‘Hot’ money starts exiting on QE fears

Foreign portfolio investments (FPIs) flowed out of the country during the week in August when the rains poured in torrents and when apprehensions over the impact of the end of a period of lax monetary policies in the United States, known as quantitative-easing (QE) tapering, were at its highest, latest data from the Bangko Sentral ng Pilipinas (BSP) showed. Portfolio investments, more popularly known as “hot” money, flowed out the week ending August 23 totaling $115.52 million.

The BSP said the outflows were heaviest toward the end of the workweek on August 22 and 23 and came in the wake of a three-day forced holiday brought about by torrential rains in Metro Manila and nearby provinces in Luzon.

The fleeing foreign money was preceded by a week marked by fund managers selling their peso investments for dollars at the local currencies market totaling another $126.61 million.

Their exit highlights the need for the Philippines to rely on the strength of its own external sector best represented by the current account, which has posted an unbroken string of surpluses since 2005. The current-account surplus helped cement the country’s transition from net borrower to net creditor country and allowed the BSP to set aside some $1 billion worth of reserves at the disposal of the International Monetary Fund.

The BSP said total portfolio funds this year showed a net inflow of about $2.26 billion, higher than the $2.16 billion posted in the same period last year.

FPIs are in essence short-term investments on securities, stock, bonds or financial assets from other countries. They are called speculative or hot money because they can be easily pulled in and out of the market, thus more volatile than foreign direct investments.

According to the BSP, the outflows reflect the regional weakness seen in the third week of August as emerging markets were affected by the anticipated withdrawal of the US Fed’s monetary stimulus program now known as the “Septaper” era.

Septaper is a word play on the month when the US Federal Reserve were to wind down or withdraw altogether its monthly purchase of US Treasuries that was at the core of its monetary-stimulus program.

Apprehension over what the exchange rate would be like and where domestic interest rates would end that started the markets to speculate, effectively pushing the peso weaker toward the P44-per-dollar territory, its lowest in more than two years.

Global developments such as the escalating crisis in Syria and elsewhere in the Middle East were contributing factors as well, the BSP said.

Members of the Federal Open Market Committee (FOMC) were to meet on September 17 and 18 to decide on whether or not the QE would remain in place, or will have to be scrapped as some have said, in recognition of the fact that the US economy was out of the woods and on the path to sustainable growth once again.

Evidence of a stronger US economy would potentially magnify the net migration of foreign funds now tentatively parked in emerging markets like the Philippines and back to the US and countries under the European Union which are considered safe havens.

Central bank officials have expressed confidence the Philippines will be able to ride out the volatilities these events represent, citing enough policy space attributed to the low inflation environment and more than ample foreign currency reserves. –Bianca Cuaresma, Businessmirror