TOPIC 2 : BALANCE OF PAYMENTS (BoP)
greater than payments. Otherwise the current
Balance of payments (BOP)
• is an accounting record of all monetary
transactions between a country and the rest
of the world within a specified period of time.
• The financial flows correspond to use of
foreign currency in transactions. What are the
flows?
Inflows of foreign exchange
• Receipts, also called credits. They increase the
Philippine holding of foreign exchange.
Outflows of foreign exchange
• Payments, also called debits. They decrease
the Philippine holding of foreign exchange.
Debits and credits in the BoP items
• The inflows and outflows of foreign exchange
as receipts and payments respectively for
transactions on the items of the balance of
payments are resolved as surplus or deficits.
* surplus: when credits > debits or liabilities
* deficits: when credits < debits or liabilities
Net status of the balance of payments account and its
components
• Trade surplus or trade deficits
• The trade account is in surplus if Exports >
imports, i.e, net exports is positive. Otherwise,
the economy has a trade deficit. Trade items
are part of the Current Account.
• Current Account (CA) surplus or deficits
• The current account has a surplus if net exports
and receipts from remittances and donations
and transfers intended for consumption are
account is in deficits.
• Capital Account
• If credits to capital transfers (i.e. remittances
intended for investment) and non-financial
transfers (e.g. patents and copyrights) also for
investment are greater than the debits, the
Capital Account is in surplus. Otherwise it is in
deficit.
• We will lump the Capital Account with the
Current Account. At present, it has a very small
role in the BoP.
• Financial Account
• If overall receipts in the Financial Account
items are greater than payments, the account
is in surplus. Otherwise, the account is in
deficit.
• Official adjustment when CA and CF do not balance
a. Monetization of gold
b. Revaluation of assets (sell assets)
c. Change in the reserve position
d. Borrowing from IFIs, use of Special
Drawing Rights
Additional Notes:
1. For the course, our main interests are the
contributions of specific items to the international
reserves (and whether the net transactions
increase or decrease the reserves), and specific net
status or balances. The specific BoP items of
interest are exports and imports, factor incomes,
transfers and donations in the Current Account.
And direct investments, portfolio investments, and
international loans and repayments in the Financial
Account. Macroeconomic developments in
relation to the items are often subject of current
news, for example the contraction in the exports of
electronic components or the level of OFW
remittances, entry into and exit of “hot money”
from the country, offshore borrowing. The specific
net status of interest to the course and the
economy are trade balance, current account
balance, the financial account balance and BoP
balance.
2. We will use the technical term gross international
reserves (GIR) instead of international reserves for
convenience.
3. Factor income receipts (or primary income) are
earnings during the year of the factors (labor
services, financial / real estate / other assets) of
Filipino nationals and residents remitted into the
country. Financial transfers include other
remittances and donations (secondary income).
4. Receipts of borrowed funds like financial
instruments such as offshores bonds are inflows
(also called receipts or credits) to the Financial
 Accounts. Repayments are outflows (also called
payments, debits or liabilities). The principal and
repayments of Philippine loans are recorded under
the Financial account, while interest earnings and
interest payments are classified as factor incomes.
5. Investment in business is classified as direct
investment if an entity or group of related firms is
able to exercise control or a significant degree of
influence over the enterprise or where ownership
constitutes 10% or more. The assumption is that of
stable long-term interest in the business evidenced
by the “sinking in” of significant amount of financial
capital. This is in contrast with the “volatile” nature
of portfolio investment (stocks and bonds that do
not reach more than 10% ownership). Purchases
and sales of stocks and bonds are easily
undertaken (“at the touch of a button”), facilitated
by the efficient operations of investment houses
and internet access.
6. The CA on one hand, and the Financial accounts
offset each other’s foreign exchange surpluses and
deficits. Net overall surplus or deficit (“BoP surplus
or deficits”) affect principally the foreign exchange
reserve position (or level of GIR), the usual
adjustment for overall surplus or deficits. In the
current pandemic, the government expanded
borrowing – raising funds through offshore
issuance of government (“sovereign bonds”) and
through loans from multilateral lending
institutions. Surplus in the net CA and Financial
accounts increase the foreign exchange reserves
while deficits reduce them. International reserves
are readily available to and controlled by the BSP
for direct financing of imbalances and managing
the magnitude of such imbalances.