• Capital flight soars, int’l reserves dive

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    Rigoberto Tiglao

    Rigoberto Tiglao

    BUSINESS news headlines yesterday: Philippine Star: “Net FDI surges 55% in Nov.”; “Philippine Daily Inquirer: “Foreign investments soared by 55% in Nov.” One reporter even gushed as if he were the presidential spokesman, pointing out the rise in foreign investments reflected “sustained confidence in the economy.” The Manila Times and The Manila Bulletin weren’t soaring in enthusiasm, simply reported figures: “Jan-”Nov foreign direct investments reach $3.6 billion” and “FDI up 37% at end-November – BSP”

    Bankgo Sentral ng Pilipinas’ (BSP) Governor Amando Tetangco, Jr. must have spent the whole day laughing at how he could manipulate media, as the press reports practically repeated nearly word-for-word his press releases. (On Friday I’ll give a more detailed analysis of that BSP report.)

    The truth is Tetangco has been getting increasingly worried, as there is a global financial storm looming on the horizon, which could even be as bad as the 1997-1998 Asian financial crisis.

    The first winds have already battered the country.

    Last month, according to official BSP data, the country’s international reserves steeply fell by $4.7 billion from its November 2013 level of $83.6 billion to $78.9 billion at the end of January.

    According to the BSP data, the January drop meant a 7.4 percent annual decrease in the country’s international reserves.

    What does a 7.4 percent decline in the country’s foreign reserves mean? In the first place, it is the first time in nine years that our reserves declined. Second, that 7.4 percent rate of decline is steep.
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    Such levels of reduction were last seen during the political crisis from 2000-2001 that erupted due to Joseph Estrada’s fall that resulted in massive capital flight. However, the recent rate of fall of the reserves is still far from the double-digit declines during the Asian Financial Crisis of 1987-1998.

    Capital flight had started in July. If one pores over the details of the BSP’s report on “foreign direct investments,” which the central bank deftly handled to fool reporters and editors into writing the happy headlines above, one sees the fact that foreign inflows of money from abroad for investments here declined in the first 11 months of last year by a staggering 41 percent, or from $2.2 billion to $1.3 billion.

    The increase in what the central bank reported as “foreign direct investments” is an accounting illusion. The BSP in March this year reclassified much of foreign companies’ debts to their mother companies as “foreign direct investments” as it adopted the International Monetary Fund’s new definitions of money flows and inflows, as contained in its “Balance of Payments Manual, Sixth Edition” referred to as “BPM6” in the central bank’s reports.

    The undeniable fact is that the capital flight is very worrying.

    In order to prevent a massive depreciation of the peso because of capital flight, the BSP liquidated $4.2 billion of its foreign placements abroad in order to release more dollars into the financial system.

    No matter. The peso’s international value still went down from P41 to the dollar in the middle of last year to touch P45 in recent weeks.

    Both international and domestic factors have combined to start a reverse of foreign capital flows in the country.

    Because of what has been termed as its quantitative-easing (QE) moves, the US Federal Reserve System has been reducing the funds it had been pumping into its financial markets since the 2008-2009 Global Financial Crisis. Those massive injections of funds had lowered that country’s interest-rates, a strategy designed to stimulate growth.

    A by-product of that move was that funds flowed into the “emerging markets,” one of which is our country, where investors could get returns on their money higher than those in the US.

    “Even if Aquino was stupid and did nothing, and it’s becoming clearer he is stupid, our economy would have grown since foreign funds were rushing here in the past three years,” one of the country’s billionaires said. “This a——e has been so-lucky that the flood of foreign funds flowed into Asia almost precisely during his administration, “ he added.

    “But now the flow has reversed, almost precisely when his popularity is waning and his political fortunes are reversing,” the magnate of a diversified conglomerate pointed out.

    One clear indication of the return of capital to the US is that American companies pulled out $676 million in the month of January 2013 alone, and another $227 million in May and June last year, for a divestment of nearly $1 billion for the whole year. Inflows were a trickle so that net outflows of US capital surged to $676 million for the last 11 months of the year, a record high.

    You can’t blame only the US though, as there are however domestic factors that explain the recent capital flight from the Philippines, particularly involving President Aquino. This is reflected in the fact that the Chinese, both from Hong Kong and the mainland, withdrew $88 million of their investments during the first 11 months of last year.

    “It isn’t obviously QE that pushed them out,” a Chinese-Filipino magnate said, smiling sarcastically.

    “Aquino has not done much to make foreign and local businessmen excited, and some ‘seguristas’ among the locals have started moving their money out of the country, resigned that this president is all hot air, and a bit worried over the political situation in the remaining two years of his watch,” he added.

    tiglao.manilatimes@gmail.com
    www.trigger.ph and www.rigobertotiglao.com
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    11 Comments

    1. Ernest Castaneda on

      Surely, this president knows nothing in managing the nation “why” “what went wrong”, by the questions itself shows his incompetence. He was just dumb lucky when monies were pouring the country under his watch, yet he cannot comprehend the factors that made this happen, but rather boasted this as the vote of confidence on his government .Now the flight of these monies came so sudden that the spin doctors of malacanang are scrambling, and here comes the idiotic statement they sent out pointing finger again to the 7.2 magnitude earthquake and typhoon Yolanda. Tell this to Tarzan

    2. I like reading about these things but truthfully i dont understand them. But here is something that puzzles me. Im english & in the uk we can get a mortgage rate fixed for 2 years for as low as 1.48%. & at the end of that if you dont take another rate it will automaticaly switch to about 4%. Here to get a mortgage from a bank its about 8 or 9%. We can also get 2.02% but you cant make any withdrawls for 18 months. Here you cant get 1%. So in the uk we have lower interest rates when we borrow & higher interest rates when we save. I dont know why, is it the filipino baks & financial institutions rip of the filipinos.

      • Exactly right. In Australia both mortgage rates and interest rates on Term Deposits are both approx double the numbers you cite as examples of the UK Financial position. Simple fact for G20 nations is that there is a spread of 50 a 60% between mortgage and interest rates. In the Philippines it’s an eighth – 12.5%. Everybody in the banking system in the PI can only be making an absolute killing with this sort of return. Of course, the banking system here falls under the protection of the Oligarchies which have as their mouthpiece, the current incumbent of the Malacanang Palace.

    3. Rosauro Feliciano on

      Capital flight is indeed worrying if and when it is related to the stock exchange but not in terms of CLOSIND DOWN of business establishments own by foreign investors. This is because those who invested in the stock exchange are gamblers unless related to infusing more capital in the already established manufacturing activities. However, if the business establishment is closed sending people jobless, then that is the real worrisome. The stock exchange can be at bullish in many months but will become bearish in a matter of a day even hours because those who infuse their money in the stock exchange are not really business investors as they don’t have manufacturing establishment in the country; they are professional gamblers.

    4. Factors such as high power cost, poor implementation of Mining programs and associated laws, red tapes in gov, bad peace and order situation, too much politics, slow justice system, economic policy not favoring local manufacturing industries, agricultural programs and infrastructures are maybe contributing to this problem.

    5. Damn Aquino. He is the biggest catastrophe that beset the Philippines when we elected him. He does not know anything except to sell government assets to his fellow Chinese moguls using Central Bank Loans extended to his cronies like Ayala’s, Henry Sy, etc. Talo tayo rito, LAWAY LANG ANG GINAGAMIT NG KANYANG CRONIES. And if he venture loses, it is the government which guarantees the profit, win or lost.

    6. Sobering news indeed. Thank you for quantifying the degree of “no confidence” movement of investments out of the Phl and declining FDI, to counter the massaged, optimistic and inaccurate PR of Abnoy.

    7. These two indicators are surely hurting the inutil president because he called a cabinet meeting which he rarely does. But sad to say his only words was Why? What went wrong? As if he was out of the country for 4 years that he could not connect to reality. Where was he then all these years that he could not see the suffering of the Filipino people? Yes I know he doesn’t like to hear bad news from his cabinet members that’s why nobody from his people would even dare to tell him the truth. Is he so ruthless, callous and insensitive that he could not feel the hardship of the people?. Sir Tiglao I have so many questions which express my dismay of this insane man in malacanang. I don’t think we deserved such kind of leader who is unable to lead but able to spend billions of taxpayers money for personal gains. I don’t think he can do much with the remaining days in malacanang. If he did not accomplish anything in four years, what is there to expect anything within the last 2 minutes of his stay in that comfortable house by the river side.. I believed that we are really a cursed country under this inutil president.

    8. Hot money flew out of the coop taking along a gain of $1 bn according to BSP, year-on-year. Mr Tetangco must really be worried as I inferred in one post that some due interest payments may have been paid or an intervention resorted to in order to keep the peso at its over valued level of PhP41 per USD. PH is in the middle of a “monetary bubble” created by the unwarranted printing of money by the US Federal Reserve. The PH has become a “milking cow” as indicated by the huge turnover of $800 to 900 million daily at the Philippine Dealing System. PH is the cheapest source of dollars as the OFWs remit their earnings only to be held in limited circulation and application in PH universal banks, there is evidence of low velocity of money as a measure of M1, M2, M3 (turnover and use of money and low loan portfolios). More than $22 bn get into PH financial and monetary systems that barely contribute to significant progress and economic development and improvements in the quality of life.

    9. I think PNoy and his DFA’s Rosario has made a huge mistake that instead of joining the common development & advance of the emergent Southeast Asia economy with China, they prefer to be the cheer leaders of China’s competitors-the US & Japan in creating the instability of the region & division among the regional players. They have make our country lagging behind of neighboring nations for another 5 years in economic development, etc.