S&P warns of reversal of capital flows

Flight of funds seen with recovery in US, Europe


Standard & Poor’s has cautioned emerging markets in the Asia-Pacific region, including the Philippines, against a potential flight of capital back to the United States and Europe once these advanced economies show more solid signs of recovery.

In one of its latest reports, S&P said the reversal of the current trend of surging foreign portfolio investments to the Philippines and its neighbors was a possibility facing those countries.

“Highly expansionary monetary policies in advanced economies are spurring very strong capital flows into Asia Pacific, which can just quickly exit if conditions improve closer to      home,” the credit-rating firm said in the report on its outlook for Asia Pacific.

S&P said the problem with a sudden and sharp reversal of flows was that it could create significant volatility in the exchange rate, which could affect prices and the competitiveness of an economy. In particular, sharp and sudden outflows could cause a steep depreciation of the peso against the dollar.

Documents from the Bangko Sentral ng Pilipinas showed that gross inflow of foreign portfolio investments hit $2.8 billion in the first month of the year, more than double the $1.2 billion registered in the same period last year.

In terms of net inflow (gross inflow less total outflow), foreign hot money reached $1.27 billion, also more than double the $586 million recorded a year ago.

The growth in foreign portfolio investments was welcome, according to the BSP, but this posed the challenge of proper liquidity management. In a bid to avoid a much faster inflation and an even sharper appreciation of the peso resulting from the surge in inflows, the BSP has implemented measures to tame these effects.

For instance, the BSP has prohibited investments of foreign funds in its special deposit accounts (SDAs) and has slapped a higher capital requirement for banks’ holdings of non-deliverable forwards (NDFs), which are hedging instruments meant to shield exporters and importers from foreign-exchange risks but were reportedly being used by some banks and investors for currency speculation.

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  • Neil Magno

    Reversal of foreign capital is better for us at the moment when the true value of the US$ is actually lesser than what is being traded. In the event some capital do go back to advanced economies, its actually more favorable for BPOs and OFWs & the country in general as the peso can stay at its current rate or depreciate just a little without the BSP intervening much. Anyway, $ inflows from OFWs will continue to stay strong and can mitigate any outflow of hot money. 

    Is the S&P acting like the grim ripper during the time of Noah after the flood? If some hot money do leave, it is based on spreading out opportunity and not fear. Historically, political instability expressed by economic adventurism is the only event that can put fear into the hearts of these foreign investors.
    With inflation inching up a bit, the Philippines needs a small dose of capital outflow to temper its own version of market exuberance. 

    • Handiong

      I suppose the impact of “hot money” outflow will be felt more in the equity market since these funds, being short-term in nature, are really invested in Philippine stocks. There will be a lower volume of trading that can result in lower share prices.

      • Neil Magno

        You are correct. But I think the amount won’t be significant since I mentioned the outflow would be based on spreading out opportunity and not because of fear in the local economy.

        If economic fundamentals are still healthy, then this would be a temporary scenario and a good opportunity to buy at a lower price.

      • dingestraza

        No! the impact should be felt in portfolio market rather than equity market. Portfolio investment come and go quickly while equity investment stay for a longer time as long as investment in the company which is profitable it will stay until kingdom come.

      • Handiong

        By equity market I mean the stock or capital market. The equity investment that you described is the foreign direct investment (FDI) by which the investor invests in the bricks and mortar of a company.

        Most of the “hot money” is in the stock exchange. With interest rates at their lowest historical levels, I don’t think portfolio money is into bonds or government securities. Even the interest on BSP’s Special Deposit Accounts (SDAs) has been cut to a uniform 3%pa.

  • Ayjayar

    “Easy [hot money] come…easy money [capital flight] go!!”… remember the 1983 Dewey Dee caper?. He only brought out $600M but it was enough to bring the country to its knees. We had to go running to the IMF with our begging bowl, tsk-tsk..

    But, of course, our finance/fiscal planners can always say: “No fear..Nandyan naman ang HUGE dollar inflows ng OFWs natin, :(…
    To me, this type of reasoning is like that of still physically-strong parents quitting gainful employment just because their children are already working and supporting the family household.. lazy and taking advantage of their children’s sacrifices…)

  • Hayek_sa_Maynila

    Reversal of portfolio flows can be harmful if the economy becomes dependent on them.
    Although they are not always apparent, there are a number of symptoms of excessive dependence on or even addiction to foreign portfolio flows.
    One symptom is rapid nominal appreciation or overvaluation of the local currency.

    o The danger of a rapid appreciation is that it erodes the competitiveness of
    industries or sectors that earn foreign currencies and save foreign currencies.

    o   Industries that earn dollars, of course, include BPOs, tourism, merchandise exporters
    (furniture, electronics, food, etc.)

    o   Industries that don’t earn but help an economy save foreign currencies are those  industries that compete with cheap imports such as food production or construction services.
    o   Fact: currently the peso has appreciated 30% against the US Dollar since end-2005.
    From an REER perspective the peso has become overvalued. In this respect,
    therefore, the PHL economy has become dependent on portfolio flows.
    Another symptom of addiction to portfolio flows is the increasing size of a country’s external or foreign currency debt (National external debt – both corporate and public sector), in relation to its foreign currency assets (GIR).

    o   More importantly, if the size of short- term external debt is growing rapidly that
    the relative size of international reserves shrinks.

    o   Unfortunately, regulators do not see all of the build up of externall or foreign currency short-term obligations because financial institutions have many ways of hiding these from the
    monetary authorities (BSP). Monetary authorities often realize they don’t have adequate reserves even if they are at record levels already. This is what happened in 2007. Despite or record reserves, we still saw a massive depreciation of the peso in 2008 when Lehman declared bankruptcy in 3Q2008. It pays, therefore, to have a sizeable amount of reserves.
    Rapid growth in credit or bank loans is another symptom of rising dependence on the portfolio flows and susceptibility to capital flow reversals or sudden stops in foreign money. Based on data from BSP, credit growth in the PHL has remained manageable.

    Bottom line: the picture is mixed and the BSP continues to do all it can to avoid excessive dependence on portfolio flows. It is clear that despite doing its best it still needs to work hardest on restoring the competitiveness of the peso.

  • carlcid

    Reversal of capital flows is bound to happen, sooner or later. Timing is, of course, very crucial here. We don’t know when exactly it will happen. We only know that it will happen. Especially when the low-interest regime begins to wane. If we are unprepared, it could get ugly.

  • dprotector

    Could be like what happened in 1997. The government and businessmen should be prepared for this and not borrow too much because interest rates could go up too fast once the hot money comes out.


    No growth in the county, the OFW, (living heroes) are the one who salvages our economy, ironically, these chinese billionaires who benefited from the influx of billions of dollars from the remittances.    By the way these billionaires like Henry Sy who have thousand of workers underpaid and on contractual basis.   Thanks to this government for doing nothing.


    • kulittwit

       Stupid comment. I would agree with you if you say, thanks for all governments for doing nothing. For one, NINE (9) years of the corrupt arroyo regime may nagawa ba about ofws and contractualization?????????

      • popeyee

        Move on, dude. Arroyo’s reign is over so it’s the present admin’s turn to pursue whatever the past admins forgot to do..dahil ba walang ginawa ang nakaraan ay dahilan na para matulog ang kasalukuyang admin sa issue ng contractualization? Kung ganyan ang ating pananaw wala tayong patutunguhan..

    • 1voxPopuli

      as the famous senator sotto has said:

      “ask not what your country can do for you – ask what you can do for your country”


  • bryanbrian

    I dont think the US and europe could fully recover within 3 years. Definitely, still years away.

  • Weder-Weder Lang

    “The continuous inflow of hot money into our stock market is a sure sign of the world’s confidence in Daang Matuwid. A stronger Peso is a a sign of a stronger republic.” — President Aquino

    Paano na when hot money flows out? Pahiya na naman si PNoy.

    Instead of misinforming our clueless president, PNoy’s advisers should share Warren Buffett’s opinion on hot money with the president:

    “Hot money chasing quick profits is a sure sign of speculators’ confidence in a bubble.” — Warren Buffett on CNBC interview with Maria Bartiromo

    • ahock

      I totally agree. In a way the investor confidence brought by this administration eh kahanga hanga. But as a whole they cant really claim all the credit. Our GIR is high when Pnoy got onboard. He is reaping from the BPO influx. And he also inherited the OFW exodus which fuel this country. He is also benefiting from PAGCOR project that past admin had put up (although may anomalya).

      I am still hoping to see an economic engine na nagsimula talaga sa administration na ito. We have not seen a hype PPP fly. Kokonti lang more into classroom (which I believe are ok). Yung daang hari eh wala na napatunguhan. 

    • carlcid

      The fact is that the low-interest regime is causing the stock and property markets to surge. Government is a very tiny, if at all, part of the equation. PNoy cannot take credit for the so-called “boom” in property and stocks. This is, indeed, hot money coming in. After all, there is very little foreign direct investments. Even local economists like Benjamin Diokno have warned about this.

      • Robert Parago

        May taga-hanga pa pala ang economista ni ERAP! 

    • Robert Parago

      Hot money is common for any economy. People should not make a monster out of it as if the monsoon rains comes as a surprise from June to September. Weder-weder Duh!

      Tama yung mama sa taas – Hayek_sa_Maynila. “Dependence” is the keyword.

      Today’s hot money comes and goes based on opportunity and not “yet” based on fear! I wonder why people talk as if we are still in the Marcos years…and also the Erap years. If Binay wins in 2016, then goodbye sa hot money.

      • Weder-Weder Lang

        Tama si Hayek, dependent na nga tayo sa hot money.

        Barado ulit si Obet Parago. Pati ba naman hot money, pinupulitika mo. May pa Erap at Marcos years ka pa.

      • Robert Parago

        Nagalit si Jaworski…

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