BOP surplus not determinative of near-term growth

BOP surplus not determinative of near-term growth"The worst does appear to be over, but..."



The head of this country’s monetary authority recently issued a statement – a statement on the 2020 expenses of the Philippine economy and its near-term growth prospects.

This is what BSP (Bangko Sentral ng Pilipinas) Governor Benjamin Diokno said: “As we enter the (final) quarter of the year, the preliminary date for July to September suggests that the worst is over… As we monitor the impact of the pandemic on the external accounts, it can be observed that the effects were mostly felt during the second quarter of 2020, particularly during the months of April and May, as stricter lockdown measures were imposed by the government as part of its effort to fight the spread of the virus.”

This country’s external accounts --- its overall BOP (Balance of Payments) -- stood on September 30, 2020 at $6.9 billion a figure $1.3 billion higher than the September 30, 2020 figure. Considering that the economy had gone into a recession, this outturn was very surprising.

The BSP chief went on to say that, “based on the preliminary data, the surplus was supported mainly by higher net foreign borrowings by the national government and a lower merchandise trade deficit, along with net inflows from trade in services, overseas filipino worker remittances and foreign direct investments.”

Governor Diokno’s statement was partly correct and partly flawed.

The BSP Chief was correct in saying that for the Philippine economy, the worst was over. The worst part of the economy’s 2020 experience was the ECQ (Enhanced Community Quarantine) regime under which the government kept Metro Manila and Calabarzon. Those regions together account for approximately 25 percent of this country’s GDP (Gross Domestic Product) - during much of 2020’s second quarter. With the two regions’ populations ordered to stay at home and almost all public transportation shut down, the Philippine economy went into a tailspin and suffered a 16.9-percent GDP contraction. With the advent of liberalized lockdown rules, GDP contraction went down to 11.5 percent in the July-to-September quarter. When the official data is in, they will very probably show a continuing decline in GDP flows during 2020’s final quarter. Thus, where the worst-is-over part of his statement was concerned, Governor Diokno was right. The worst of the current economic downturn does appear to be over.

Where the BSP chief erred was in suggesting a close link between the Philippine’s 2020 BOP performance and the Philippine economy’s near-term growth prospects. There is no close link between them. The composition of the welcome BOP outturn provides the explanation for the absence of such a link.

The highest give-away was the trade-related items, namely the lower merchandise trade deficit. The lower-imports element of this is a reflection of the deep economic slump occasioned by the pandemic; and the lower-exports is simply a manifestation of the continuing weakness of a narrow-base, unstable export trade. The FDI (foreign direct investments) continues to be a nothing-to-get-excited-about item; with $4.4 billion for 2020’s first eight months, the Philippines remained close to the bottom of the East Asian FDI league. The OFW continue, God bless their souls, continue to keep the Philippines afloat with their remittances; in a time of pandemic the OFW remitted to their country almost $22.9 billion. Lastly, the higher net foreign borrowings by the national government are not a felicitous item; government; they helped make it possible for the national government to provide fiscal support for 18 million distressed families, it is true, but they were additions to their country’s debt and need to be repaid. 

All in all, with the exception of the OFW remittances, planners and implementers of the Philippine economy’s 2021 growth strategy can find no solace from the outturn -- admittedly welcome -- of this country’s 2020 financial dealings with the world. What they would have found solace from, for purposes of a sustained 2021 economic recovery, were robust foreign exchange inflows on account of higher exports of merchandise and services and greater foreign direct investor interest.

Topics: Philippine economy , Bangko Sentral ng Pilipinas , Benjamin Diokno
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