Portfolio flows to remain volatile
Portfolio flows to emerging markets such as the Philippines will remain volatile in the near term, debt watcher Moody’s Investors Service warned on Thursday.
“We expect portfolio flows to emerging market countries to remain volatile as monetary policy accommodation in advanced economies is gradually withdrawn,” Moody’s said in the August edition of its Global Macro Outlook 2018-2019.
Citing data from the Institute of International Finance, it noted that net capital flows to 19 emerging market countries including the Philippines slowed to $11 billion in the second quarter from $118 billion in the first quarter.
The list includes Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Hungary, India, Indonesia, Korea, Mexico, Poland, Russia, South Africa, Thailand, Turkey and Ukraine.
“Excluding China, this group saw net outflows of some $2.0 billion in the second quarter,” Moody’s added.
On a positive note, the credit rater pointed out that other flows, including foreign direct investments (FDI) and bank transactions, “will remain relatively strong overall” for emerging market countries.
Latest data showed year-to-date foreign portfolio investment flows to the Philippines at a net $455.74 million as of July, while FDI flows hit a net $ 4.847 billion as of May.
Portfolio investments are also known as “hot money” as these, being invested in stocks, bonds and other asset classes, can be taken in and out of an economy fairly quickly.
Foreign investors, for example, have been instrumental in the direction of the Philippine Stock Exchange index, which on Thursday surged by 2.25 percent or 171.77 points to close at 7,804.03 while the broader All Shares soared 2.36 percent or 108.97 points to finish at 4,732.58.
Foreign funds bought P4.05 billion worth of issues and sold P3.54 billion for a net foreign selling position of P514 million.
FDI, on the other, involves taking a sizeable stake in an enterprise and possibly exercising management control.
“As we have argued before, challenging monetary policy decisions are in store, particularly for central bankers of recovering emerging market economies faced with the trade-off of meeting inflation objectives by ensuring a degree of exchange rate stability without compromising economic recoveries,” Moody’s also noted.
In the Philippines, increased inflation risks prompted the Bangko Sentral ng Pilipinas’ (BSP) policymaking
Monetary Board to raise key interest rates by 50 basis points (bps) last August 9.
The adjustment, which followed two 25-bps increases in May and June, took the BSP’s overnight borrowing, lending and deposit rates to 4 percent, 4.50 percent and 3.50 percent, respectively.
The last time that monetary authorities increased interest rates by 50 bps was in July 2008, when inflation hit 12.2 percent.
Last month, Moody’s affirmed the Philippines’ “Baa2” investment grade rating with a stable outlook on the back of “a number of very positive credit features.”
“The credit strengths include a relatively large economy and high growth potential that support the economy’s capacity of absorb shocks,” it said.
WITH A REPORT FROM ANGELICA BALLESTEROS
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