Thursday , 28 March 2024

OFW transfers, BPO earnings kept FX flowing–Tetangco

Riza Lozada

Remittances from Overseas Filipino Workers (OFWs) and receipts from the Business Process Outsourcing (BPO) jointly offset the foreign-exchange drain from trade and capital outflows in 2014.

Without the OFW remittances and BPO earnings, the Philippines could not have met its trade obligations, in particular its trade imports and services with balance of payments (BOP) incurring a deficit of $4.5 billion or 7 percent of gross domestic product (GDP) in the first quarter of 2014.

Bangko Sentral Ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the strong capital outflows in first quarter of last year caused the BOP position to turn negative for the first 11 months of the year at a deficit of $3.7 billion.

Nonetheless, strong remittances and BPO receipts kept the country’s current account in surplus and helped support the peso.

The gross international reserves (GIR) remained ample at nearly $79 billion by the end of November and will cover foreign-exchange requirements for more than 10 months’ worth of imports and payments for goods and services.

Tetangco said OFW remittances would provide the continued support for the economy to remain robust in 2015 as remittances would spur private-sector consumption.

He said forecast the GDP to grow between 7percent and 8 percent for 2015 based on the latest report from the Development and Budget Coordinating Committee.

Tetangco, however, said that for the growth target to be achieved, the national government must increase spending.

Prudent fiscal management in recent has given the government ample fiscal space, Tetangco added.

“On the real-estate sector, economic growth is seen to remain robust given firm private demand on the back of continued inflows of OFWs remittances, a low inflation and interest-rate environment, and positive market sentiment among households and firms.  At the same time, it remains critical that government ramp up spending to provide the vital infrastructure projects that will sustain economic growth in the medium term,” he said.

The Philippine Economic Update, which publishes findings from recent World Bank studies on the Philippines, indicated that the Philippines experienced large capital outflows in the first quarter of last year, resulting in a large balance-of-payments (BOP) deficit and a decline in reserves.

“The tapering of US monetary policy and developments in emerging markets, including slower growth and default risk in shadow banking in China, the devaluation of the Argentine peso, and increased political tensions in several middle-income economies, resulted in a significant outflow of portfolio investments in Q1 2014 (mostly in January),” the report said.

Net foreign selling of bonds was sizable causing the BOP to reach a deficit of $4.5 billion (7 percent of GDP), the highest since the 2008 Global Financial Crisis. The outflow of capital also resulted in lower GIR by $3.2 billion, because the central bank intervened to smooth out excessive currency fluctuations, the same report said.

The WB country updates noted “the level of GIR at $80 billion remains at comfortable levels. Reserves are enough to cover around 11 months of imports or 6.8 times the value of short-term external liability by residual maturity. With strong capital outflow, the peso depreciated by around 10 percent between first quarter of 2013 and a year after before regaining its strength beginning the second quarter of last year.”

Despite recent depreciations, “the peso remains as one of the strongest currencies in real effective terms (in the region)”, Tetangco said.

“Despite some moderation owing to slower agricultural production and lower public spending, economic growth remained robust supported by a broadening production base and solid domestic demand,” he added.

Tetangco said the spike in prices from May to August put the government’s inflation target at risks.

He said that among the measures taken to avert this, BSP raised the reserve requirements, SDA (Special Deposit Account) and policy rates which were also aimed to help prepare the markets for policy normalization in the US.

“These measures coupled with the decline in international oil prices and improvement in domestic rice supply helped to bring year-to-date inflation back to within target range,” he said.

Inflation for the year 2014 was confined within the target recording an average of 4.1 percent.

According to Tetangco, the BSP can be expected to remain focused on its primary mandate of price and financial stability as it recognized that the volatility of the financial sector as the US dollar continues to gain strength that would put some depreciation pressures on the peso.

“This volatility impact valuation of assets and liabilities of banks, their corporate clients and also households,” he noted.

The baseline forecast for inflation is 2-4 percent for 2015, which is “manageable inflation outlook over the policy horizon,” according to him.

“There may be greater scope in the months ahead for policymakers to focus on facilitating and maintaining supportive conditions for domestic demand,” Tetangco said.

Among the identified risks to the outlook included the upside price pressures due to pending petitions for utility-rate increase and tight power supply with high energy demand, he said.

The BSP would also closely monitor of any possibility the reversal trend in world prices of crude oil.  In 2014, oil prices went down bringing lower costs for transport and imports.

“We will continue with our policy of allowing the peso value to be determined by the market.  We will, therefore, not go against any fundamental trends in the peso, but will continue with our policy of providing liquidity in the market as necessary to avoid sharp and excessive movements, Tetangco said.

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