7-mo capital account deficit of $2.083B overshoots ’03 target

The Bangko Sentral ng Pilipinas (BSP) reported yesterday a capital account deficit of $2.083 billion in the first seven months of the year, overshooting the full-year deficit target of $1.973 billion.

Capital account covers all government transactions that involve the receipt/payment of capital transfers and acquisition/disposal of non-produced, non-financial assets.

The BSP said that despite the net inflow realized during the period, the capital account remained in deficit as the National Government and the private sector repaid their maturing debts.

The latest figures from the BSP indicated that the debt burden of both the government and the private sector was seriously eating into the economy, compounded by declining capital investments in manufacturing industries.

"This was a significant turnaround from the $504- million surplus posted in the same period in 2002," the BSP said, adding that the net outflow for the seven-month period was due to the absence of firmer indications of a sustained global economic recovery.

According to the BSP, the dismal outlook on global and domestic activity postponed investment plans in the key industries, namely electronics and manufacturing–both export oriented industries.

The Semi-conductor and Electronics Industries in the Philippines (SEIPI) had earlier warned of an imminent collapse of the industry due to weak government support.

SEIPI said that semi-conductor companies were already moving out of the Philippines and relocating in China where labor is cheaper.

The unique position of China in global politics also assured it of market share in the fast-dwindling export markets in Japan and the US.

SEIPI had originally projected additional investments of about $1 billion for the industry this year but as of January to April, only about $53 million actually came in.

The BSP said the weak global investor sentiment was evident in the performance of the direct investment account which yielded a net inflow of only $10 million during the period, substantially lower than the previous year.

Non-residents‚ investments in equity capital also declined significantly to $139 million compared to $760 million in "Moreover, there was also a net outflow of capital representing repayment of intra-company loans and this further eroded the direct investment account," the BSP said in its report.

The BSP said other investment accounts posted a substantially larger net outflow of $3.085 billion compared with the $1.640 billion net outflow registered in the first seven months of last year. The BSP attributed this to repayment of maturing loans.

The BSP reported that portfolio investments actually performed better as it managed a $1.005 billion surplus although this level was lower than last year’s $1.280 billion surplus.

The BSP said investments in equity securities were being driven out of corporate issues and into fixed income instruments such as bond issues of the national government which was viewed as the only credit-worthy issuer in the market today.

The capital and financial account deficit was offset by large borrowings in July which resulted in a balance of payment surplus of $239 million.

By August, however, preliminary data indicated that the BOP was back in deficit amounting to $414 million.

BSP Deputy Governor Amando Tetangco Jr. said the deficit was a result of the increase in foreign-currency denominated liabilities that the growth in gross international reserves (GIR) was not able to offset.

In August, BSP data indicated that the GIR stood at $16.159 billion in August from $16.106 billion in July but this was not enough to offset the increase in total liabilities which went up to $3.557 billion in August from $3.326 billion in July.

Short term liabilities alone, according to the BSP, skyrocketed from $1.968 billion in July to $2.263 billion in August while the use of fund credits went down from $1.358 billion to $1.293 billion. These two items comprise the total liabilities that also determine the net international reserves.