Net ‘hot money’ outflow reached $641M in May

The Philippines in May suffered its biggest net outflow of foreign portfolio investments on record as speculations that the US Federal Reserve might soon end its stimulus program prompted fund owners to dump the assets of emerging markets.

The Bangko Sentral ng Pilipinas on Friday reported that the net outflow of foreign “hot money” amounted to $640.84 million—a reversal of the $106.28 million in net inflow recorded in the same month last year.

Reports of the improving job situation and retail sales in the United States led to speculations that the US Fed would soon end its bond purchase program, through which it injects enormous liquidity to help boost the US economy.

Part of the liquidity injected into the US economy spilled over to emerging markets like the Philippines in the form of foreign portfolio investments. With the US Fed seen ready to halt its stimulus program, investors’ appetite for assets from the Philippines and other emerging markets quickly dampened.

Nonetheless, cumulative foreign portfolio investments in the first five months of 2013 stood at a net inflow of $1.58 billion, up by 75 percent from the net inflow of $904.6 million recorded in the same period last year.

BSP officials credited the net inflow to the country’s strong economic fundamentals, which they said helped attract foreign fund owners to buy peso-denominated stocks and bonds.

In the first months of the year, demand for Philippine portfolio assets was brisk, thanks to the economy’s sound performance.

The economy grew by 7.8 percent in the first quarter from a year ago—the highest growth rate in Asia during the period.

This development pushed the Philippine Stock Exchange Index to post several record closing highs this year. As a result, peso-denominated stocks became some of the most expensive in the world, with average price-earnings ratio peaking at 22.

But concerns of over the US Fed’s decision to stop its stimulus program prompted some fund owners to turn to US assets, traders said.

But the BSP expects this development to be temporary.

BSP Governor Amando Tetangco Jr. said that the country’s favorable macroeconomic fundamentals would help keep peso-denominated assets relatively attractive.

The government expects the Philippines to grow between 6 and 7 percent this year, after it posted a robust expansion rate of 6.8 percent in 2012.