Foreign Investments in the Philippines

During the last couple of months, we’ve seen an increased volatility in our stock market, the Philippine Stock Exchange (PSE). Our Philippine Stock Exchange (PSEi) went down from a high of 7,403.65 to a low of 5,678.73. That was a decrease of more than 20%!  Recently, the PSEi has recovered from its low and is now back to the 6.800 levels as of yesterday. Nevertheless, the correction had unnerved the investors and some have become doubtful on the recovery of the market.

 One of the major reasons of the sell-off in the stock market is the indiscriminate selling of the foreign investors. Day after day, week after week, the foreign investors are disposing their holdings from the Philippine stock market as if there is no tomorrow. The investors were spooked by the statement of the US FED chairman Ben Bernanke last May 22 who said “In the next few meetings, we could take a step down in our pace of purchases.” With just one sentence, investors immediately sold down their emerging markets portfolio which includes the Philippines.

Let’s take a look at chart below. Since May 22, the PSEi has fallen from 7,385 to 5,678 in a span of five weeks.

From May 20 to June 21, foreign investors have unloaded Php 11.8 billion worth of shares. As of July 26, foreign investors account for 51% of the market's traded value for the year to date. Since foreign investors make up the majority of the traded shares during this period, there is no wonder why the PSEi went down dramatically since May 22 when the foreigners exited from the market. 

Foreign investors' funds in the stock market are commonly referred to as Hot Money. They are called as such because of the short duration of their investments in the stock market. Stock market is just one of the financial instruments being targeted by the hot money. Bonds and other financial instruments whose favorable interest rates and exchange rates are subject to hot money inflow also.

The Philippines economic resurgence has been a widely circulated story. Investors are flocking to the country due to the improved fundamentals of the country. 

Take a look at the hot money table below. Except for 2008, foreign investors have been pumping money in our financial system.

Foreign Portfolio Investments (Hot Money)

Year	Amount
Y2013 1H	$1.55 Bn net inflow
Y2012	$3.90 Bn net inflow
Y2011	$4.10 Bn net inflow
Y2010	$4.6 Bn net inflow
Y2009	388 M net inflow
Y2008	$1.8 Bn net outflow
Y2007	$3.5 Bn net inflow

Source: BSP

The Quantitative Easing policy adopted by the central banks around the world have pushed interest rates lower. As such investors have looked at countries whose interest rates and exchange rates are better. Philippine's currency is strong and the investors are taking an advantage of it coupled with the rising economic growth of the country. 

The Philippines has been one of the best performing stock market in recent years. Foreign investors have been flocking in our stock market as seen in the table below.

Net Foreign Transactions in Stock Market

Year	Amount in Php	Exchange Rate	Amount in USD
Y2013 1H	Php 53.44 Bn net buying	41.24	$1.30 Bn
Y2012	Php 109.98 Bn net buying	42.23	$2.56 Bn
Y2011	Php 56.52 Bn net buying	43.31	$1.37 Bn
Y2010	Php 35.62 Bn net buying	45.11	$0.87 Bn
Y2009	Php 14.92 Bn net buying	47.637	$0.37 Bn
Y2008	Php 22.16 Bn net selling	44.475	$0.54 Bn
Y2007	Php 55.57 Bn net buying	46.148	$1.36 Bn

Source: PSE, NSCB

Much has been said about the hot money coming into our country. While these hot money provides liquidity in our financial system, they are short term in nature and volatile.Hot money can create an asset bubble by investing huge amount of money and then pulling it quickly.

Foreign Direct Investments on the other hand provides stability and has a more direct impact in the economic activity of the country. According to Investopedia, FDI is An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Foreign Direct Investments (Real Investments)

Year	Amount
Y2013 4M	$1,505M
Y2012	$2,033M
Y2011	$1,852M
Y2010	$1,241M
Y2009	$1,948M
Y2008	$1,544M
Y2007	$2,916M

Source: BSP

FDI's provides capital, increased production level and employment opportunities. It is one of the major steps for developing economies like Philippines towards economic growth. It provides opportunities for increased trading of goods and services in the country.

Likewise, technological know-how and expertise is enhanced as companies with superior technology invest in the country.

I hope more FDI's will come into our country rather than hot money.