'Hot money' tempers outflows in July

MANILA, Philippines — Short-term foreign funds left the Philippines at a slower pace in July amid the start of Bangko Sentral ng Pilipinas’ tightening cycle and the continued depreciation of the peso.

What’s new

Data from the BSP released Thursday showed foreign portfolio investments recorded net outflows of $103 million last month. Net outflows mean more flighty foreign funds exited the country than those that stayed. 

This was a better performance than the $342 million net outflows in June. Year-to-date, net inflows amounted to $625 million. 

Why this matters

Foreign portfolio investments are also known as “hot money” because they come and go markets with ease, unlike firmer commitments like foreign direct investments. These funds are very sensitive to domestic and global developments.

In July, Asian equity markets were dealing with rising inflation and decisions from central banks to hike interest rates. Inflation in the Philippines hit 6.4% in July, highest since October 2018, overshooting the central bank’s 2-4% target. 

What analysts say

For Domini Velasquez, chief economist at China Banking Corp., the weak peso could be credited for motivating foreign investors to exit.  

“The weaker Philippine peso in July could have contributed to lower net outflows as foreign investors took advantage of the favorable exchange rates,” she said.

“Moreover, government securities with shorter tenor, such as 1-, 2-, 3-year government bonds saw a peak in yields, especially as the BSP pivoted to become more hawkish with its off-cycle hike in mid-July,” Velasquez added. 

Nicholas Mapa, senior economist at ING Bank in Manila, agreed with Velasquez, adding that “concerns about China’s growth prospects and brewing tension in the Taiwan strait also likely weighed on sentiment.”

By the figures

• Gross hot money outflows retreated 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. 
• Meanwhile, gross hot money inflows declined 34.5% month-on-month to $681 million with the UK, United States, Singapore, Hong Kong, and Luxembourg accounting for 84.7% of the inflows. Data revealed 64.8% of these investments were parked in publicly-listed companies while the remaining were invested in government securities.