Crossroads (Toward Philippine economic and social progress)
Philippine Star, 28 June 2017


Mistakes in proper names are almost unforgivable. In my column last week, the president of the ADB’s name Takehiko Nakao was mistaken. In the column of the week before, the name of UP School of Economics alumnus Delano Villanueva, formerly of the IMF, was misspelled. My apologies to both.

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The Philippine balance of payments is healthy. But in recent months, there have been signs of weakening.

Fundamentally sound but altered balance of payments picture. The reason for this reversal come from different sources. Structural reasons mainly account for those features of the balance of payments that remain problematic for economic performance.

The other internal reasons might have come from the change in administration. The style and approach to issues of the Duterte administration compares remarkably differently from the previous one. For one, the new government is committed to higher public spending.

Recent changes in the balance of payments. The most recent report from the Bangko Sentral ng Pilipinas based on reliable data for the first quarter of 2017 was recently released. This happened on the eve of the departure of outgoing Governor Amando Tetangco and the transition to his successor, Gov. Nestor Espenilla Jr.

This assessment, which is based on first quarter data, is equivalent to the mid-year report on the country’s BOP.

A BOP first quarter 2017 deficit of $994 million has been incurred. The year-on-year balance in 2016 was also a deficit, but it was only $210 million. For two years in a row, the payments deficit has increased, although not alarming.

Commenting on the relevant external environment during the period, a BSP report said: “Global economic growth remained uneven…. The lingering volatility in the external environment continued to affect the country’s external trade and capital flows.”

To reassure that the country’s external balance is sustainable and stable, the BSP report states that the country’s gross international reserves are valued at $80.9 billion as of the end of March 2017, slightly higher than the end 2016 level of $80.7 billion. This, however, is less than the $83 billion of March 2016 a year ago.

At this level, the country’s international reserves could sufficiently cover 8.6 months’ worth of imports of goods and payments of services and income.

When measured against the country’s external debt maturity position, the reserves are equivalent to 5.4 times the country’s short-term external debt.

Given these, the country’s BOP is fundamentally healthy.

Detail (1): trade-in-goods has high deficits. Philippine trade-in-goods has been in poor shape.

The year-on-year first quarter data tells a full story. Exports of goods from the country amounted to $19.9 billion in Q1 2017. This performance reflects a growth of 10.7 percent over Q1 2016 exports of $18 billion.

On the other hand, the country’s imports in Q1 2017 was $21.5 billion and for Q1 2016, $18 billion. Imports grew by 19.2 percent compared to 14 percent for exports in the same period, thus contributing to the higher deficit on trade.

The country’s actual trade deficit (that is, exports minus imports) on the current account based on the above numbers was $7.5 billion in Q1 2017 and $5.8 billion in Q1 2016.

The total trade deficit this quarter as a proportion of the country’s imports for Q1 2017 represent 25 percent of the import needs. This is a substantial shortfall which, however, is made up for by earnings from non-merchandise services as well as remittances received from OFWs.

Structurally, the Philippine trade deficit looks more like that of the United States, a mature import-consuming country. This is in contrast with the typical dynamic East Asian economy. These latter economies – Japan, China, South Korea, Thailand, for instance – all have high trade surpluses as propellers of their growth and sustenance.

Detail (2): high surplus on non-merchandise trade and on inward income remittances. This large trade deficit has been offset over the years by two major sources of international income for the country: OFW remittances and services exports from BPO services. Also, in the course of years, services earned from tourism have provided additional foreign exchange.

Specifically, the surplus on non-merchandise services was $2.4 billion. This surplus is mostly due to earnings of BPO services which provide a large offset against payments for services that the country essentially pays for.

Net remittances (OFW) received amounted to $6.4 billion during the first quarter of the year. Assuming that the amount of remittances stay at such an amount per quarter, we can expect $25.6 billion by the end of the year. This allows for a higher cushion to absorb more imports into the economy.

All of these sources of non-merchandise trade incomes have contributed toward the balance of payments surpluses earned across the years in the past. But now, uncertainties on the international front are appearing.

Of these, rising protectionist policies in industrial countries, restrictions and new regulations on labor migration, and continuing problems in the Middel East which affects OFW deployment are providing doubts about any further optimism about the expansion of remittances and BPO services.

Detail (3): more FDI volume needed. The financing part of the balance of payments could inform about the changes in the overall picture.

Any deficit on the current account could, of course, be met by the financing part, either by borrowings or by foreign investment. Borrowing is almost always an option because as long as an economy has economic viability, borrowings are always available.

Better yet, however, is the inflow of investments. This comes in two parts: foreign direct investments or foreign portfolio investments which are active assets in the domestic economy.

Inflows of FDI (foreign direct investments) have been improving recently in the country. However, the improvement has been modest compared to those that have helped to prop up other countries.

Portfolio foreign investments represent a less stable source of dollar flows into the country because it is highly volatile and responds (sometimes erratically) to short-term factors.

In this year and last, the net flows of portfolio investments have represented outflows from the equity market. Such outflows have added an altered the outlook to the balance of payments.