‘Hot money’ inflow breaches $4 B in 2011

MANILA, Philippines – The net inflow of foreign portfolio investments or “hot money” managed to breach the $4 billion level last year despite the economic uncertainty in the US as well as the debt crisis in Europe, the Bangko Sentral ng Pilipinas (BSP) reported over the weekend.

Data released by the BSP showed that hot money or speculative investments that flowed into the Philippines reached $4.002 billion as of Dec. 23 last year, $622 million lower than the $4.624 billion booked in the same period in 2010.

Gross inflow of foreign portfolio investments increased 26.9 percent to $16.35 billion from $8.986 billion while outflows – consisting mainly of withdrawals from interim peso deposits – jumped 49.4 percent to $12.349 billion from $8.263 billion.

Bulk of the speculative investments went into shares listed at the Philippine Stock Exchange (PSE), particularly in holding companies, banks, property developers, telecom provider, and utility firms, as well as in government securities as investors sought to reduce risk arising from external developments.

Major sources of hot money include Singapore, United Kingdom, the US, Hong Kong and Luxembourg. The US remained the main beneficiary of funds withdrawn from the Philippines.

Monetary authorities are convinced that emerging markets in Asia, including the Philippines would continue to attract foreign capital inflows despite the massive outflows over the past few weeks in light of the sovereign debt crisis in Europe as well as debt concerns in the US.

The inflow of foreign portfolio investments hit a new record level of $4.61 billion in 2010, or nearly 12 times the $388.02 million in 2009, as funds flooded emerging markets such as the Philippines due to the fragile growth in advanced economies led by the US and Europe.

Strong capital inflows, however, could stoke up inflation through excessive liquidity in the financial system.

As a pre-emptive move to keep inflation expectations well anchored, the BSP’s Monetary Board raised interest rates by 50 basis points in the first half of last year due to the continued build up in inflation pressures brought about by escalating prices of oil and food in the world market.

This brought the overnight borrowing rate at 4.50 percent while the overnight lending rate is at 6.50 percent.

Monetary authorities believed that strong liquidity in the financial system amid continued strong capital inflows blunted the impact of adjustments in the monetary policy stance on market interest rates.

This prompted the BSP to raise the reserve requirement for banks by a combined 200 basis points to 21 percent from 19 percent last year as a pre-emptive move to counter any additional inflationary pressures from excessive liquidity. The twin increase is expected to siphon off at least P70 billion from the financial system. –Lawrence Agcaoili (The Philippine Star)