Overseas Exchange Transactions for July 2020

Remittances held up supporting foreign reserves


Overseas Exchange Transactions
Net Change to Foreign Reserves (TOP$ millions)

  Month Ended Year Ended
 

  Jul 20
Jun 20
May 20
Apr 20
Jul 20
Jul 19


Overall balance
12.1 54.2 14.5 17.7 63.0 16.4
Net Current Account
4.1 40.9 13.4 19.2 56.7 -2.4
Net Capital Account
1.6 4.3 1.9 1.0 23.6 38.5
Net Financial Account 6.4 8.9 -0.8 -2.5 -17.3 -19.6
Foreign Reserves Levels 555.9 543.8 489.6 475.1 555.9 492.9

Sources: Banking system | National Reserve Bank of Tonga

Overall Balance & Foreign Reserve

The Overseas Exchange Transactions (OET) overall balance maintained a surplus of $12.1 million in July 2020, although significantly lower than the surplus in the previous month. Both OET receipts and payments declined sharply in July 2020 by $46.7 million (42.9%) and $5.3 million (9.3%) respectively. However, total OET receipts were still higher than the total OET payments. All accounts recorded a net receipt over the month with financial account contributing the most, supporting the overall surplus. Annually, the overall OET balance also recorded a surplus driven mainly by the improvement in the current account balance as a result of higher receipts of official transfers and lower import payments.

The official foreign reserves increased again this month by $12.1 million to its highest record of $555.9 million (equivalent to 8.5 months of import cover) from $543.8 million in June 2020. This is also higher by $63.0 million compared to $492.9 million in July 2019. The monthly increase in foreign reserves attributes to the inflow of budget support, project grant funds from donor partners, and remittances.

Current Account

The current account recorded a lower surplus of $4.1 million, compared to the $40.9 million surplus in the previous month. The current account surplus was a result of net receipts in the transfers and income accounts. In contrast, trade and services accounts remained in deficit. The lower surplus, however, attributes to the lower official transfer receipts compared to the previous month. Over the year, the current account surplus improved by $46.6 million, resulting mainly from the higher net transfers receipts and the lower deficit in merchandise trade.

A sharp drop in official transfer receipts in July 2020 by $48.1 million (93.2%), following the inflow of budget support for the closing of the fiscal year, project grants, and additional funds from donor partners providing assistance for the COVID-19 impacts in the previous month. This was partially offset by the increase in both private and non-profit transfer receipts by $5.2 million (17.9%) and $0.8 million (27.9%) respectively. Remittance receipts have held up strongly despite the global COVID-19 shock and cancellation of annual events, peaking in July 2020 at $37.5 million, the highest recorded in the past 5 years. Total transfer payments, on the other hand, slightly increased over the month by $0.9 million (19.5%). However, the surplus in the transfer accounts increased over the year by $57.6 million (15.2%) to $436.4 million driven mostly by higher official transfer receipts and remittances.

The merchandise trade deficit narrowed over the month by $2.7 million (5.3%) due to the decline in import payments by $2.4 million (6.4%), largely from payments for other imports, construction materials, and oil imports. Total export proceeds increased by $0.3 million (32.5%) owing to higher proceeds from agricultural exports. Annually, the merchandise trade deficit narrowed by $22.4 million (5.3%) supporting the improvement in the current account balance. Import payments declined by $24.9 million (5.7%) over the year due to lower payments for imports of wholesale & retail trade, motor vehicles, and construction materials. However, export proceeds declined by $2.5 million (12.7%) due to lower agricultural and other export proceeds.

The deficit in the services account improved to $0.4 million in July 2020 from $3.8 million in the previous month. This was due to the decline in payments of $3.1 million (26.9%) coupled with the increase in receipts of $0.3 million (4.0%). The decline in service payments was due mostly to lower payments for professional & management, computer and telecommunication services over the month. Annually, the services account recorded a lower surplus of $12.5 million compared to the surplus of $32.2 million a year ago. This attributed to the impact of the border lockdown on tourism services over the past couple of months. Both travel receipts and payments fell over the year by $34.1 million (16.6%) and $14.3 million (8.3%) respectively in line with the decline in passenger arrivals over the year.

Meanwhile, the surplus in the income account increased to $2.6 million in July 2020 from $2.4 million in the previous month. This was largely driven by a $0.2 million (5.6%) increase in income receipts, which offsets a slight decline in income payments. Annually, the income account recorded a lower surplus of $7.0 million over the year to July 2020, compared to a surplus of $8.1 million in the previous year. This resulted mainly from the increase in income payments of $2.3 million (13.3%) driven by payments of dividends to foreign investors offshore and interest on external loans.

Capital Account

The capital account recorded a lower surplus of $1.6 million in July 2020 following the surplus of $4.3 million in the previous month. This reflected the decline in official capital receipts by $3.2 million (86.9%), whilst the private capital receipts increased by $0.5 million (92.0%). There were no capital payments recorded for the month.

Over the year, the capital account surplus declined by $14.9 million (38.7%) to $23.6 million in July 2020. The decrease in official receipts drove the $2.7 million (62.6%) decline in capital account receipts, reflecting lower receipts for reconstruction and renovations from the aftermath of TC Gita and TC Harold. Furthermore, the capital account payments fell by $1.7 million (66.4%) for both private and official capital accounts.

Financial Account

The surplus in the financial account declined by $2.5 million (28.0%) to $6.4 million in July 2020. This was primarily driven by the lower inflow of other investments which are mostly interbank transfers.

In year ended terms, the deficit in the financial account improved to $17.3 million from the $19.6 million deficit in the previous year. This resulted mainly from lower payments offshore for investment purposes coupled with the decline in interbank receipts.

Outlook

The NRBT is still expecting the ongoing COVID-19 pandemic to affect macroeconomic stability, given the deteriorating global economy and the expected contraction in domestic economic growth. However, the foreign reserve increased to record high level and is still expected to be well above the 3 months minimum threshold of import cover. This is supported by the anticipated lower import payments reflecting the economic impact of COVID-19 which has presumably weakened aggregate demand. Additionally, the delay in implementation of major infrastructure projects contributes to the slowdown. Deferrals or suspension of external debt repayments may also affect the outlook. Remittances have also been holding up despite expectations of a slowdown. The prolonged state and high uncertainty of the pandemic paired with Tonga’s vulnerability to natural disasters and external shocks are downside risks to the outlook.


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