Capital flight soars, int’l reserves dive

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.