Bullseye! 1Q 209 Balance of Payment (BOP) Data Shows Extensive Buildup of USD Liabilities Boosted GIRs and the USD peso
Last April, I proposed that the rocketing of Philippine Gross International Reserves (GIRs) had been a function of a massive buildup of USD short positions or borrowing.
So, aside from UST liquidations, USD inflows have originated from where?
The likely answer: Foreign Official Institutions (FOI) and Foreign Banks (FB) THROUGH the US banking system.
The Treasury International Capital Reporting System reveals of a two-month jump in total claims on the Philippines.
Last January, claims by FOIs and Foreign Banks on the Philippines vaulted 33.3% year-on-year to push growth in Total Claims up by 20.73%. FOI and FB constituted 92.9% of total claims.
So to prop up its GIR, the BSP along with the banking system must have borrowed substantially from foreign central banks and foreign banks (Eurodollar capacity). The surge in inflows of US Dollars not only pushed Philippine Treasury yields down, but also firmed up the peso.
See From One Crisis to the Next: From Rice Crisis to Water Crisis to Power Crisis? The Return of Inflation? Has the Peso been Boosted by Massive USD Borrowings? April 14, 2019
From the BSP’s 1Q Balance of Payment (BOP) press release which announced a reversal from deficit to surplus: (bold added)
The country’s balance of payments position (BOP) recorded a surplus of US$3.8 billion in Q1 2019, a reversal of the US$1.2 billion deficit recorded in the same quarter last year. This developed as a result of the higher net inflows (i.e., net borrowing by residents from the rest of the world) in the financial account, mainly on account of the reversal of portfolio investments to net inflows as well as the increased net inflows in the other investment and direct investment accounts during the quarter…
Financial Account. The financial account recorded net inflows (i.e., net borrowing of residents from the rest of the world) of US$4.7 billion in Q1 2019, more than five times the US$816 million net inflows posted in Q1 2018. This significant upturn was driven by the reversal of portfolio investments to net inflows (from net outflows) coupled with the higher net inflows of other and direct investments…. The other investment account posted higher net inflows of US$1.8 billion in Q1 2019 compared to the US$1.3 billion net inflows in the same period in 2018. Net inflows were driven mainly by residents’ net incurrence of liabilities and their net disposal of financial assets. Residents’ net incurrence of liabilities in the first quarter of 2019 reached US$1.1 billion, a turnaround from the net repayment of US$318 million in 2018. This developed as net availment of loans by resident banks totaled US$103 million (from net repayments of US$1.8 billion) and that of the NG amounted to US$947 million (from US$399 million).
Bullseye!
To cosmetically buoy international reserves and to inundate the system with foreign exchange, the financial system, the BSP and the NG have increased its USD liabilities on a grand scale.
And because such FX leveraging translates to a funding liability mismatch, where USD borrowed today will have to be paid tomorrow in the same currency from a system which operates on the peso, thereby signifying a funding mismatch, such exposure represents a “USD short” that magnifies the system's currency risk profile.
The BSP reported April GIRs at USD 85.02 billion, higher by USD 1.14 billion from a month ago to almost reach the 2016 apex.
Figure 1
Aside from gold’s price increase, the BSP wrote that the jump in reserves had been from inflows “arising from the National Government’s (NG) net foreign currency deposits, the BSP’s foreign exchange operations and income from its investments abroad”. The inflows had been “tempered partially by payments made by the NG for servicing its foreign exchange obligations”.
The BSP’s Forex holdings jumped USD 636.4 billion month-on-month to account for 55.65% share of the USD 1.144 billion. Foreign investments grew by USD 300.8 billion while gold rose USD 208.7 billion. Since peaking in September 2018, the BSP’s FX holding collapsed.
The NG has depended more on the capital markets to raise forex exchange funding as the BSP reduced its FX exposures.
Put this way, the NG and the BSP have resorted to financial operations or increased leveraging to bolster headline reserves.
Meanwhile, operational sources of USD revenues continue to show material slack.
Figure 2
External trade continues to slow. Total trade contracted -1.03% in April, mainly from a 1.91% decline in imports as exports inched higher by .44%, PSA data showed.
For the first four months, total trade barely expanded .93%, predicated on 2.91% of import growth and from a 2.09% decrease in export growth.
Weak imports have coincided with the flailing trend of money supply growth, which translates to domestic demand shortfall.
As such, April deficit ballooned anew to USD 3.5 billion.
Figure 3
OFW Remittances can hardly be reliable source of USD supplies. That’s because Remittances growth has been on a declining since 2014. 1Q19 personal and cash remittances were up 3.7% and 4.2% from the same period a year ago.
Figure 4
FDI’s have been a tenuous source of USD supply.
Though headline FDIs have increased in 1Q 2018, but lower 15.15% in 2019, debt has become the primary source of investments. It constituted 72.7% of the reported March FDI. Debt’s share of FDI continues to expand.
This leaves services exports (BPOs) as the last non-financial operations source of USD supplies. Unfortunately, except for the GDP, there barely is an updated published data on these.
But the general point is that unless these revenue centers grow sufficiently, the mounting USD liabilities, which temporarily provides a soothing effect on the peso, is going to take its toll in a not so distant future.
As a matter of partial confirmation, the BSP reported that outstanding external debt rose by 9.8% to USD 80.431 billion in 1Q 2019 from USD 73.196 billion over the same period a year ago.
We remain bullish the USD-php.
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