Balance of payments and the peso

The Philippine Daily Inquirer’s top story in the business section today says “BOP surplus seen topping $7-B mark”.

Balance of payments (always with an S) is an economic jargon that simply refers to a record of all international transactions between one economy and the rest of the world in a particular period.

Doris Dumlao, in her article, further explains:

Any transaction which gives rise to a payment by a Philippine resident like importation or debt servicing is a deficit item in the BOP while any which gives rise to a receipt like borrowing, exporting or overseas Filipino worker remittance is a surplus item.

Just by looking at the simple definitions, you can imagine that the list of transactions that the BOP captures is very extensive.

So why do you need to read about the BOP? It is closely related with how the peso is doing in relation to other currencies, especially the dollar.

When the BOP is in surplus, or seen to be in surplus, there are more dollars coming in and that usually makes the peso appreciate against the dollar. The opposite is true when the BOP is in deficit.

Next year, as the article says, the BOP is seen to breach the $7-billion mark and mostly due to remittances from overseas Filipino workers.

As with every economic indicator from the Philippines, however, read news articles on the BOP with caution. The Philippines has a huge ‘errors and omissions’ in its BOP accounts. That means the BOP does not record large amounts of international transactions, which may include trade misinvoicing or smuggling or capital flight.

A study from the Ateneo de Manila University’s economics department written by Edsel L. Beja, Jr. released earlier this year placed the unrecorded transactions from 1990 to 2005 at $192 billion. That’s nothing to sneeze at and shows “a weakening capacity in the governance of international transactions.”

That includes your remittance money. Good or bad?

(A fork lift maneuvers containers before loading it into a ship at Manila’s international container terminal. Transactions such as this eventually get recorded in the country’s balance of payments. Photo credit:AFP)

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