PHL to gain capital inflows from US low interest rates — BSP

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. on Monday said that foreign portfolio investments or hot money would keep pouring into emerging economies including the Philippines after the US Federal Reserve decided to keep interest rates at record lows last week. “On one hand, (low US interest rate) can cause a continuation of capital flows to emerging markets. On the other hand, there is a need to support the US economy," Tetangco told reporters. He said that after the US Fed kept policy rates low at 0 to 0.25 percent, more hot money or speculative money would go into emerging markets like the Philippines. Latest data from the BSP show that as of April 15, net foreign portfolio investment inflows amounted to $1.65 billion – two and a half times that of the $664 million net inflows for the same period last year. Inflows surged 153 percent to $5.65 billion as of April 15 this year from $2.24 billion, while in the same period last year outflows leapt 155 percent to $4 billion from $1.57 billion. Speculative money inflows to the country soared to $4.6 billion last year from $338 million as foreign portfolio funds inundated emerging markets due to economic growth uncertainties in advanced economies led by the US. Tetangco said that pronouncements made by the US Fed that there would no more quantitative easing – coupled with the decisions of the European Central Bank and the Bank of England to cut interest rates – would result to steady inflows of capital into emerging markets. ‘Hot money’ to cool down But he warned that monetary authorities expect lower capital flows to the Philippines once central banks in the US and Europe pursue tighter monetary policies as the continued global economic recovery gains momentum. “As recovery in the advanced economies gains further traction, and there is further normalization of the easy monetary policy in advanced economies, we may see capital flow to emerging market economies at a slower pace than in recent past," said the BSP governor. He explained that hot money tends to come back to advanced economies that developed tighter monetary policies after withdrawing stimulus measures introduced during the height of the global financial crisis. “This is what is happening this year, if the trend continues with the recovery of advanced economies and they will probably have to continue tightening monetary policy as the recovery proceeds then that will serve to attract capital back to advanced economies. That can leave emerging economies getting a smaller amount capital inflows," he added. Capital flows won’t ‘dry up’ But Tetangco clarified that capital flows to emerging markets would not just cease because foreign funds would still flow to emerging markets including the Philippines and provide fundamental support to the peso. “I am not saying that there will be drying up of capital flows to emerging markets. That will continue because of the expected good economic performance as well as continuing positive interest rate differentials, but to a lesser degree. This is going to be part of the constant rebalancing," he said. He explained that the Philippine economy has other forms of capital flows – such as remittances from Filipinos abroad, export earnings, tourism receipts, and earnings of the business process outsourcing (BPO) sector. “These are real capital flows that we prefer instead of hot or speculative money," he said. — MRT/VS, GMA News