Angelo Taningco
Economist, Treasury Group

Philippine foreign reserves have expanded in August, reversing its two-consecutive months of decline. This could mean that the country’s overall balance of payments (BOP) position may have increased in the same month, potentially reaching a modest surplus level. Such news could trigger a peso appreciation.

Gross international reserves (GIR) grew by $448 million month-on-month (mom) in August, leading its end-month level to reach $81.5 billion, according to the latest GIR data of the Bangko Sentral ng Pilipinas (BSP). The key mom growth drivers of the GIR in August were the revaluation adjustments on the central bank’s gold holdings ($428 million mom) amid the gold’s price increase in the global market and bigger foreign currency deposits ($310 million mom). Meanwhile, foreign reserves have remained adequate in terms of meeting import requirements (import cover: 8.7 months) and short-term external debt obligations (short-term external debt cover: 560.5%) since both are higher than their corresponding benchmarks (Figure 1).

Figure 1: GIR & Foreign Reserve
Adequacy Indicators
Jan. 2016 – Aug. 2017

 
We have previously reported our findings of a positive correlation between the BOP and the monthly change in the GIR, i.e., a correlation coefficient of 0.76 spanning the Jan. 2014 – Jul. 2017 period. This suggests that the BOP for the month of August may have likely been in a surplus position.

The BOP is calculated as the change in the country’s net international reserves (NIR)-which is the difference between the GIR and the total of the BSP’s short-term liabilities and use of funds credits-minus non-economic transactions (ex. gold valuation adjustments). As expected, we find a very small difference between the GIR and NIR. With this, our new results show a stronger positive correlation between the BOP and the change in NIR less gold revaluation adjustments, with its correlation coefficient higher at 0.89 (Figure 2).

Figure 2: BOP &
∆(NIR-Gold Revaluation Adjustment)
($ million)
Jan. 2015 – Jul. 2017

 
Recall that the BOP was in a deficit position of $678 million in July. Our new findings mean that the BOP has likely increased in August versus July, potentially indicating that it may have shifted to a modest surplus level in August. If the August BOP data, which is scheduled to be released on 19 September, would indeed report a surplus position, this would reduce the year-to-date BOP deficit, which currently stands at $1.4 billion and could exert upward pressure on the peso’s value vis-à-vis the US dollar.

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