ON Saturday, business news giant Bloomberg published an outlook for money markets in Asia, based on the observation of many analysts that foreign portfolio investments or “hot money” is returning to this part of the world. With investors who had withdrawn their funds in what Bloomberg describes as “a knee-jerk reaction to the election of Donald Trump as US president” looking to return, Bloomberg sought to identify the most attractive local markets for them.
For the first time in years, the Philippines is not on that list. Rather, India, Indonesia, and South Korea, in that order, are tipped as the most attractive markets for foreign portfolio investments right now.
The common theme for all three markets is low volatility; investors can expect to be able to reasonably forecast what sort of returns they may earn from equity or debt investments, because prices and yields are not changing too much too fast. Beyond that, the three countries have different attributes. India is the fastest growing economy in Asia; Indonesia is growing at a healthy pace due to a clear and effective reform policy from President Joko Widodo that includes cutting red tape and offering a selective tax amnesty; and South Korea, despite being mired in a high-level corruption scandal involving some of the country’s biggest conglomerates and having Kim Jong-Un as a next-door neighbor, is remarkably stable in terms of debt instrument yields.
We have grown so accustomed to seeing the Philippines significantly mentioned in any outlook of the Asian economy, particularly since the election of President Rodrigo Duterte that it verges on being offensive when the country is completely overlooked. Nevertheless, we have to recognize that there may be good reasons why the Philippines may have lost a little of its luster as an investment destination.
Late last week, the Bangko Sentral ng Pilipinas (BSP) reported that in January, net hot money flows recorded a positive $301.33 million, reversing a $129.85 million outflow in the same month a year earlier. Since July of last year, or the very beginning of Duterte’s term (for that month, hot money inflows registered a massive $1.066 billion), the aggregate net flow after January’s positive result is just $65.82 million; in those seven months from July 2016 to January 2017, net flows were positive in four months and negative in three – a pattern that could be reasonably described as “volatile,” which, as the analysts surveyed by Bloomberg suggested, is something that tends to discourage investors.
The reason there is such a marked up-and-down pattern in the Philippines is because nearly all of the hot money goes to the stock market rather than debt securities; about 94.5 percent, according to the BSP. By contrast, in the three countries said to be better options, foreign equity and debt investments are much more balanced.
The reason this is important and should concern policymakers here is because foreign investments in local stocks and bonds are based on very different perspectives. Stock investments are based on specific issues, sectors, or the stock market’s overall performance; either way, the basic assessment is at the level of individual corporations, and how they are performing on a short-term timeframe. Bond investments, on the other hand, are based on a longer, more forward-looking timeframe and a broader economic picture; for example, a change or expected change in policy rates has a direct impact on bond yields, which in turn affects the cost of debt for the government or corporate issuers, which in turn dictates capital spending and expansion.
Apparently, despite the Philippines’ robust economic growth and the general optimism of the local business sector that growth will continue under the Duterte administration, there is not quite enough clarity in policy moving forward to encourage portfolio investors to put their money here and keep it here long enough to make a difference. If the government wishes for the Philippines to again be recognized as “the” place for overseas investors to escape from things like the Brexit or whatever Donald Trump will think of next, the administration will have to increase its efforts to give them a substantial reason to by presenting clearer policy direction: Get the stalled tax reform package moving, present clearer plans for infrastructure development, and clarify the chaos Environment head Gina Lopez has thrown the mining sector into, all things that have a much more direct impact on everyone’s bottom line – from the government, to individual companies, to the wallets of consumers in the mall – than debates over the death penalty or Leila de Lima do.