BSP defends itself against Tiglao criticism of its ‘statistical integrity’

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Subject: Article written in The Manila Times entitled “Under Arroyo’s watch, FDI bigger than Aquino’s; The President lies on foreign-investment flows”

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This refers to the article written by Mr. Rigoberto Tiglao which appeared in The Manila Times on 12 August 2015. In his article, Mr. Tiglao claims that: Aquino is right that the $6.2 billion “is the highest ever recorded in our entire history” only because that figure for the first time in history includes that [sic]not just foreign equity but even foreign debts, the amounts of which are suspect.

Let me emphasize three points with respect to the generation of statistics by the Bangko Sentral ng Pilipinas (BSP). First, the methodology used by the BSP for the compilation and generation of foreign direct investments (FDI) statistics is not unique to the Philippines. It is not the BSP’s methodology but it is prescribed by the International Monetary Fund (IMF) for all its country members to ensure international comparability of data. This international standard is based on the Balance of Payments and International Investment Position Manual, 6th edition (BPM6), hereinafter referred to as the “new methodology.”

The BSP adopted the new methodology in March 2013 and completed the shift to this framework in March 2014. Prior to that, the BSP followed the 5th edition of the Manual (BPM5), hereinafter referred to as the “old methodology” in the compilation of the Balance of Payments (BOP) statistics starting with year 2000 series.

Second, we would like to note that, under both the old and new methodologies, intercompany loans (particularly borrowings of local subsidiaries from their parent firms abroad) are recorded as part of FDI. Our FDI series based on the old methodology covered the period 1999 – 2012 and already includes intercompany borrowings in the FDI data. Meanwhile, the FDI series based on the new methodology included the period 2005 onwards. As prescribed in the BOP Manual, the direct investment account has the following components, namely: (1) equity and reinvestment of earnings, which is presented as equity capital and reinvested earnings in the old methodology; and (2) debt instruments (or intercompany borrowings) which is called other capital in the old methodology.

The difference in the compilation of intercompany loans (debt instruments/other capital) between the old and the new methodologies lies in the treatment of borrowings if the local enterprise is the parent company to which the foreign subsidiary extends the loan, also known as “reverse investments.” Under the new methodology, the amount of such loan is added to the investments in debt instruments component of FDI (liabilities side). Under the old methodology, however, the amount is deducted from the other capital component of residents’ direct investments abroad (assets side). The new methodology is aligned with the asset/liability principle as prescribed in the BOP Manual and is consistent with the compilation of the country’s international investment position. Thus, all borrowings by the resident enterprise (regardless of whether it is the parent company or the affiliate/subsidiary) from the related enterprise abroad are counted as FDI. The change in recording effectively increases the FDI level by the amount of reverse investments. However, reverse investments in 2014 amounted to only US$75 million, equivalent to 2.2 percent of total intercompany loans or 1.2 percent of FDI.

It is true that intercompany borrowings comprised a large chunk (54 percent) of FDI in 2014 at US$3.3 billion, and about the same percentage (53.7 percent) of FDI for the first 5 months of 2015 at US$0.9 billion. However, it is not only in recent years that this account registered substantial increases. In 2010 and 2013, intercompany loans reached US$1.3 billion (increasing by 617.3 percent; equivalent to 120 percent of FDI) and US$2.7 billion (increasing by 578.8 percent; or 71 percent of FDI), respectively.1

Finally, our FDI data are sourced from and validated with bank reports, debt statistics, investment registration records, financial statements, and surveys. They are not drawn from thin air.

Let me assure Mr. Tiglao of the BSP’s statistical integrity. BSP’s methodology in monetary, banking and external statistics are all consistent with international standards and best practices.

Yours sincerely,
DIWA C. GUINIGUNDO
Deputy Governor
BANGKO SENTRAL NG PILIPINAS
(This printed letter on Bangko Sentral letterhead paper is dated August 16, 2015).

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