Philippines may see another sharp increase in ‘hot money’ inflows

The Philippines is likely to experience another sharp and sudden increase in foreign “hot money” inflows should the United States implement another economic stimulus program to speed up growth.

This was according to the Bangko Sentral ng Pilipinas, which said it was not discounting the probability of another spike in capital flows.

The BSP said it was prepared to implement policy adjustments necessary to ensure that such development would not result in Philippine inflation breaching the ceiling.

While higher inflows of foreign portfolio investments boost activity in the capital market, too much of those may cause inflation to accelerate.

“If indeed there would be QE3 (third round of ‘quantitative easing’), it would have a short-term impact on risk appetite, thereby affecting capital flows to emerging markets like the Philippines,” BSP Governor Amando Tetangco Jr. told reporters Wednesday.

Tetangco made the statement when asked for reaction to reports that the US Federal Reserve was considering another round of stimulus, given the still sluggish growth of the US economy.

When the US Federal Reserve implemented the first two rounds of economic stimulus (referred to by economists as “quantitative easing 1 and 2), which involved the release of multibillion dollars to the US economy mainly through purchase of bonds, portions of the liquidity were used by recipient entities to purchase portfolio instruments from emerging economies like the Philippines.

The first round started in November 2008, while the second ran from November 2010 to mid-2011. The stimulus measures were meant to help the United States recover from the financial and economic crises that led to increased unemployment.