OF SUBSTANCE AND SPIRIT
Last Friday, two sets of economic data were released by the BSP. They were disappointing and might likely be markers for bumpy roads ahead. First, foreign portfolio investment (FPIs) for March 2021 and for the first quarter of the year showed more outgoing than incoming foreign funds. Second, the balance of payments (BOP) for both periods reflected higher dollar outflows mainly for external debt servicing.
While they look seemingly harmless, these figures illustrate the economic costs of our failure to act fast in managing the pandemic. Insisting on simply re-opening the economy so that business activities would resume is a risky public pronouncement.
BSP statistics on FPIs reflects foreign investments registered with the BSP that actually flowed in and flowed out from the Philippines. Foreigners invest in shares of stocks listed in the Philippine Stock Exchange (PSE), peso-denominated government securities, time deposits with resident banks as well as other debt instruments, unit investment trust funds and other instruments.
For March 2021, FPIs recorded more outflows of $541 million, or over 13 times larger than the $40 million net outflows in February 2021. Against March 2020, the peak of economic lockdown, net outflows dropped by 44 percent from the level of $961 million.
For the first quarter 2021, total net outflows of $483 million declined from year-ago-level of $1.4 billion. The bulk of withdrawals came from the stock and government securities markets.
No wonder the PSE composite index remained weak at below pre-pandemic levels and market capitalization shrank. Without domestic support, our corporates would be looking at a desolate trading floor. Without the BSP’s easy monetary policy, the National Treasury would have a more difficult time raising funds for the Republic. Taxes and duties are weakest in a recession. FPIs in other instruments were nil during the first quarter.
Sustained downtrend in FPIs suggests low market confidence in the Philippines’ growth prospects. The general trend is one of nervousness and uncertainty. The BSP admitted that among the downsides in investor sentiment included the high inflation rate for the first quarter of 4.5 percent against the government target of 2-4 percent. Investment return could turn negative in real terms. They were worried about the health situation in the Philippines. Finally, the reimposition of restrictions on mobility sent investors scampering away. Latest Philippine Manufacturing Purchasing Managers’ Index indicates a decline from an expansionary level of 52.2 in March to a contractionary level of 49.
On this basis, some people say 2021 could be another write off year. Some pockets of normalcy have been increasingly restored in many countries in the region.But we are still struggling with another wave of infection here. Unless we quickly shape up, we shall be left behind.
With the first quarter closing with a $541 million net outflows, the BSP’s target of a huge bounce back to $5.7 billion net inflow this year from 2020’s $4.2 billion net outflow is definitely a tough act.
To get the big picture, we should also examine the widening of the country’s BOP deficit. This is a summary of all dollar inflows and outflows involving foreign trade, remittances, loans and investments. Any surplus beefs up the country’s gross international reserves (GIR) unless the BSP decides not to buy from or sell foreign exchange to the market.
March did not break the BOP shortfall since January 2021. While the BOP was in the red at only $73 million against January and February net outflows of $752 million and $2.0 billion, respectively, the first quarter BOP aggregated $2.8 billion.
The trade numbers are still unavailable, but the BSP explained that the big-ticket items in the BOP deficit consisted of merchandise trade and public loans. With some improvement in business activity early this year, imports started to grow while exports continued to drop. Net repayments of higher foreign loans also contributed big to the BOP shortfall.
The challenge is how to reverse the first quarter BOP shortfall of $2.8 billion to the targeted amount of $6.2 billion surplus or 1.6 percent of GDP.
Last year’s BOP surplus stood tall at $16 billion and many equated it with a strong economy without thinking that one, imports contracted in 2020 and two, foreign loan proceeds climbed up like anything.
With declining imports and enormousforeign loan proceeds, the BOP had no way to go but up. GIR accumulated to over $100 billion. With very little demand for dollars, the peso gained traction and has remained relatively strong.
We might find ourselves in a bind.
Our poor health management could easily lead to further economic dislocation, output decline and lower market confidence. Poor FPIs could replicate in the last eight months of 2021 while the BOP position could get farther away from the ambitious target.
The political boiler that is the West Philippines Sea is another game changer as we approach May 2022. The issue is our capability to discharge good governance and enforce an independent foreign policy. If we foul up on asserting our territorial integrity in the way we dropped the ball on the vaccines, what is preventing us from harming our own economic prospects?
Let’s not shoot ourselves in the foot, please.