A motorcycle pases a building of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) in Manila, Philippines REUTERS Image Credit: REUTERS

Manila: The Philippines achieved a significant economic milestone, recording a $2 billion balance of payments (BOP) surplus in May 2024. This marks a turnaround from the deficit recorded in the same month last year.

The Bangko Sentral ng Pilipinas (BSP) on Thursday attributed the surplus to inflows from the government’s foreign currency deposits and income from the BSP’s investments abroad.

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This indicates a healthier flow of money into the country compared to what's flowing out. While lower than the surplus in the first five months of 2023, the year-to-date figure remains positive at $1.6 billion.

This improvement reflects a narrowing trade deficit and sustained inflows from remittances, foreign investments, and service exports.

The positive BOP position also contributed to an increase in the Philippines' gross international reserves (GIR) to $105 billion as of May 2024, providing a buffer equivalent to over 7 months of import costs.

What it means

A BOP surplus occurs when a country's total exports of goods, services, and capital are greater than its total imports.

In simpler terms, it means more money is flowing into the country than flowing out. This can happen for a number of reasons – current account surplus and a strong export sector. A current account surplus occurs when a country exports more goods, services, and capital than it imports.

Positive implications

Economic strength: A surplus often reflects a competitive economy that produces goods and services in high demand globally.

Currency appreciation: Increased demand for the country's currency can lead to appreciation, making imports cheaper and controlling inflation.

Foreign exchange reserves: A surplus can lead to an accumulation of foreign exchange reserves, providing a buffer against economic shocks.

Negative implications

While BOP surplus can be a sign of a healthy economy and strongr exports, it’s important to be aware of both the potential benefits and drawbacks. A BOP surplus also it could also a weak domestic economy that discourages imports, or foreign investment.

Recurrent large surplus could also lead to trade tensions with other countries who feel they are being disadvantaged, as well asset bubbles (inflow of foreign capital can inflate asset prices), and make it harder for exporters to compete, potentially leading to deflation (falling prices).

Higher reserves

Higher gross international reserves (GIR) raises a country's score card in the minds of investors, as it generally indicates a stronger financial position for a country.

At $105 billion (as of end-May 2024), the country's GIR ranks 27th in the world – a notch behind Canada’s (at No. 26) $116 billion and slightly ahead of Malaysia’s $102 billion (at No. 28, data as of March 2024).

Larger reserves act as a financial cushion during economic crises or external shocks, the ability to fund essential imports (food, fuel, machinery) with foreign currency and increased business confidence and investment, and lower borrowing cost.

Moreover, a strong financial position makes a country more attractive to foreign businesses looking to invest.

Ample reserves also provide a country with more flexibility in managing its economic policies, such as using reserves to fund stimulus programmes without excessive borrowing and maintaining a stable exchange rate.

The International Monetary Fund (IMF) projects the country's GDP to hit 6 per cent in 2024, backed by a uptick in domestic demand and exports. Inflation, which peaked at 6 per cent in 2023, is expected to decline to 3.4 percent in 2024.