Hot money remains at net outflow

MANILA, Philippines - Negative market sentiment is still driving capital out of the country as various external developments heighten volatility in global financial markets, a Bangko Sentral ng Pilipinas official said.

“Negative sentiment is still prevalent in the market, especially coming from US Fed (Federal Reserve) actions and some other geopolitical issues like the Ukraine crisis,” BSP Deputy Governor Diwa C. Guinigundo told reporters.

Guinigundo made the comment after net hot money outflows have been observed in the last two weeks of March following five consecutive weeks of net inflows.

Emerging markets including the Philippines were once sought by investors as safe havens following the global financial crisis that hit the US economy and the euro zone.

However, recovery and changes in monetary policy in advanced economies have prompted the flight of capital from emerging markets.

The US Fed, for one, has been scaling back its massive monthly purchases of US Treasuries and mortgage bonds since the start of the year.

The pace and amount of asset purchases reduction contribute to the volatility in global financial markets because the faster the stimulus is fully taken out, the sooner higher interest rates will materialize.

Guinigundo said that should the US Fed start raising its interest rates which it has kept near-zero since 2008 and the Philippines did not make any adjustments accordingly, the scenario could lead to the country seeing sustained capital outflows.

Moreover, this could also cause the depreciation of the peso and also impact domestic liquidity as well, he added.

Foreign portfolio investments amounted to a net outflow of $361.09 million in February. This marked the third consecutive month the country has seen a net outflow of hot money, a term also used for foreign portfolio investments for the ease with which they are put in and taken out of markets.

But latest foreign direct investments data showed the number reached an inflow of $1.027 billion in January, the highest level in two years.

The increase in FDI showed sustained confidence in the country’s strong macroeconomic fundamentals as foreign companies continued to lend to their local affiliates for funding existing operations and expansion plans in the Philippines.

The central bank stressed the country’s macroeconomic fundamentals remain sound and this should continue to attract investments despite regional sell-offs.