Bigger market boosts dollar reserves
A bigger trading field means more dollar flows and increased investments. The coming Asean economic integration in December 2015 will open up more trade opportunities for the Philippines that will eventually support its external position, especially the balance of payments and international reserves.
Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said these opportunities will spring derived mainly from the expansion of domestic markets to include the rest of the Asean.
“As experience and history have shown, integration offers potential opportunities which may support the BoP position of the AMS [Asean member states],” Guinigundo tells Manila Standard.
He said these potentials include increase in trade in goods and services, overseas Filipino remittance flows and investment flows.
“In recent years, the BoP surplus position of the Philippines has been due to lower trade deficit, and a steady increase in the net receipts in the secondary income account. Should the Philippines be able to maximize the opportunities under the Asean, the strong BoP position of the Philippines may be sustained,” Guinigundo says.
The BoP position remained in surplus at $114 million as of end-August this year, a reversal of the $318-million deficit a year ago.
Guinigundo said a strong BoP position would allow the Philippines to accumulate foreign exchange and maintain a comfortable level of reserves.
Guinigundo said the biggest opportunity that the Asean Economic Community offers is a market of more than 600 million people, all potential consumers of Philippine products and services. AEC expands the domestic markets to include the rest of the Asean.
“The AEC also allows us to participate in the regional value chain under a single production base where goods and services from the different Asean member states complement each other in the manufacture or production of goods and services that our domestic markets need,” he says.
He said more businesses and manufacturers across Asean would become aware of the Philippines’ capacity and capability of producing better quality goods at less cost, with the ease of transporting these goods to their destinations given the country’s proximity and rapidly improving infrastructure.
Guinigundo said that between 2001 and 2010, total services trade in Asean almost tripled and growth in services exports and imports outpaced global services trade growth since 2005.
“Based on the Philippines’ balance of payments accounts, services exports’ average growth increased substantially from 5 percent during the years 2000-2005 to 25 percent during the 2006-2010 period, which shifted from trade in services balance from continuous deficits to surpluses,” he says.
He said the Philippines has already become a significant exporter of modern services in sectors such as professional and information services, transport and communication technology, business processing outsourcing, higher education and health tourism.
In just a few years, he said the Philippines became the third largest player in the global BPO market, accounting for 15 percent of the market output, after India (37 percent) and Canada (27 percent).
He said the integration would also accelerate further the movement of skilled professionals across the region, which will be beneficial to the Philippines when it comes to money sent home from abroad.
“For the Philippines, this signifies promising opportunities for Filipino workers and potential of remittances under the Asean integration. According to the 2012 report from the International Fund for Agricultural Development and the World Bank, remittance inflows to Asean from 2000 to 2012 significantly increased. Asean was described as the world’s most dynamic and diverse remittance market,” Guinigundo says.
He said the Philippines received the highest remittances among Asean countries, accounting for over half of all flows to the region. He said the country’s young demographic profile would be an advantage vis-à-vis the Asean neighbors, providing ample supply of young, skilled and educated workers.
Meanwhile, Guinigundo said recent policy reforms have been implemented to liberalize foreign exchange regulations on trade and non-trade transactions, investments and foreign loans as well as simplify reporting and documentary requirements.
“In banking, the liberalization of foreign bank entry has led to the increased share of foreign bank branches and subsidiaries to the total resources of the country’s banking system.
“Based on the annual ‘Survey on the Effects of Foreign Bank Entry into the Philippine Banking System’ conducted by the Bangko Sentral ng Pilipinas, foreign banks in the Philippines have attracted foreign investments and served as channels for the flow of funds and investments into the economy,” he says.
Risks of integration
Guinigundo said while integration offers a number of benefits, there are potential risks and challenges that will have an impact on the external position of the Philippines.
“A single market and production base provides more vulnerability to supply chain disruptions. A more liberalized financial market makes the economies vulnerable to rapid in- and outflow of foreign capitals,” he says.
He said capital inflows could reverse themselves suddenly, with a potential for the depletion of reserves or sharp currency depreciation.
“An integrated financial market may expose the country to contagion risks/spillover effects when one Asean member state experiences a domestic crisis. The AEC has recognized the risks attendant to integration and has put in place necessary safeguards and cooperation initiatives to ensure BoP and foreign exchange stability,” Guinigundo says.