Net ‘hot’ money inflows surge to $299.55M

Foreign portfolio investments continued to surge in July, as global investors shift their funds from the United States and other developed countries to emerging markets like the Philippines.

Data from the Bangko Sentral ng Pilipinas showed that the net inflow of “hot” money jumped to $299.55 million in July from only $14.33 million in the same month last year.

In the first seven months of the year, net inflows amounted to $2.66 billion, up by 280 percent from $700.89 million in the same period last year.

The inflows came mostly from investors from the United States, United Kingdom, Luxembourg and Hong Kong.

The BSP said the surge in foreign capital inflows was expected to persist over the short to medium term, or until the economies of the United States and Europe, which used to be the preferred destinations of portfolio investments, recover from their current state.

Despite this, however, the BSP said it was against a proposal to tax foreign portfolio investments, saying it was not a wise solution to the ill-effects of rising “hot money” inflows.

BSP Governor Amando Tetangco Jr. said imposing tax on foreign capital inflows would have negative repercussions. He said there were less drastic and more prudent means to counter the adverse impact of the strong “hot” money inflows.

“Capital controls (taxation) in general tend to create distortions and these are difficult to implement administratively,” Tetangco said.

The central bank believes that imposing tax on “hot” money inflows could trigger the pull out of huge amounts of portfolio investments.

The BSP said such a scenario was not the goal, explaining that foreign portfolio investments were also important to the economy.

“The capital inflows are welcome, but a sudden and sharp growth should be avoided,” it said.

One major adverse effect of strong foreign capital inflows could be an accelerated increase in commodity prices. The inflows result in increases in liquidity, which boosts demand.

Since the start of the year, the BSP has already raised the reserve requirement on banks by a total of 2 percentage points. This is expected to temper the increase in liquidity and slow down demand growth and inflation.

The proposal to impose a Tobin tax, which is tax on foreign portfolio investments, was raised in view of the surge in foreign portfolio investment inflows which resulted in the continued strengthening of the peso.