BSP: Peso under threat as ‘hot money’ flows in

The Bangko Sentral ng Pilipinas said that the country could expect a surge in foreign portfolio investments because of the United States government’s plan to automatically cut public spending worth $85 billion.

The steep cuts in the budget of US government agencies, if not reversed by an agreement by the US executive and Congress, are widely expected to dampen the US economy. As a consequence, the Federal Reserve (the central bank of the United States) may be forced to pump more liquidity into the economy to cushion the adverse impact of the budget reductions.

Because of the US Fed’s stimulus initiatives, more money will circulate in the global economy, some of which will go to emerging markets like the Philippines, the BSP said. The liquidity could come in the form of foreign investments in peso-denominated stocks, bond, and other securities.

“The budget cuts are seen to simply increase the balance sheet of the US Fed. That means, liquidity overhand may even grow higher,” BSP Deputy Governor Diwa Guinigundo said over the weekend.

“The liquidity could spill over to emerging markets, including the Philippines.”

The BSP official cited reports saying that the US Congress and the White House failed to agree to amend the law requiring an automatic $85 billion worth of US Federal budget cuts to be implemented between March 2 and Oct. 1.

Guinigundo said the BSP would continue to monitor factors affecting stability of prices and financial markets in the Philippines.

Monetary officials are also ready to implement measures that will deter any disruption to the domestic economy, he said.

The BSP earlier reported that the gross inflow of foreign portfolio investments reached $2.8 billion in the first month of the year—over twice as much as the $1.2 billion registered in the same period of 2012.

Moreover, net inflow of foreign “hot money” (which is gross inflow less the outflow) hit $1.27 billion. It was also more than double the $586 million recorded a year ago.

The BSP said that the inflow of foreign capital is welcome. But it said that excessive amounts should be avoided or carefully managed to prevent any adverse impact on the financial markets and the economy in general.

A surge in foreign portfolio investments may trigger an appreciation of the peso. Exporters have complained that a strengthening peso makes Philippine-made goods more expensive in dollar terms, and thus become less competitive in the global market.

A steep and sudden rise in foreign portfolio investments likewise has the tendency to cause asset price inflation, which may lead to volatility in the financial markets.

In an earlier interview, Guinigundo said the BSP is mulling over plans to further relax the rules on foreign exchange outflows in response to projections of rising inflow of foreign portfolio investments.

In further relaxing the rules, an entity will find it easier to bring foreign currencies out of the Philippines, thereby offsetting the impact of any surge in inflows on the peso’s exchange rate.