• Does the Philippines need ‘hot money’?

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    MIKE WOOTTON

    MIKE WOOTTON

    A writer in the Wall Street Daily the other day was touting the Philippines as the safest emerging market for investors because of its “balanced budget, its avoidance of monetary stimulus, [it]is growing rapidly and [it]has a balance of payments surplus that should insulate it against another financial crisis.” He then goes on to give stock tips for PLDT and Manila Water.

    He is aiming, of course, at the “hot money” market and I’m a bit surprised that he didn’t manage to add a few more monopolies or duopolies to his list of hot tips for making a quick buck or two in the Philippine stock market.

    “Hot money” is speculative funds moved around the world frequently in order to benefit from exchange rate fluctuations, government bond rate rises and falls and other financial market movements including hot tips on stock exchanges. The money doesn’t stay for long, possibly a day or two and the zips off again to somewhere else. In fact when banks play the game, it may not even be real money that gets used for these transactions, although the money they make is real.

    What people don’t realize is that this sort of money-centric applause for the Philippines is quite damaging to the further economic development of the nation. Foreign investment influencing share prices in such dinosaur-like oligarch businesses does absolutely nothing for socio-economic development; it just helps to maintain the status quo of monopoly power, regulatory capture and increasing inequality.

    “Hot money” is only of short-term benefit to traded Philippines companies, and if they get their timing right to the foreign gamblers on the Philippine Stock Exchange. The Philippines needs foreign investment, which creates decent jobs, exports and skill development, otherwise you may as well just fly in spend a few nights at the City of Dreams and then fly out with your winnings having contributed to the Philippines economy by spending a couple of nights in a hotel, taking a taxi or two, having a few meals and possibly paying an air fare.

    So to my mind, this sort of foreign investment is not something to boast about and if it comes in place of real foreign direct investment, then it should be a matter of shame not least because the law continues to be so restrictive of FDI and even if it wasn’t for that the red tape and bureaucratic inefficiencies are a real turn-off.

    I have some investment in renewable energy–it’s clean, it’s cheap it will lower the price of electricity for its users, it will reduce the need for fossil fuel import dependency and improve domestic energy security and once built will provide reliable power for 50 years or more–there is nothing bad about it. But it has taken 7 years and considerable up front costs to get to the point of financial closure in order to start construction. The books say such a project should take 4 years for pre-development, so I am asked, “Why has this taken 7 years, have you been sleeping on the job?” The simple answer is “because we don’t pay bribes, and no, we have not been sleeping on the job we have been battling through the legions of petty [and not so petty]bureaucrats who keep changing the rules all the time.”

    Turkey, China, Chile and several other nations do not want “hot money” inflows because of their potentially damaging effects in increasing inflation and creating asset bubbles. In China, for example, the regulations do not permit foreign funds to invest directly in its capital market.

    So rather than having the Philippines be headlined as an attractive prospect for short-term speculators, it would do better to restrict foreign “hot money” and turn more attention to attracting real new foreign direct investment where monies will stay and work within the Philippines to create real economic development. Attracting speculators while at the same time repelling industrial investors just makes the Philippines a big casino for the benefit of the gamblers and starkly epitomizes all that is bad in the “unacceptable face of capitalism.”

    Mike can be contacted at mawootton@gmail.com.

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    3 Comments

    1. Very informative as to the negative impact of hot money. What the country need is common sense. Reduce borrowing, develop export product and encourage Non-Resident Filipinos (NRF and not called them Overseas Filipino Workers) to invest
      in our country specially on infrastructures, agriculture, electronic and heavy industries.
      PH can excel on manufacture of ships or shipbuilding, manufacture of subsea cables and fiber optics to link all major islands, and develop the steel industries. PH should revive the nuclear power plants as most countries such as, China, India, South Korea even oil producing countries such as UAE are wise to invest. PH should also think about desalination plants to anticipate the dwindling potable water resources.