Asian Crisis Redux? Hot Money Leaving Philippines

♠ Posted by Emmanuel in at 6/09/2008 02:03:00 AM
A few days ago, I cited the interesting parallels between 1997 when Asian economies defended their currencies against speculation and 2008 when they did so to help control domestic inflation. In another sign that the flashbacks to 1997 may not be over yet, the Philippine Star is reporting that the Philippines is experiencing hot money outflows of some magnitude. Whereas foreign portfolio investment in the country was quite healthy (at least by Philippine standards) in 2007, this trend seems to be reversing itself in 2008. Even if the country is rather removed from the housing contagion, the knock-on effects of domestic inflation may be making foreign investors think twice and head for safer shores. It may be a cautious sign of things to come in the region:

Portfolio investments continued to flow out of the financial market this month as foreign investors withdrew into the US and other developed markets where they consider their funds to be safer. Although officials expected investors to differentiate among emerging markets, monetary authorities said the Philippine market was not deep enough for this rule of thumb to work.

The Bangko Sentral ng Pilipinas (BSP) reported over the weekend that portfolio investments, also known as hot money, showed a net outflow of $189.9 million as of the third week of May, marking a steady departure of foreign funds from the capital market.

In contrast, data from 2007 covering the same period showed a whopping $1.587 billion inflow, with investors getting increasingly optimistic about their prospects in the market. Hot money refers to investments in the stock market and the money market that are relatively easier to take in or out of a country.

According to BSP Governor Amando Tetangco, foreign portfolio investors were not differentiating the Philippines from other emerging markets despite its steady and positive economic fundamentals. “Our stock market is just not that deep,” Tetangco said. “A deeper market attracts more investors.”

“If you have a bigger market with more liquidity, then investors will prefer that over a market that is relatively small and does not really have the kind of liquidity that investors are looking for,” Tetangco added. He said portfolio investors prefer to be able to go in and out of a market on any given day. This kind of flexibility, he said, could not be found in a market the size of the Philippine stock market.

“If your market is small, a single fund manager can drop $20 million in and prices would go haywire. If they take that much out, prices would go haywire too,” he explained. “What’s $20 million to fund managers? That’s a drop in the bucket.”

According to Tetangco, foreign portfolio investors end up paying for such fluctuations that they could cause merely by doing normal market play. “If they want to buy in, the very act sends prices up so it ends up being more expensive for them. When they want to get out, their sheer size sends prices down and they lose.”

Tetangco said the market would have to be sufficiently deep for transactions that foreign fund managers would consider normal and non-disruptive. When choosing which emerging market to invest in, this meant that the size of the Philippine market becomes a disincentive and often trumps macro-economic fundamentals such as economic growth, debt ratios and even the performance of specific corporations.

Foreign portfolio investments continued to flow out of the country in April, leading to a $113.7 million net outflow for the first four months of the year as investors shed their holdings in emerging markets. Data from the BSP indicated that registered portfolio investments resulted in a net outflow of $49.9 million in April, way below $197.7-million net outflow in March but still a reversal from the $261.9-million net inflow in April 2007.

“Principally accounting for this development were investors’ continuing risk aversion and concerns on the impact of elevated energy and commodity prices on domestic interest rates and corporate earnings,” the BSP said in its report. On a gross basis, registered foreign portfolio investments in April amounted to $885.9 million, not far from total inflows in April last year of $931 million. According to the BSP, 62 percent ($547.6 million) of total inflows went to shares listed in the Philippine Stock Exchange (PSE). Investments in peso-denominated government securities, primarily Fixed Rate Treasury Bonds or FXTBs, and placements in peso time deposits accounted for 14 percent and 24 percent, respectively, of registered investments.

However, the BSP said investment outflows were larger, totaling $935.8 million. The BSP said this consisted of divestments from PSE-listed shares (38 percent), government securities (13 percent); and withdrawals of peso bank deposits (49 percent).

Over the four-month period, the BSP said foreign portfolio investment transactions posted a net outflow of $113.7 million, down about 90 percent from $1.1 billion net inflow for the comparable period in 2007.