TWO seemingly contrasting pieces of news Monday from the Bangko Sentral ng Pilipinas provided what should be a comforting outlook for the Philippine economy into 2016, although neither disclosure was obviously positive.
The first was the assessment by the BSP that the balance of portfolio investment, or “hot money” flows will be away from the Philippine financial markets.
The central bank forecasts a net $200 million outflow for this year, and a larger $1.3 billion outflow for 2016.
By itself, that is a clear negative indicator; but in a wider context means very little, and might actually be a small positive factor for local markets. For all of 2015, hot money has been flowing away from ‘emerging markets.’ This is not really a reflection on individual markets themselves, but an inevitable response to much broader trends of tightening monetary policies elsewhere—the end of massive ‘quantitative easing’ programs, and most recently, the long-awaited (and probably overdue) raising of benchmark interest rates by the US Federal Reserve—and the general rout of commodity prices.
Despite what the credit-grabbing President BS Aquino 3rd has occasionally claimed, the booming local equities market prior to these factors taking effect had little to do with the local economy’s characteristics, and even less to do with his management of it, but was a matter of global circumstances. Conversely, the retreat of hot money also has little to do with the Philippine economy. While investment of any sort flowing away from the country is not necessarily a good thing, losing the hot money, which does very little for the economy outside the financial markets, is mostly painless. And lower hot money flows do have one benefit in that market volatility will be reduced; the index should be more reflective of actual market strength once the level of hot money is reduced.
The second piece of deceptively good news was the BSP’s release of bank deposit data, which is part of the calculation of M3 money, or domestic liquidity. Except for time deposits, which shrank by about 1.4 percent, peso-denominated savings and demand deposits, and domestically-held foreign currency deposits all increased at healthy rates, 8.9, 15.3, and 13.7 percent respectively, through the third quarter of this year (full year data won’t be available until mid-first quarter next year). That, according to the BSP, raised total savings in the banking system by 7.8 percent, and kept deposits as the main source of banking funds.
Overall, M3 money supply increased by 8.7 percent to P7.8 trillion; banking system deposits account for P6.9 trillion of that. The BSP, however, highlighted the sharp 12.7 percent increase in ‘domestic claims or credits to the domestic economy,’ a metric that generally comprises broad money, resident claims on the banks, domestic securities, and stock market capitalization. Beyond bank deposits (which are part of broad money), an increase in domestic claims and credits indicates healthy financial market activity—i.e., markets that are growing due to listing companies’ activities in increasing their capitalization or issuing bonds, rather than due to trading activity.
We can draw a couple of conclusions from all of this news. First, what the BSP has been telling us for years (and what has been repeated, although much less credibly, by the Aquino Administration) about the strong fundamentals of the Philippine economy is probably true. A significant part of the country’s massive remittance inflows are finding their way into bank deposits, which is the most stable source of lending capital. The financial markets are, likewise, reasonably stable; the outflow of hot money led to a slowing down, not a rout, and the corresponding increase in corporate funding through securities—although growth seems somewhat modest—suggests that the markets as they are now are largely built on reasonably sound corporate fundamentals.
None of this matters, however, if policymakers cannot figure out how to translate fundamental stability into real-world growth in jobs, incomes and consumer spending power. The Aquino Administration has largely failed in that objective, and the distinct lack of attention—so far—to economic concerns by the current crop of aspirants for Aquino’s job is not encouraging.