$750-million borrowing to boost BOP surplus

MANILA, Philippines - The government’s $750-million additional borrowing this week will propel the country’s balance of payments over $1 billion this year, much higher than earlier projected.

The Bangko Sentral ng Pilipinas (BSP) projects a balance of payments (BOP) surplus of $700 million this year but central bank Governor Amando M. Tetangco Jr. said the surplus could be higher than expected.

According to Tetangco, the BOP position would be boosted by inflows from overseas workers as well as proceeds from the government’s $750-million global bond issue which were not factored into the original projections.

Remittance growth is expected to be flat this year but actual month-on-month levels ae still growing by an average of one to two percent so far this year – slower than last year’s double-digit growth rates but still avoiding the predicted decline.

But Tetangco pointed out that even before the government’s decision to issue global bonds this week, the country’s BOP surplus has been consistently over $1 billion, even hitting $2.143 billion in January to May.

However, it remains to be seen whether inflows from overseas Filipino workers (OFWs) and government borrowing would be enough to offset weak foreign direct and portfolio investments as well as declining export incomes.

Although in April, the BSP reported that net foreign direct investments surged to $601 million, propelled by the infusion made by Japan’s Kirin Holdings into San Miguel Brewery.

The April net inflow brought the four-month total to $648 million, putting it back into the positive zone, bouncing back by 29.1 percent compared with the $502-million inflow over the same period in 2008.

That one transaction might be enough for foreign direct investments to remain afloat and stay slightly higher than projected under the BSP’s most recent BOP estimates.

Tetangco said the BSP is currently conducting its usual mid-year review to determine whether its original projections would still hold. He expressed optimism that the BOP surplus would be higher than $700 billion.

When asked whether the surplus could even go over $1 billion, Tetangco said it was possible.

Inflows continue to beef up the country’s foreign exchange reserves which now could cover 6.3 months of imports of goods and payments of services and income. 

The BSP said portfolio investments in stocks and bonds were also up, indicating an improvement in the risk appetite of investors who have shied away from emerging markets for nearly a year.

The recovery of the stock and bond markets, however, could just as easily be attributed to the so-called dead cat bounce phenomenon when markets crash so badly that there is no other way but up.

These bear market rallies, however, are unsustainable and normally signal a prelude to more declines in the financial market.

Asked whether he thought this could be the case, Tetangco said much of investor sentiments would depend on whether the initial positive signs in the real economy could also be sustained.

“In a down market, you would usually see the improvement in the financial market first,” Tetangco said. “Then whether or not that can be sustained depends on whether the improvement in the real economy can be sustained also.”

But Tetangco said the BSP cannot say whether the expected record high in May would be the peak or whether the forex reserve level could still go up even higher this year.

“We will have to see,” Tetangco said, recalling that the BSP only expects reserves to reach $38.5 billion this year, with the balance of payments position at $700 million.