Comment on the Deteriorating Balance of Payments

By Prof. Jose Maria Sison
August 22, 2018

The Philippine balance of payments has deteriorated and will further deteriorate. The maturing debt will grow at an accelerated rate and the inflow of portfolio investments (hot money from the hedge funds) will continue to decelerate because of rising US interest rate. Income from the export of raw materials and semi-manufactures will continue to sink and the import costs of foreign manufactures will rise.

The global capitalist economy continues to be stagnant and depressed, afflicted by the crisis of overproduction and burdened by excessive debt of central banks, corporations and households. The US is now raising the interest rate on US-denominated loans and other transactions under a quantitative tightening policy to appreciate (raise the value of) and suck back the global flood of US dollars under the policy of quantitative easing.

It is not true that the import of capital goods is developing an industrial economy in the Philippines. Such capital goods are at best for infrastructure projects and are mostly equipment for the foreign big-comprador and foreign companies in the service sector. At worst, even luxury goods like cars and other end-consumer equipment are misrepresented as capital goods to evade taxes. Capital goods to serve national industrializaion are not being imported.

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Balance of payments deficit swells to $3.7 billion in 7 months
Lawrence Agcaoili (The Philippine Star) – August 21, 2018 – 12:00am
https://www.philstar.com/business/2018/08/21/1844351/balance-payments-deficit-swells-37-billion-7-months

MANILA, Philippines — The country continued to book a balance of payments (BOP) deficit up to July, to more than double the shortfall in the first seven months of the year amid strong outflows.

Data released by the Bangko Sentral ng Pilipinas (BSP) yesterday showed the Philippines booked a BOP deficit of $455 million in July, 33 percent lower than the $678 million shortfall recorded in the same month last year.

The country’s BOP position has been bleeding since the start of the year.

“Outflows in July 2018 stemmed mainly from payments made by the national government for its maturing foreign obligations and foreign exchange operations of the BSP,” the central bank said in a statement.

The BSP said the outflows were partially offset by net foreign currency deposits of the national government and income from its investments abroad in July.

The BOP is the difference in total values between payments into and out of a country. A deficit means more foreign exchange flows out of the country to pay for the importation of more goods, services, and capital than what flows in from exports.

From January to July this year, statistics showed the country’s BOP deficit swelled to $3.71 billion, more than double or 168 percent higher than the $1.38 billion shortfall recorded in the same period last year.

The shortfall in the first seven months of the year was more than double the revised $1.5 billion BOP deficit target set by the BSP for this year.

“The higher cumulative BOP deficit for the period may be attributed partly to the widening merchandise trade deficit for the first half of the year that was brought about by the sustained rise in imports of raw materials and capital goods to support domestic economic expansion,” the BSP added.

Latest data from the Philippine Statistics Authority (PSA) showed the country’s trade deficit swelled 63.2 percent to $19.1 billion in the first half of the year from $11.7 billion in the same period last year.

For the month of June alone, the balance of trade in goods booked a deficit of $3.35 billion, more than double the $1.59 billion shortfall recorded in the same period last year.

Imports amounted to $51.8 billion in the first semester, while exports reached $32.7 billion. The ballooning trade deficit continues to drag the country’s current account (CA) into a shortfall.

BSP Governor Nestor Espenila Jr. had said the country’s external payments position remains very manageable as it has built sufficient liquidity buffers against global headwinds.

According to the BSP chief, the economy needs more capital goods and raw materials to sustain its growth momentum.

“Two factors are motivating the modest shortfall. One is the surging growth of the Philippine economy, which requires higher imports of capital goods like machineries and equipmen,t and the other is the continued softness of the global economy particularly in 2015-2016,” Espenilla said.

The current account shortfall indicates that the economy is, on a net basis, importing what is required to continue its expansion as imports are mostly comprised of capital goods, raw materials, and intermediate products which together account for more than 80 percent of total imports.

The BSP said the reported BOP position is consistent with the final gross international reserve (GIR) level of $76.89 billion as of end-July, providing 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 6.1 times the country’s short-term external debt based on original maturity and 4.1 times based on residual maturity.

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