MANILA - The year 2020 was supposed to bring in nearly $9 billion in net foreign direct investment inflows, a near 10 percent growth in tourism income, and the steady, ever-so-reliable dollar income stream of overseas Filipino remittances and business process outsourcing. Trade was also seen continuing at a deficit, as the Philippines imported more to feed its growing appetite for infrastructure and foreign goods and services.
Then COVID-19 happened. Here’s the Philippine Central Bank’s latest full year projections for the Philippine’s Balance of Payments, which covers all sources of cash inflows from abroad.
The evolution of the forecasts from May, during the worst quarterly contraction ever recorded in Philipipne history, to September, which now offers some signs of hope.
In the second quarter, both exports and imports of goods and services were seen contracting sharply. Tourism and remittances from overseas Filipinos were also seen slumping, but there was a general expectation that things would improve in the second half of the year.
The latest projections released last week still have some gloom and doom. The Philippine Central Bank is expecting a worse outcome for imports of goods, and a sharper decline in services trade. Tourism is expected to fare worse compared to the already dismal 63.3 percent contraction in the first half of 2020.
On the bright side, overseas Filipino remittances are seen contracting at a slower pace than expected. Net Foreign Direct Investments (FDI) won’t take as big a hit. Gross International Reserves, the Philippines’ holdings of foreign currencies, gold, and cash equivalents to buffer itself from external shocks, has already breached $100 billion for the first time ever.
Foreign Direct Investments
Foreign direct investment is down about 11 percent year on year for the January to July period. That may seem like a small contraction considering the circumstances wrought by the COVID-19 pandemic. But this continues a disappointing downtrend for FDI in the Philippines, where investment from abroad has been a weak spot historically. It was only in 2017 that FDI inflows for the Philippines breached $10 billion. Now the Philippine Central Bank is hoping for a total of $5.6 billion at the end of 2020.
April, the first full month of lockdown in the Philippines, saw the biggest contraction in FDI so far this 2020. $314 million compared to an average of $1 billion through April 2018 and 2019. The encouraging trend in this month by month breakdown is FDI has been trending higher since the low in April.
Net equity capital, or new investments shown in light orange, actually more than doubled year on year in the first seven months of 2020, a good sign reflecting the resilience of investor confidence in the Philippines. However the reinvestment of earnings and net debt instruments, shown in dark orange and red, contracted by over 20 percent each year on year.
Approved foreign investments, pledges approved by government’s investment promotion agencies, hit PhP44.6 billion, less than half the total from the same period in 2019. These approved investments may or may not materialize into actual foreign direct investments in the future, but they are usually used by the government as a gauge for foreign investor interest in the Philippines.
Cash remittances from overseas Filipinos contracted by 16.2 percent in April, and 19.3 percent in May. Those were the worst monthly drops in remittances in nearly two decades. Many industry analysts forecast the contraction would hit 20 percent by the end of 2020. However remittances recovered and actually grew in June and July, before suffering another setback in August which was thankfully much smaller compared to the second quarter. The Central Bank of the Philippines has since cut its initial forecast for a 5 percent contraction in remittances for 2020, to just a 2% percent dip.
Central Bank Governor Benjamin Diokno said the revival in remittances reflects the altruistic nature of overseas Filipinos. In other words, they send more money home to their loved ones in times of need. The stronger remittances may also be a reflection of the strong Philippine Peso, which is one of the most appreciated regional currencies against the US Dollar this year. A strong Peso devalues the US Dollars overseas Filipinos earn, so they have to send home more dollars to cover the same expenses of their families.
Exports and imports contracted sharply from March to May this year, and they continue to do so. There are several factors here. On the import side, the COVID-19 pandemic shut down factories and logistics hubs, preventing the delivery of raw materials and other commodities. Even after lockdowns were eased, demand remained low for non-essential products, such as electronics and big ticket items like vehicles, due to the diminished financial capacity of consumers.
Demand for imported goods, usually more expensive than locally manufactured versions, also declined. The Philippines is also a big importer of fuel, but because of the sharp decrease in demand for transportation due to global COVID-19 lockdowns, oil has become much cheaper. All of these have contributed to the sharp decline in imports.
On the export side, the COVID-19 pandemic’s effect on demand has kept Filipino manufacturers from ramping up production. The contraction in Philippine exports accelerated in August, nearly matching the decline in Philippine imports. But overall, Philippine exports have done better than imports this year.
As a result, the trade deficit in the first eight months of 2020 amounted to $14.6 billion, nearly half of the $27.1 billion from the same period in 2019. This means the Philippines is spending less for imported goods, helping to keep more wealth in the country.
Gross International Reserves
Better than expected remittances, less expenses for imports, a smaller hit to foreign direct investment, and steady receipts from Business Process Outsourcing have led to an accumulation of assets in the Philippines, and a record high $100.49 billion gross international reserves as of the end of September 2020.
This is a great development because it means the economy remains well-cushioned against external shocks. All business can stop and the Philippines would still be able to pay for 10 months’ worth of imports of goods, services and primary income, or nine times the Philippines’ short-term external debt based on original maturity.
However, the data also point to a weakened manufacturing and export sector, and poor demand in both local and foreign markets for all non-essential products. Foreign direct investments remain on a downtrend, and approvals for foreign investment have also been halved. Overseas Filipinos are forced to send home more money despite facing a challenging international job market.
The Philippines is weathering the COVID-19 pandemic well. 2020 won’t deliver what was expected at the start of the year. That can be blamed on COVID-19, and the other out of our hands calamity that the pandemic made us forget, the Taal Volcano eruption. However, much of the recovery must be attributed to the hard work of Filipinos.
Overseas Filipinos are battling some of the most challenging circumstances in the international job market ever to send home more money to their families, and they are getting less bang for their buck due to the strong Philippine Peso. BPOs have pivoted well to adjust to our new normal, avoiding a significant drop off in their contribution to the Philippines’ dollar earnings. The Philippine government has leveraged its highest ever credit ratings to prudentially tap foreign debt as a means to buffer the economy from shocks.
But there’s no rest for the weary. Trade and tourism are down for the count, and investment will definitely need a shot in the arm. Pending legislation, including the 2021 national budget, measures to lower business taxes and create new incentives, and proposals to remove barriers to entry for foreign firms, are all seen as vital to the economic recovery. The Philippines is doing well enough, but 2020 isn’t over yet, and 2021 will bring more challenges in the struggle to revive the virus ravaged economy.