Interest money

Speculative Money: Short-lived Love – BusinessWorld Online

JP VALERY-UNSPLASH

“‘Hcash outflows slow down in July,” Business world headlining on August 26, 2022.

The Bangko Sentral ng Pilipinas (BSP) collated reports from Authorized Agent Banks (AABs) on short-term foreign investment transactions, showing a net outflow of $103.14 million in July. This amount was 70% lower than the net outflows of $342 million recorded in June and the net outflows of $339.7 million in July 2021.

Foreign investments registered through AABs are known as “hot money” because of the ease with which they enter and exit financial markets. These investors typically want to get the best short-term rates possible, taking advantage of interest rate differentials between borrowing and investing rates and speculating on local currency movements. Generally, “investments” (influx) within a month relate to securities of companies listed on the Philippine Stock Exchange (PSE) or government securities denominated in pesos.

The top five investors of speculative money in July were the usual investors that came and went throughout the year: the UK, the US, Singapore, Hong Kong and Luxembourg, which accounted for 84.7% of gross inflows speculative money of $681 million. , fell 34.5% from the previous month, June. Gross speculative capital outflows fell 43.2% month-on-month to $784 million in July. The United States, considered a haven for investors, absorbed 66.1% of outflows in July.

Net outflows mean that more “flying” foreign funds left the country than stayed. Net outflows of $103 million in July should worry BSP, which “expects speculative money to generate a net inflow of $4.5 billion in 2022,” according to the BSP. Business world story that animates this column. Although for the first seven months of this year (January to July), foreign investment generated net inflows of $625 million, a turnaround from net outflows of $446 million during the same period the last year, it seems difficult to hope to recover from the dizzying fall in the gross outflow of speculative capital of $1.3343 billion in March 2020, when the COVID-19 pandemic was announced by the World Organization of Health (WHO) when it was already raging in the first quarter of that year.

Yes, COVID did. Businesses and financial markets were virtually at a standstill in intermittent two-year shutdowns and restrictions, exacerbated by the resurgence of virus variants in 2021. Russia’s war on Ukraine has fueled rising gas prices as meltdowns suffocated major economies. and small. In the unproductive environment of expensive fuel and material shortages, incapable labor and complicated delivery systems, costs rose as supply dwindled, squeezing what little was left of the lukewarm demand from a world stunned by fear of COVID. Even America and its almighty dollar had to give in.

In May 2022, the US Federal Reserve raised its benchmark interest rate by 0.5 percentage points to a target range of 0.75 to 1%, the largest increase in two decades. This follows a 0.25 percentage point hike in March, the first since December 2018. The decision to raise interest rates came amid attempts to control inflation in the United States, which hit a 40-year high of 8.5% in March (oxfordbusinessgroup.com, June 2, 2022).

While the rate hikes were initiated to help the US domestic economy, higher interest rates are nonetheless likely to impact emerging markets, according to the Oxford Business Group. Interest rate hikes increase the cost of servicing US dollar-denominated debt for emerging markets, lead to depreciation of their currencies, lower demand for US exports and potential capital outflows from low-income economies.

The Federal Reserve itself comments that “rising U.S. interest rates are often seen as bad news for emerging market economies (EMEs) because they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises A key factor influencing the fallout from U.S. monetary policy is the domestic situation in EMEs themselves; financial conditions in economies with higher macroeconomic vulnerabilities tend to tighten be more sensitive to a given rise in US interest rates.federalreserve.gov, “Remarks”, June 23, 2021)

And the Philippines, a developing economy, is in this very fragile place, in this debilitating grip of the pandemic that is not yet going away. The country remained a net importer as the trade balance – the difference between merchandise exports and imports – hit a deficit of $43.226 billion last year, wider than the gap of $24.597 billion in 2020. (bworldonline, April 22, 2022). The total stock of National Government (NG) debt stood at 12.68 trillion pesos at the end of March 2022 (treasury.gov.ph). The Philippines’ external debt hit a record high of $109.8 billion in March 2022, up from $106.4 billion in the previous quarter (ceicdata.com). The country’s external debt position recorded a deficit of $1.819 billion in July, compared to $642 million last year, according to the BSP. The balance of payments (BoP) deficit since the beginning of the year is 4.920 billion dollars. BoP measures the country’s transaction with the rest of the world. A surplus means that more money entered the Philippines while a deficit shows that more funds fled the economy than entered (bworldonlineAugust 22, 2022).

Headline inflation in the Philippines was 6.3% in August, down from 6.4% in July 2022, after five consecutive months of acceleration (psa.gov.ph). Have speculative capital inflows fueled inflation further as supply has failed to meet consumer demand and prices continue to soar? Has the speculative money at least helped ease local pressures on its currency demands – or has the speculative money added depreciation to the local currency that bases its value on the US dollar?

The Philippine peso fell to an all-time low on Friday, September 2, as the US dollar continued its rally. The peso closed at P56.77 against the greenback, even reaching P56.90 intraday. The previous lowest level of the Philippine currency was 56.45 pesos, recorded on October 14, 2004 (Rapper, September 2, 2022). According to the official list of BSP exchange rates as of Friday, September 9, one US dollar is equivalent to P57.1400 (bsp.gov.ph).

Analysts agree that the Philippine peso and all the weaker currencies fell because the US dollar strengthened on the increase in the benchmark 10-year US Treasury yield – to solve the problem of US inflation. Rising interest rates make the US dollar attractive to investors, but erode the value of other currencies.

But judging and condemning the strongest economies for their opportunistic behavior in times of crisis is neither fair nor just, even for the “victims” of this necessary self-preservation of one at the expense of the other. “Opportunism” is a legitimate and respected strategy “whether we study the nearly omniscient Homo economicus of rational choice theory or the limited rational Homo psychologicus of cognitive psychology,” according to Professor Oliver E. Williamson of the University of California. (Managerial and decision-making economics, 1993: Vol. 14, 97-107)

Perhaps the Filipino economic and psychosocial culture relies more on trust in relationships – which is a benign attitude towards life and survival. Yet are we content with short-lived “love”, like the intermittent investors with unstable money and the like, who wreak havoc through the untimely and accelerated mobility of already deteriorated economic factors for our own survival, in the global economic recession?

Our economic managers and planners must be more proactive in initiating fiscal and monetary reforms that will present the country to the world as an equal, respected and worthy partner-participant in the global community.

Amelia HC Ylagan is a Doctor of Business Administration from the University of the Philippines.

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