‘Hot money’ outflows slow in July

THE EXIT of short-term foreign investments slowed in July, as the Bangko Sentral ng Pilipinas (BSP) continued to tighten monetary policy.

Data released by the central bank showed transactions on foreign investments registered with the BSP through authorized agent banks (AABs) saw a net outflow of $103.14 million in July, the smallest outflow in two months.

The July figure was 70% lower than the $342-million net outflows recorded in June, and the $339.7 million in net outflows in the same month in 2021.

Foreign investments registered with the BSP through AABs are also known as “hot money” due to the ease with which they enter and exit financial markets. Investors typically want to secure the best short-term rates possible.

The exit of foreign funds was due to “broad risk-off tone on expectations for rate hikes from the Fed,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a Viber message. 

The US Federal Reserve implemented a second straight 75-basis-point (bp) rate hike in July, as it sought to tame runaway inflation. The rate is currently in the 2.25%-2.5% range.

“Concerns also about collapsing interest rate differentials and surging inflation may have also caused some panic after BSP opted to stay dovish at their June meeting,” Mr. Mapa said.   

The BSP raised the benchmark rate by 25 bps at its June meeting. However, it implemented an off-cycle 75-bp hike in July as it sought to contain broadening inflationary pressures.

Inflation rose to 6.1% in June, and quickened to 6.4% in July, beyond the central bank’s 2-4% target band.

Gross inflows of hot money decreased by 2.9% to $7.82 billion in July from $8.06 billion a year earlier.

The top five investor economies during the month included the United Kingdom, United States, Singapore, Hong Kong and Luxembourg, which accounted for 84.7% of foreign portfolio investment inflow.

The bulk of investments went to securities of holding companies; food, beverage and tobacco; property; banks; and transportation services. The rest were invested in peso government securities. 

Meanwhile, gross outflows declined by 15.4% to $7.19 billion in July from $8.5 billion a year ago.

For the first seven months, foreign investments yielded a net inflow of $625 million, a turnaround from the $446-million net outflows in the same period last year.

Asian Institute of Management economist John Paolo R. Rivera said in a Viber message that outflows were expected as the Philippine central bank raised interest rates.   

“The cost of borrowing for investment is rising. If the interest rate in the Philippines would be higher relative to other countries, investments might go to economies with relatively lower cost of borrowing for investments,” Mr. Rivera said. 

“However, because many countries are following suit in increasing policy rate, it is now a matter of who has better investment climate and clearer economic plans to manage persistent downside risks like currency depreciation and inflation,” he added.   

With its recent 50-bp hike last week, the central bank has raised rates by a total of 175 bps so far this year.

Meanwhile, concerns on China’s growth prospects and brewing tension in Taiwan may have also weighed on investor sentiment, Mr. Mapa said.

The BSP expects hot money to yield a net inflow of $4.5 billion in 2022.

The BSP said registration of inward foreign investments delegated to AABs by the BSP is “optional under the rules on foreign exchange transactions.” — KBT