investments remained strong in the midst of positive investor sentiment on the country’s macroeconomic fundamentals. However, these inflows were partly tempered by the reversal of portfolio investments to net outflows (from net inflows last year), along with the increase in net outflows of other investments during the quarter.

As a result of these developments, the country’s gross international reserves (GIR) amounted to US$77.5 billion as of end-June 2018, lower than the US$81.3 billion level registered in end-June 2017. At this level, reserves may sufficiently cover 7.1 months’ worth of imports of goods, and payments of services and primary income. It was also equivalent to 6.4 times the country’s short-term external debt based on original maturity and 4.3 times based on residual maturity. The year-on-year decrease in reserves was due mainly to outflows arising from the BSP’s foreign exchange operations, revaluation losses on foreign currency-denominated reserves, and the National Government’s payments for its foreign exchange obligations.
   
Second Quarter 2018 Developments

Current Account. The current account reversed to a deficit of US$2.9 billion in Q2 2018 from a US$157 million surplus registered in Q2 2017. This development was due to the higher trade-in-goods deficit and the lower net receipts in the primary income account, even as the trade-in-services and secondary income account posted increased net receipts during the quarter.

The trade-in-goods deficit widened to US$12.9 billion in Q2 2018 from US$9.1 billion in Q2 2017 as a result of the double-digit growth in the imports of goods at 16 percent, combined with the decline in exports of goods at 1.7 percent. Exports of goods decreased to US$12.8 billion in Q2 2018 from US$13.1 billion in Q2 2017 owing to the sluggish demand from the country’s trading partners, specifically Japan and South Korea. The modest decline in exports of goods was due to the 16 percent drop in shipments of mineral products to US$1 billion in Q2 2018 from US$1.2 billion in Q2 2017, particularly the exports of copper concentrates, copper metal and other mineral products. Lower exports of fruits and vegetables, sugar products, and coconut products were also registered during the quarter. This development more than offset the growth in the exports of manufactured goods, which comprised about 79 percent of the total goods exports. Manufactured goods exports grew by 2.6 percent, owing to the 24.4 percent increase in shipments of non-consigned electronic products, notwithstanding the 86.3 percent decline in exports of wood manufactures. Imports of goods expanded in Q2 2018 to reach US$25.7 billion, compared to US$22.2 billion in Q2 2017.

The 16 percent growth was spurred by increases posted across all major commodity groups, notably imports of raw materials and intermediate goods, which increased to US$9.9 billion during the quarter from US$7.9 billion in Q2 2017.  The 24.9 percent expansion was boosted by higher purchases of semi-processed raw materials (31.3 percent), particularly materials and accessories for the manufacture of electronics (107.6 percent), manufactured goods (26.7 percent), notably iron and steel (44 percent), and chemicals (15.9 percent). Imports of mineral fuels and lubricant rose by 34.5 percent to reach US$3.1 billion in Q2 2018 from US$2.3 billion in Q2 2017 due to higher imports of petroleum crude. Imports of consumer goods increased by 17.3 percent to US$4.4 billion due to higher purchases of both durable and non-durable goods. Imports of capital goods grew by 6.8 percent to US$7.3 billion due primarily to increased importation of power generating and specialized machines.

Net receipts of trade-in-services totaled US$2.8 billion in Q2 2018, higher than the US$2 billion net receipts in the same quarter a year ago. The 40.3 percent growth in net services receipts was driven by the higher net receipts registered in technical, trade-related, and other business services; manufacturing services; and computer services, combined with lower net payments in transport services. Bulk of the net receipts in technical, trade-related, and other business services, as well as computer services was comprised mainly of earnings from business process outsourcing (BPO) related transactions. Export earnings from BPO services totaled US$5.5 billion in Q2 2018, which was 8.1 percent higher than the US$5.1 billion receipts in Q2 2017.

The primary income account recorded net receipts of US$613 million in Q2 2018, lower than the US$864 million net receipts in Q2 2017. The 29.1 percent shortfall was on account of the increase in net payments of investment income during the quarter. Net payments of investment income rose by 30.6 percent due mainly to increased dividends paid to foreign direct investors and higher interest payments by the National Government (NG) on long-term portfolio investments.

By contrast, higher net interest receipts on reserve assets (27.2 percent) were registered in Q2 2018. Compensation inflows mostly from resident overseas Filipino (OF) workers also increased (4.4 percent) amounting to US$2.1 billion.

Net receipts in the secondary income account totaled US$6.5 billion in Q2 2018, higher than the US$6.4 billion net receipts in Q2 2017. The 2.1 percent improvement was on account of the increase in net receipts of personal transfers, which more than offset the decline in net receipts of current transfers to the NG (72 percent). Net receipts of personal transfers amounted to US$6.3 billion, the bulk (about 97 percent) of which comprised of non-resident OF workers' remittances totaling US$6.1 billion.

Capital Account. The capital account registered net payments of US$1 million in Q2 2018, a turnaround from the net receipts of US$18 million recorded during the same quarter in 2017. This development was due to lower receipts from other capital transfers to the NG, along with the gross acquisition of non-produced non-financial assets of US$3 million in Q2 2018
(from net disposal of US$2 million a year ago).

Financial Account.  The financial account recorded net inflows of US$757 million in Q2 2018, lower than the US$908 million net inflows in Q2 2017.  The higher net inflows of direct investments was partly offset by the reversal of the portfolio investment account to net outflows (from net inflows in the same period last year) and the higher net outflows of other investments during the quarter.
    
Direct Investments registered net inflows of US$3 billion during the quarter, higher than the US$1.7 billion net inflows recorded in the same quarter a year ago.  This was on account of the increase in residents’ net incurrence of liabilities or foreign direct investments (FDI) coupled with the decline in their acquisition of financial assets. In particular, FDI expanded by 41 percent to US$3.5 billion from US$2.5 billion with all the FDI components posting increases during the quarter. Investments in net equity capital increased by more than 14 times to US$698 million on account of the US$752 million placements, which more than offset the withdrawals of US$54 million. Non-residents’ investments in debt instruments (intercompany borrowings) issued by their local affiliates rose by 16.7 percent to US$2.6 billion from US$2.2 billion. Meanwhile, residents’ investments abroad contracted by 39.1 percent to US$480 million from US$788 million. This resulted on account of the 71.8 percent decline in residents’ investments in debt instruments issued by their foreign affiliates. This was partly mitigated by the increase in their net equity capital investments, which reached US$253 million.

The portfolio investment account posted net outflows of US$1.1 billion in Q2 2018, a reversal from the US$225 million net inflows recorded in Q2 2017. This was on account of residents’ net repayment of liabilities of US$378 million (a reversal from the US$585 million net incurrence of liabilities in the previous year), coupled with higher net acquisition of financial assets of US$715 million.  On the liability side, outflows emanated mainly from non-residents’ withdrawals of investments in equity and investment fund shares issued by private corporations (US$440 million) and local banks (US$165 million).  On the asset side, outflows came largely from residents’ investments in debt securities issued by non-residents US$646 million).

The other investment account yielded net outflows of US$1.2 billion during the quarter, higher by 14.1 percent than the US$1 billion recorded last year. This was on account of residents’ higher repayments of liabilities to non-residents. In particular, non-residents’ net withdrawals of currency and deposits reached US$321 million, from net placements of US$123 million a year ago. Higher net repayment of long-term loans extended by non-residents was also registered by the NG (US$219 million from US$49 million) and private corporations (US$101 million from US$44 million). Local private corporations also posted higher net repayment of short-term trade credits and advances extended by non-residents (US$635 million from US$540 million).  Meanwhile, residents’ net disposal of financial assets reached US$123 million during the quarter from net acquisition of US$263 million a year ago.

 January-June  2018 Developments

The BOP position for the first half of 2018 yielded a deficit of US$3.3 billion, more than four times higher than the US$706 million deficit posted in the same period a year ago. This resulted primarily from the higher current account deficit from the previous year’s level, as the trade-in-goods deficit continued to widen, combined with the decline in net receipts of primary income.

Current Account. The current account posted a deficit of US$3.1 billion (1.9 percent of GDP) in the first half of 2018, markedly higher than the US$133 million deficit (0.1 percent of GDP) recorded in the same period in 2017. This outcome was due mainly to the widening deficit in the trade-in-goods account and lower net receipts in the primary income account, which more than offset the higher net receipts in the trade-in-services and secondary income accounts.

The trade-in-goods deficit for the first half of 2018 went up by 27.9 percent to US$23.3 billion as imports of goods expanded by 10.7 percent while exports of goods declined by 1.6 percent. Exports of goods dropped to US$25.3 billion in the first six months of 2018 from US$25.7 billion in the same period last year. Exports of goods dropped to US$25.3 billion in the first six months of 2018 from US$25.7 billion in the same period last year.  Contributing largely to the decrease in exports goods were lower shipments of coconut products (22.9 percent), and fruits and vegetables (16.4 percent). These more than offset the moderate growth in other commodity groups, particularly manufactures during the period. Imports of goods rose to US$48.7 billion in the first six months of 2018 from US$44 billion in the same period in 2017. The 10.7 percent growth was attributed mainly to higher imports of raw materials and intermediate goods, reflecting the robust expansion in domestic economic activity. The 22.2 percent growth in imports of raw materials and intermediate goods, which totaled US$18.5 billion in the first half of the year, was due largely to the increased purchases of materials and accessories for the manufacture of non-consigned electronic products (133.8 percent) along with imports of manufactured goods (20.2 percent). Increased imports of mineral fuels and lubricant, consumer goods, and capital goods were also registered during the period.

Net receipts in the trade-in-services account totaled US$5.9 billion in the first half of the year, higher than the US$3.8 billion net receipts recorded in the comparable period a year ago. The 55 percent upturn was attributed largely to increased net receipts in technical, trade-related and other business services; manufacturing services; and computer services. Earnings from BPO services in January-June 2018 amounted to US$10.9 billion or a growth of 6.8 percent from the same period in 2017.These gains, combined with lower net payments for travel, transportation, and financial services more than compensated for the higher net payments in government goods and services, charges for use of intellectual property, and the reversal of the personal, cultural, and recreational services to net payments from net receipts.

The primary income account registered net receipts of US$1.3 billion, 12.7 percent lower than the US$1.5 billion net receipts in  the first half of 2017. This was the result of the 14.1 percent increase in net payments of investment income, particularly due to higher dividend payments on direct investments (63.8 percent) combined with decreased interest receipts on portfolio investments (by 63.7 percent). Meanwhile, higher interest receipts were posted on reserve assets (26.7 percent) and on other investments (58.4 percent).

Net receipts  in the secondary income account registered a moderate growth in the first half of 2018 to reach US$13 billion. The 1.9 percent improvement was boosted by the 2.5 percent increase in remittances of non-resident OF workers amounting to US$12.2 billion as well as the 30.4 percent increase in other current transfers.

Capital Account.  The capital account recorded net payments of US$1 million in the first six months of 2018, a reversal of the US$24 million net receipts in the same period last year. This developed due to lower receipts of other capital transfers to the NG and increased net payments on gross acquisitions of non-produced non-financial assets.

Financial Account.  The financial account registered lower net inflows (or net borrowing of residents from the rest of the world) of US$252 million in the first half of 2018 compared to US$720 million net inflows posted in the same period in 2017. Net inflows declined by 65.1 percent due to the reversal of the other investment account to net outflows and the increase in net outflows of portfolio investments, even as net inflows of direct investments grew during the period.

 The direct investment account posted net inflows of US$4.1 billion on account of the 42.4 percent increase in FDI during the period. This developed as net equity  capital investments increased by more than seven times to US$1.6 billion on account of higher equity capital placements (US$1.7 billion from US$508 million) and lower withdrawals (US$163 million from US$307 million). Likewise, non-residents’ investments in debt instruments issued by their local affiliates increased by 9.6 percent to US$3.8 billion during the semester. On the asset side, residents’ investments abroad grew by 90.2 percent to US$1.7 billion following the 124.8 percent growth in residents’ investments in debt instruments issued by their foreign affiliates.

 Net outflows of portfolio investments grew by 7.9 percent during the period to reach US$3.1 billion on account of residents’ higher acquisition of financial assets totaling US$2.4 billion.  In particular, net placements of local banks and private corporations in debt securities issued by non-residents increased to US$2.3 billion from US$369 million last year. Meanwhile, net repayments of liabilities were lower at US$660 million compared to US$2.1 billion last year. This developed on account of non-residents’ net placements in debt securities amounting to US$599 million during the period, which was a reversal from net withdrawals of US$2.5 billion a year ago.

 The other investment account reversed to net outflows of US$787 million in the first half of 2018 from net inflows of US$290 million in 2017. Net outflows emanated mainly from net repayments of loans extended by non-residents to local banks (US$1.8 billion) and other private corporations (US$841 million). These negated the net inflows arising from residents’ withdrawals of placements in currency and deposits abroad (US$2.2 billion). 

Revised 2017 BOP data

The 2017 BOP data have been revised to reflect updates from various data sources and
post-audit adjustments. The revised 2017 BOP data with accompanying technical notes are posted in the BSP website.

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