“‘Hot money’ outflows slow in July,” BusinessWorld headlined on Aug. 26, 2022.
The Bangko Sentral ng Pilipinas (BSP) collated reports by authorized agent banks (AABs) of transactions on short term foreign investments showing a net outflow of $103.14 million in July. This was 70% lower than the $342-million net outflows recorded in June, and the $339.7 million in net outflows in July 2021.
Foreign investments registered through AABs are known as “hot money” due to the ease with which they enter and exit financial markets. These investors typically want to secure the best short-term rates possible, leveraging on interest rate differentials between borrowing and investment rates, and speculating on local currency movements. Typically, “investments” (inflows) in a month are on securities of companies listed on the Philippine Stock Exchange (PSE) or in peso-denominated government securities.
The top five hot money placers in July were the usual year-round come-and-go investors: the United Kingdom, the United States, Singapore, Hong Kong, and Luxembourg, which accounted for 84.7% of gross hot money inflows of $681 million, declined 34.5% from the previous month, June. Gross hot money outflows decreased by 43.2% month-on-month to $784 million in July. The US, considered a safe haven for investors, took in 66.1% of outflows in July.
Net outflows mean more “flighty” foreign funds exited the country than those that stayed. The net outflows of $103 million in July must be worrisome for the BSP, who “expects hot money to yield a net inflow of $4.5 billion in 2022,” according to the BusinessWorld story that leads this column. Though for the first seven months of this year (January to July) foreign investments yielded a net inflow of $625 million, a turnaround from the $446-million net outflows in the same period last year, it seems hard to hope to recover from the staggering blow of the $1.3343 billion gross hot money outflow in March 2020, when the COVID-19 pandemic was announced by the World Health Organization (WHO) as it was already raging in the first quarter of that year.
Yes, COVID did it. Business and the financial markets were practically at a standstill in the on-and-off lockdowns and restrictions over two years, exacerbated by the resurgence of virus variants in 2021. Russia’s war on Ukraine fed deadly fuel to rising gas prices as meltdowns smothered economies big and small. In the unproductive environment of expensive fuel and dearth of materials, incapacitated labor, and complicated delivery systems, costs rose as supply shrank, clutching in its throes what little was left of tepid demand from a world dazed in the fear of the COVID. Even America and its all-powerful Dollar had to bend.
In May 2022 the US Federal Reserve raised its benchmark interest rate by 0.5 percentage points to a target range of 0.75-1%, the largest increase in two decades. This followed a 0.25-percentage-point rise in March, the first since December 2018. The decision to lift interest rates came amid attempts to control inflation in the US, which hit a 40-year high of 8.5% in March (oxfordbusinessgroup.com, June 2, 2022).
While the rate hikes were initiated to help the US domestic economy, higher interest rates are nevertheless likely to impact emerging markets, the Oxford Business Group says. The interest rate hikes increase the cost of servicing US dollar-denominated debt for emerging markets, lead to a depreciation of their currencies, weaker demand for exports in the US, and potential outflows of capital from lower-income economies.
The Federal Reserve itself comments that “rising US interest rates are often thought to be bad news for emerging market economies (EMEs) as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises. A key factor influencing the spillovers from US monetary policy is the domestic conditions in the EMEs themselves; financial conditions in economies with higher macroeconomic vulnerabilities tend to be more sensitive to a given rise in US interest rates.” (federalreserve.gov, “Notes,” June 23, 2021)
And the Philippines, a developing economy, is in that very fragile spot, in this debilitating viselike grip of the pandemic that will not go away just yet. The country remained a net importer as the trade balance — the difference between merchandise exports and imports — reached a $43.226-billion deficit last year, wider than the $24.597-billion gap in 2020 (bworldonline, April 22, 2022). The National Government’s (NG) total outstanding debt was registered at P12.68 trillion as of end-March 2022 (treasury.gov.ph). The Philippines External Debt reached an all-time high of $109.8 billion in March 2022, compared with $106.4 billion in the previous quarter (ceicdata.com). The country’s external debt position registered a deficit of $1.819 billion in July, from the $642 million last year, according to the BSP. The year-to-date balance of payments (BoP) deficit is $ 4.920 billion. BoP measures the country’s transaction with the rest of the world. A surplus means more money entered the Philippines while a deficit shows more funds fled the economy than what entered (bworldonline, Aug. 22, 2022).
Headline inflation in the Philippines was 6.3% in August, from 6.4% in July 2022, after five consecutive months of acceleration (psa.gov.ph). Did the hot money inflows feed inflation further while supply has not met up with consumer demand, and prices continue to soar? Has hot money at least helped to ease the local pressures on its foreign exchange demands — or has hot money added depreciation to the local currency that bases its worth on the US dollar?
The Philippine peso sank to an all-time low on Friday, Sept. 2, as the US dollar continued its rally. The peso closed at P56.77 against the greenback, even reaching P56.90 intraday. The Philippine currency’s previous weakest level was P56.45, recorded on Oct. 14, 2004 (Rappler, Sept. 2, 2022). Per the official BSP listing of exchange rates as of Friday, Sept. 9, one US Dollar is equivalent to P57.1400 (bsp.gov.ph).
Analysts agree that the Philippine peso and all weaker currencies have shrunk because the US dollar has gained strength from the raising of the benchmark 10-year US Treasury yield — to address the US inflation problem. Higher interest rates are making the US dollar attractive for investors but eroding the value of other currencies.
But to judge and condemn the stronger economies for opportunistic behavior in times of crisis is not fair and right, even for the “victims” of this necessary self-preservation of one at the expense of another. “Opportunism” is a legitimate and respected strategy “whether we are studying the nearly omniscient Homo economicus of rational choice theory or the boundedly rational Homo psychologicus of cognitive psychology,” according to Prof. Oliver E. Williamson of the University of California. (Managerial and Decision Economics, 1993: Vol. 14, 97-107)
Perhaps Filipino economic and psycho-social culture relies more on trust in relationships — which is a benign attitude towards living and surviving. Yet are we content with short-time “love,” like the come-and-go investors with fickle hot money and its like, that wreak havoc by the untimely rousing and accelerated mobility of the already-deteriorated economic factors to our own survival, in the world economic recession?
Our economic managers and planners must be more proactive by initiating fiscal and monetary reforms that will present the country to the world as a respected and worthy, equal partner-participant in the global community.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.
