Angelo Taningco
Economist, Treasury Group
Foreign portfolio investment (FPI) shifted to net outflows in February and in the first two months of the year amid heightened financial market volatility last month that spurred massive selloff in equities and bonds. In contrast, overseas Filipinos (OF) remittance growth accelerated in January despite the government’s deployment ban of OF workers to Kuwait. Compared to last year, we expect this year’s FPI to post bigger net outflows on the basis of greater market volatility whereas we forecast stronger OF cash remittance growth of 5.0% given weaker peso and higher domestic inflation. FPI net outflows tend to exert downward pressure on the balance of payments (BOP) and the Philippine peso while OF remittance inflows have a positive impact on both BOP and value of the local currency.
FPI’s net outflows amounted to $545.1 million in February—the biggest net outflow level since October last year and a reversal from its $162.2 million net inflows in January. The month of February was the period of heightened financial market volatility that resulted in massive selloff in equities and bonds. The Bangko Sentral ng Pilipinas (BSP) reported that February’s FPI net outflows may have been a result of investors’ expectations of rate hikes and rising inflation in the United States (US) as well as profit taking. On a cumulative basis, FPI net outflows totaled $383 million in January-February, already exceeding the $108 million it posted in the first two months of last year. Aside from market volatility, we think foreign investors’ expectations of rising domestic inflation and bond yields may have also contributed to the FPI net outflows. We argue that this year will likely depict a bigger FPI net outflow position on the basis of greater degree of market volatility.
OF cash remittances soared in January with its growth at 9.7% yoy, a 10-month high and higher than Bloomberg’s market median forecast of 5.0%. The BSP stated that the top ten source countries accounted for 80% of the total led by the US. We think January’s strong OF remittance performance was above expectations given concerns about the Philippine government’s deployment ban of OF workers to Kuwait. We continue to observe that a peso depreciation and higher domestic inflation tend to encourage OFs to remit more: in January, the rate of peso depreciation was 2.7% mom while 2006- and 2012-based headline CPI inflation rates stood at 4.0% and 3.4% yoy, respectively—higher than their previous month’s figures of 3.3% and 2.9%. Moreover, external demand for OF workers continued to be robust, and has also positively influenced OF remittance inflows.
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