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Q3 2018 BOP Position Posts a Deficit

12.14.2018

The country’s balance of payments position (BOP) registered a higher deficit of US$1.9 billion in Q3 2018 compared to the US$662 million deficit recorded in the same quarter a year ago. This development was primarily due to the deficit in the current account, which was a result of the continued widening of the trade-in-goods deficit and the lower net receipts of services and secondary income. The increase in the primary income account tempered the rise in the current account deficit. The sustained expansion in imports of goods was driven by the strong growth of domestic economic activity propelled by the government’s big infrastructure projects. Meanwhile, the financial account recorded net inflows (or net borrowing by residents from the rest of the world), a reversal from the net outflows posted in the same quarter a year ago. Net inflows of direct investments remained robust on the back of country’s solid macroeconomic fundamentals. Net inflows were likewise posted in the portfolio and other investment accounts during the quarter as investor sentiment and global growth prospects remained positive.

As a result of these developments, the country’s gross international reserves (GIR) amounted to US$74.9 billion as of end-September 2018, lower than the US$81 billion level recorded in end-September 2017. At this level, reserves may sufficiently cover 6.6 months’ worth of imports of goods, and payments of services and primary income. It was also equivalent to 5.6 times the country’s short-term external debt based on original maturity and 4.0 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, the NG’s payments for its foreign exchange obligations, and revaluation losses on foreign currency-denominated reserves and gold holdings.
   
Third Quarter 2018 Developments

Current Account. The current account registered a deficit of US$2.9 billion in Q3 2018, a reversal from a US$1.1 billion surplus posted in the same quarter last year. This development stemmed mainly from the widening deficit in the trade-in-goods account. Lower net receipts in the trade-in-services and secondary income accounts also contributed to the current account deficit, which were partly offset by the higher net receipts in the primary income account during the quarter.

The trade-in-goods deficit widened further to US$13.5 billion in Q3 2018 from US$9.4 billion in Q3 2017 due to the double-digit expansion in imports of goods at 18.1 percent and as exports of goods posted a marginal growth of 0.2 percent. Exports of goods increased to US$13.5 billion in Q3 2018 from US$13.4 billion in Q3 2017 owing to improved demand from the country’s trading partners, particularly China and the US, and newly industrialized economies such as Singapore, Taiwan and Hong Kong. The improvement in exports of goods was driven mainly by the 35 percent growth in shipments of fruits and vegetables to US$644 million in Q3 2018 from US$477 million in Q3 2017, notably exports of bananas. Increases in exports of petroleum and forest products likewise contributed to the recovery in total exports in Q3 2018. Imports of goods grew in Q3 2018 to US$27 billion, higher than the US$22.9 billion in Q3 2017. Growth in imports of goods accelerated to 18.1 percent, boosted by increases registered across most major commodity groups. Imports of raw materials and intermediate goods were the leading contributors to the overall growth in imports, recording a 20.1 percent increment from last year’s US$8.1 billion to US$9.8 billion during the quarter. Growth was boosted by increased purchases of semi-processed raw materials (27.4 percent), particularly manufactured goods (38.9 percent), such as iron and steel, materials and accessories for the manufacture of electronics (52.8 percent), and chemicals (9.2 percent). Imports of capital goods rose by 16.2 percent to US$7.6 billion on account of increased purchases of aircraft, ships and boats, land transport equipment excluding passenger cars and motorized cycle, and office & EDP machines. Imports of mineral fuels and lubricants expanded by 31.4 percent to reach US$3.5 billion in Q3 2018 owing to higher imports of petroleum crude. Imports of consumer goods increased by 14.6 percent to US$4.8 billion due to higher purchases of both non-durable and durable goods.

Net receipts of trade-in-services amounted to US$3.2 billion in Q3 2018, lower than the US$3.3 billion net receipts in Q3 2017. The 5.5 percent downturn in net services receipts was on account of the higher net payments posted in travel, transport, and insurance and pension services. These more than offset the net receipts recorded in manufacturing services and in telecommunications, computer and information services. Meanwhile, net receipts in technical, trade-related, and other business services, as well as computer services, comprising largely of earnings from business process outsourcing (BPO) related transactions also increased during the quarter.

The primary income account posted net receipts of US$1 billion in Q3 2018, 49.5 percent higher than the US$700 million net receipts in Q3 2017. The upturn was attributed to the 20.9 percent decline in net payments of investment income due mainly to higher interest receipts on portfolio investments (by 167.7 percent) and direct investments (by 59.4 percent) abroad. Interest receipts on reserve assets likewise increased during the quarter. Similarly, compensation inflows mostly from resident overseas Filipino (OF) workers grew by 4.2 percent to reach US$2 billion.

Net receipts in the secondary income account amounted to US$6.4 billion in Q3 2018, slightly lower than the US$6.5 billion net receipts in Q3 2017. The 1 percent shortfall stemmed from the 6.9 percent decline in net receipts of current transfers to financial corporations, nonfinancial corporations, households, and non-profit institutions serving households (NPISHs). Meanwhile, net receipts of personal transfers amounted to US$6.2 billion, the bulk of which comprised of non-resident OF workers' remittances totaling US$6.1 billion.

Capital Account. The capital account registered net payments of US$3 million in Q3 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 National Government (NG), along with the gross acquisition of non-produced non-financial assets of US$4 million in Q3 2018 from gross disposal of US$3 million a year ago.

Financial Account.  The financial account reversed to net inflows of US$2 billion in Q3 2018 from net outflows of US$1.3 billion in Q3 2017. This was traced to the turnaround in both the other investment and portfolio investment accounts to net inflows from net outflows, and higher net inflows in the direct investment account.
    
Direct investments recorded higher net inflows of US$1.3 billion during the quarter from US$929 million net inflows in the same quarter a year ago. This resulted mainly from the 37.7 percent decline in residents’ net acquisition of financial assets to US$935 million. All components of residents’ direct investments abroad posted decreases, particularly debt instruments, which declined by 34.7 percent to US$780 million, and equity and investment fund shares, which dropped by 49.6 percent to US$155 million. Meanwhile, net inflows from residents’ net incurrence of liabilities or foreign direct investments (FDI) reached US$2.2 billion, albeit 8.1 percent lower than the US$2.4 billion net inflows in Q3 2017. This was due to the decline in net equity capital investments to US$315 million from US$1 billion.   

The portfolio investment account yielded net inflows of US$447 million, a reversal from the US$605 million net outflows recorded in Q3 2017.  This was on account of the expansion in non-residents’ portfolio investments to US$1.5 billion (from US$114 million), which negated the 53.1 percent increase in residents’ portfolio investments abroad to US$1.1 billion (from US$718 million). The surge in non-residents’ portfolio investments was brought about by the NG’s net issuance of long-term debt securities of US$1.4 billion (from US$1.1 billion) and short-term debt securities of US$45 million (from repayments of US$1.8 billion). Meanwhile, residents’ portfolio investments abroad expanded due to the increase in non-bank private corporations’ net placements in debt securities issued by non-residents to US$981 million from US$35 million during the quarter.

The other investment account posted net inflows of US$262 million, a reversal from the US$1.6 billion net outflows recorded a year ago.  Residents’ net incurrence of liabilities posted net inflows of US$1.8 billion (from US$820 million net outflows) due mainly to trade credits and advances extended by non-residents, which increased by 48.3 percent to US$1.2 billion from US$809 million during the quarter. Moreover, net availment of long-term loans by the NG from non-residents increased by 296.7 percent to US$700 million from US$176 million in Q3 2017. These net inflows of other investments, however, were tempered by outflows from residents’ acquisition of financial assets, which reached US$1.5 billion from U$795 million. These comprised mainly of residents’ placements of currency and deposits abroad of US$753 million and loans extended by local banks to non-residents amounting to US$739 million.

January-September  2018 Developments

The BOP position for the first three quarters of 2018 yielded a deficit of US$5.1 billion, higher than the US$1.4 billion deficit registered in the same period last year. This emanated mainly from the reversal of the current account to a deficit from a surplus in the previous year due to the continued widening of the trade-in-goods deficit. Meanwhile, the financial account registered net inflows, a turnaround from net outflows in the previous year. This stemmed from the other investment account which reversed to net inflows, together with the increase in net inflows of direct investments and the lower net outflows of portfolio investments during the period.

Current Account. The current account yielded a deficit of US$6.5 billion (2.7 percent of GDP) in the first three quarters of 2018, a turnaround from the US$968 million surplus (0.4 percent of GDP) registered in the same period in 2017. This development was brought about primarily by the continued widening deficit in the trade-in-goods account despite the higher net receipts posted in the trade-in-services, primary and secondary income accounts.

The trade-in-goods deficit for the first nine months of 2018 rose by 33.2 percent to US$36.9 billion as a result of the double-digit growth in imports of goods of 13.2 percent, coupled with the marginal decline in exports of goods of 0.9 percent. Exports of goods dropped modestly to US$38.8 billion in the first three quarters of 2018 from US$39.2 billion in the same period last year due mainly to the 29.8 percent drop in exports of coconut products. Lower shipments of sugar, and other agro-based products likewise contributed to the shortfall in total exports goods for the first nine months of the year. These more than offset the expansion in exports of other commodity groups, particularly forest and mineral products. Meanwhile, imports of goods expanded by 13.2 percent to US$75.7 billion from US$66.9 billion in the same period in 2017 attributed primarily to higher imports of raw materials and intermediate goods, as domestic economic activity remained robust. Imports of raw materials and intermediate goods grew by 21.4 percent to reach US$28.3 billion, boosted by higher purchases of materials and accessories for the manufacture of electronic products (98.4 percent), and increased imports of manufactured goods (26.1 percent). Imports of mineral fuels and lubricants rose by 23.4 percent to US$9.5 billion. Imports of capital goods grew by 7.1 percent on the back of increased purchases of power generating and specialized machines. Imports of consumer goods rose by 11.7 percent, on account of increased purchases of both durable and non-durable goods during the period.

Net receipts in the trade-in-services account aggregated US$8.4 billion, 18.2 percent higher than the US$7.1 billion net receipts posted last year. The upturn was on account largely of increased net receipts in manufacturing services; technical, trade-related and other business services; and telecommunications services, along with lower net payments in travel services. This positive development more than compensated for the higher net payments in government goods and services, charges for use of intellectual property, insurance and pension services, and the reversal of the personal, cultural, and recreational services to net payments from net receipts.

The primary income account recorded net receipts of US$2.5 billion, higher by 12.8 percent than the US$2.2 billion net receipts in  the first nine months of 2018. This emanated mainly from the 3.5 percent increase in net compensation inflows amounting to US$6 billion from US$5.8 billion last year. Another contributory factor was the lower net payments of investment income (2.4 percent) arising from higher net interest receipts on other investments (153.4 percent) particularly on loans extended by corporations and banks to non-residents, as well as lower net payments of dividends on portfolio investments (14.5 percent). Interest receipts on reserve assets likewise increased by 27 percent to US$877 million during the quarter.

Net receipts  in the secondary income account posted marginal growth in the first nine months of 2018 to reach US$19.4 billion. The modest improvement was on account largely of the 2.1 percent increase in remittances of non-resident OF workers amounting to US$18.8 billion during the period.

Capital Account.  The capital account recorded net payments of US$5 million in the first three quarters of 2018, a reversal of the US$42 million net receipts recorded a year ago. This resulted from lower receipts of other capital transfers to the NG and from the reversal to gross acquisition of non-produced non-financial assets of US$10 million from gross disposal of US$1 million a year ago.

Financial Account.  The financial account posted net inflows of US$4 billion, a turnaround from net outflows of US$615 million in the same period last year. This was brought about by the reversal of the other investment account to net inflows, higher net inflows of direct investments, and lower net outflows of portfolio investment.

The direct investment account recorded net inflows of US$5 billion, a 23.2 percent expansion from the US$4.1 billion net inflows recorded in the same period last year. This resulted from the 24.2 percent increase in FDI to US$8 billion. Non-residents’ investments in debt instruments issued by their local affiliates went up by 19.6 percent to US$5.5 billion from US$4.6 billion. Likewise, net equity capital investments increased by 52.1 percent to US$1.9 billion from US$1.2 billion as placements of US$2.3 billion more than compensated for the withdrawals of US$382 million.

Net outflows of portfolio investments dipped by 18.7 percent to US$2.8 billion in the first three quarters of 2018 on account of the reversal of the liability side to net inflows of US$686 million from net outflows of US$1.9 billion in the same period last year. In particular, the NG recorded net issuances of debt securities amounting to US961 million during the period from net redemption of US$2.5 billion.  On the asset side, net outflows rose as net placements of non-bank private corporations and local banks in foreign debt securities increased markedly by 619.3 percent (to US$1.8 billion) and 113 percent (to US$1.5 billion), respectively. 

The other investment account recorded net inflows of US$1.8 billion in the first three quarters of 2018, a reversal from the US$1.3 billion net outflows in the same period last year. This resulted as both the asset and liability sides reversed to net inflows of US$818 million and US$976 million, respectively. On the asset side, net inflows emanated from residents’ withdrawal of their currency and deposit placements abroad, which totaled US$2 billion from US$107 million in the same period in 2017. On the liability side, the reversal to net inflows was due mainly to net availments of foreign loans by local non-bank private corporations of US$559 million (from net repayments of US$1.4 billion) and by the NG of US$913 million (from US$406 million). The 8.1 percent growth in trade credits and advances extended by non-residents to US$1.4 billion also contributed to the net inflows.

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