US stimulus augurs more capital flows to PHL

The decision of the Federal Reserve to stimulate the US economy would mean higher capital flows into emerging market economies including the Philippines, monetary authorities said Thursday.

The flow of money to emerging market economies will continue as market rates in the US will stay on the low side for a longer period, Bangko Sentral Gov. Amando Tetangco Jr. said in a text message to reporters.

“The BSP will therefore remain vigilant in monitoring developments and gauging how effectively this Fed move will perk [up] real US growth, and therewith [the] global inflation outlook,” Tetangco stressed.

In an attempt to stimulate the faltering US economy, the Fed said Wednesday it would buy $600 billion in long-term Treasuries over the next eight months and at the same time reinvest an additional $250 billion to $300 billion in Treasuries using the proceeds of its earlier investments.

As part of the second wave of quantitative easing in the US, the Fed intends to buy $900 billion worth of Treasury bonds until the third quarter of next year to boost the American economy that grew 2 percent in terms of gross domestic product in the third quarter while the unemployment rate stood close to 10 percent.

The quantitative easing in the US would definitely fuel a surge in capital toward emerging economies in Asia, BSP Deputy Gov. Diwa Guinigundo said in a separate text message to reporters Thursday.

“It may in fact exacerbate what is going on in emerging markets including the Philippines. In the US, the issue is whether quantitative easing will actually work. More foreign exchange goes out in search of yield,” Guinigundo stressed.

Hot money surges

BSP data released Thursday showed that net foreign portfolio investment or hot money surged by 301 percent to $1.825 billion as of Oct. 15 from $454.5 million a year earlier.

Foreign portfolio investment totaled $7.938 billion, up by 53 percent from $5.176 billion in the same comparable period, while withdrawals or outflows grew by 29.5 percent to $6.113 billion from $4.722 billion.

The Bangko Sentral expects net foreign portfolio investments to reach $2.9 billion by the end of the year or 747 percent more than the $388.02 million recorded in 2009. Foreign portfolio funds are also called hot money because these could be brought out of the country as quickly as were brought in.

Guinigundo, however, warned that hot money will help sustain a stronger peso against the US dollar. “Thus, foreign exchange flows can be heavier and more destabilizing. There is more pressure building up against the peso,” he said.

“The challenge really is to increase demand for foreign exchange and temper peso appreciation,” Guinigundo said.

The peso strengthened to its highest level in 30 months closing at P42.53:$1 Thursday from P42.59:$1 Wednesday.

The sluggish American economy has weakened the US currency, that the peso already strengthened by 6 percent against the dollar in the year to date. — VS, GMANews.TV