EU QE to bring short-term “hot money” gains to PH, says DOF

MANILA, Philippines – The Philippines stands to gain additional inflows of short-term portfolio investments or so-called “hot money” as Europe goes into quantitative easing (QE), but monetary authorities should temper local market volatility through a “flexible” monetary policy, according to the Department of Finance.

The ECB [European Central Bank] QE program will generate additional portfolio flows equivalent to a fraction of the levels that benefited the country under US QE program. It will probably approximate the net portfolio flows from EU [European Union]—about 2 percent of GDP [gross domestic product] annually or $3 billion,” Finance Undersecretary and chief economist Gil S. Beltran said in a bulletin, citing 2007-2009 data from the Bangko Sentral ng Pilipinas (BSP).

To recall, the ECB recently announced a QE program, under which 60 billion euros shall be poured into the European economy starting March this year until September 2016 to inject liquidity and, ultimately, revive the ailing economy.

Beltran noted that when the US Fed implemented a similar QE program, emerging markets such as the Philippines, where interest rates also remain low, benefited via increased hot money inflows spent to buy bonds and equities.

It should be noted though that hot money can easily be pulled out by foreign investors when economic conditions improve in bigger markets, unlike brick-and-mortal foreign direct investment or FDI, which generate jobs.

It was precisely what happened during the US QE tapering in 2014, during which portfolio investment flows dropped by almost a quarter to $21.8 billion and brought about net outflows of $300 million, Beltran pointed out, citing the latest BSP data.

The US was the destination of over four-fifths of portfolio investment outflows from the Philippines in 2014, he further noted.

Hence, when the ECB QE tapering happens, “the same flows [gained] may reverse,” Beltran warned.

To temper volatility, Beltran said Philippine monetary authorities should jack up the level of gross international reserves or GIR, while also developing more sources of investments to avoid reliance on just one or a few countries.

Also, the BSP should “[a]djust monetary policy flexibly to narrow the interest rate differentials between the peso and euro/dollar” in order to slash the net outflows to manageable levels, he said.