Balance of payments in surplus for fifth straight month in March despite ‘hot money’ outflow

THE COUNTRY’s balance of payments (BoP) — which summarizes the Philippines’ economic transactions with the rest of the world for a given period — yielded a surplus for the fifth month in a row as inflows from the national government’s (NG) net foreign currency deposits and the central bank’s foreign exchange operations as well as income from the latter’s investments abroad offset outflows due to NG’s foreign debt payments, the Bangko Sentral ng Pilipinas (BSP) reported on Wednesday.
The central bank reported separately on Friday that foreign portfolio investments — also called “hot money” for the ease by which they are infused and taken out of local markets and which form part of BoP’s financial account — reversed to a net outflow in March from a year ago and the preceding month.
BoP posted a $627-million surplus in March that was a turnaround from the year-ago $429-million deficit and 46.8% more than February’s $467-million surfeit.
That led to a year-to-date $3.797-billion surplus that was a turnaround from the $1.227-billion deficit in last year’s first quarter, and compares to the $3.5-billion deficit the central bank has projected for 2019 and the $2.306-billion gap incurred in 2018.
“The reported BoP position reflected the final gross international reserves (GIR) level of $83.61 billion as of end-March 2019,” the central bank said in a press statement.
“At this level, the GIR represents a more than ample liquidity buffer and is equivalent to 7.4 months’ worth of imports of goods and payments of services and primary income. It is also equivalent to five times the country’s short-term external debt based on original maturity (outstanding foreign debt with maturity of up to a year) and 3.5 times based on residual maturity (outstanding foreign debt with original maturity of up to a year plus principal payments on medium- and long-term loans of the public and private sectors falling due in the next 12 months).
BSP Deputy Governor Diwa C. Guinigundo told reporters via mobile phone message: “… [W]e continue to see very encouraging signs in the first two months of the year that OFW (overseas Filipino worker) remittances and tourist receipts would continue to be robust”, adding that “[i]nflows of foreign loans are expected to have also supported the surplus in the March BoP”.
The BSP reported last Monday that the first two months saw money sent home by OFWs grew three percent year-on-year to $4.784 billion.
“If this trend continues, we should be looking at a better BoP position at the end of the year. It should also validate the financiability of the current account deficit we have sustained in the last few years on account of strong economic performance,” Mr. Guinigundo said.
In an e-mail, Security Bank Corp. Chief Economist Robert Dan J. Roces said that the surplus masks the negative current account that includes trade in goods.
The Philippine Statistics Authority reported on April 11 that the country’s merchandise trade deficit grew 16% to $6.708 billion as of February from the $5.763-billion shortfall in 2018’s comparable two months.
“The surplus reflects the high reserves accumulated by the central bank via the capital account; our gross international reserves at an all-time high and foreign investors are coming back, having poured in around $400+ million as of February,” Mr. Roces wrote.
“However, these mask the negative in the current account which measures among others imports and exports where our imports are high and exports are stagnant,” he added.
“Moreover, OFW remittances, also high for the quarter, are part of the current account which goes to show that the remittances are not enough to cover for the trade gap,” Mr. Roces noted.
“On a positive note, our high capital account means we have enough forex reserves to stabilize the peso. And as long as economic growth stays robust, the export sector gets its support after the budget was signed, and our economic fundamentals remain solid, we see a sustained surplus for the year.”
In a separate comment, Michael L. Ricafort, economist of the Rizal Commercial Banking Corp. (RCBC), said via text: “The improvement in the BoP surplus may be attributed to the sustained pickup in net foreign portfolio/net foreign buying in the local financial markets since the start of 2019 amid easing trend on both local inflation and interest rates.”
“BoP surplus may also reflect the sustained growth in the country’s structural US dollar/foreign currency inflows such as OFW remittances, BPO [business process outsourcing] revenues and foreign direct tourism receipts, as well as foreign direct investment inflows.”
HOT MONEY RETREATS
The central bank also reported on Wednesday that hot money net outflows in March ended four straight months of net inflows.
March saw $739-million net outflows that was a reversal of the year-ago $1.132-billion net inflows, as gross inflows went down a third to $1.732 billion from $2.469 billion and gross outflows nearly doubled to $2.471 billion from $1.337 billion.
“About 66.5% of investments registered during the month were in Philippine Stock Exchange-listed securities (mainly to holding firms, food, beverage and tobacco companies, property firms, banks, and transportation services companies); while 33.4% went to peso(-denominated) government securities and the 0.1% balance went to UITFs (unit investment trust funds),” the BSP said in a separate statement.
“The United Kingdom, the United States, Singapore, Luxembourg and Hong Kong were the top five investor countries for the month, with combined share to total at 80.3%.”
The central bank added that gross outflows “may be attributed to large outflows from peso GS amounting to $939 million for March 2019 vis-à-vis the $154 million recorded in February.”
“The US continued to be the main destination of outflows, receiving 76.8% of total remittances.”
That brought first-quarter flows to a $363.4-million net inflows that were less than half the year-ago $766.05 million, as gross inflows edged up 1.3% to $5.204 billion from $5.137 billion and gross outflows grew 10.7% to $4.841 billion from $4.372 billion.
Sought for comment, RCBC’s Mr. Ricafort replied in a text message: “Some profit-taking activities in March 2019 may have ensued after hefty market gains in January-February 2019, partly triggered by slower global economic growth and outlook amid declines in manufacturing gauges of China, Euro zone and in some developed countries… and declines in China’s exports and imports largely due to the adverse effects of the lingering US-China trade war and uncertainties related to Brexit.”
“[G]eopolitical risks related to tensions between India and Pakistan in March 2019 also triggered some profit taking in the local markets. Some profit taking in the local markets also came after the announcement on increased MSCI weighting of Chinese stocks in global benchmarks,” Mr. Ricafort added.
In a separate comment, Nicholas Antonio T. Mapa, senior economist of ING Bank NV-Manila, said that the outflows could reflect investors’ monetary policy expectations.
“Portfolio flows continue to help determine direction for the peso, with the outflow driven mainly by expectations for monetary policy… March’s depreciation trend mirrored the outflow from both the bond and equity markets with the BSP perceived to take on perhaps a more dovish tone to support flagging growth prospects after their ultra-aggressive rate salvo of 2018 to quell supply-side inflation,” Mr. Mapa said in an e-mailed response to questions.
“We can also note that sentiment can help drive the direction for trading with the first two months of the year seeing stark appreciation pressure for the peso even as interest rate differentials between the US and the Philippines remained unchanged. We’ve noted that foreign exchange direction is driven by both interest rate differentials as well as market-assigned probability to a Fed rate hike and thus the peso can remain stable even if actual differentials are maintained for as long as investors believe the Fed to be on hold for the time being,” he added.
“In the coming months, we can expect the peso to still enjoy some appreciation pressure given that investors are no longer expecting the Fed to hike rates in 2019 given the recent adjustment to the Fed’s outlook on rates. This expectation will help drive the flow of funds to emerging markets like the Philippines even if differentials are unchanged or even narrowed.” — Reicelene Joy N. Ignacio