Asian Economy: Philippines Peso ₱ strengthens as inflow of portfolio investments rises

The Philippine Peso ₱ has continued to strengthen during the last few days as a result of the strong inflow of foreign portfolio investments, thus further improving the country's macroeconomic fundamentals.

According to the Bangko Sentral ng Pilipinas (BSP), the country' s central bank, foreign portfolio investments yielded a net inflow of $138.68 million as of June 17 compared to a net inflow of only $2.40 million for the same period in 2010.

The BSP said that the strong inflow of hot money could be attributed to the credit rating upgrade of the Philippines by international rating agencies such as Moodys and Fitch Ratings.

Moody's raised the country's foreign debt rating from three to two notches below investment grade while Fitch upgraded Manila' s long-term foreign currency rating to BB+ from BB, with a stable outlook.

The BSP said that the strong inflows, which went mostly to peso- denominated government securities, came from top portfolio investing countries such as the United Kingdom, Singapore and the United States.

Cumulative transactions in hot money as of June 17 resulted in a net inflow of $2.29 billion, up 228 percent from $696.52 million in the same period in 2010.

Total inflows of foreign capital into the country as of June 18 amounted to $8.57 billion, more than twice the $4.08 billion last year, the BSP said.

On July 6, 2011 (Wednesday) the Philippines Peso ₱ led other Asian currencies in appreciating, going back to the 42-to-a-dollar level, the currency's strongest finish in nearly two months.

Financial analysts have credited the appreciation of currencies in the region to rising inflows of foreign portfolio investments, which in turn were being driven by expectations that interest rates in emerging economies in Asia would rise further.

Higher interest rates could cause yields of bonds and other portfolio instruments to rise, thus attracting foreign fund owners to invest in them, the analysts said. On Friday, the peso closed at P42.735 against the dollar, up by 32 centavos from Tuesday's close of ₱ 43.055 to the dollar.

On Wednesday's trading, when the peso started to move up, the volume of trade rose beyond the billion-dollar mark to hit $1.102 billion from only $754.59 million previously.

Traders said portfolio yields in the Philippines and its neighbors including China, India, South Korea, Thailand and Malaysia are expected to further rise in the months ahead as a consequence of the move of respective countries' central banks to hike key policy rates.

In the case of the Philippines, the BSP has already raised its key policy rates twice this year, the first one by 25 basis points in March and the second by a similar margin in May.

The increase in the key policy rates was meant to influence an increase in the deposit and lending rates of banks.

BSP Governor Amando Tetangco said the inflow of hot money combined with the remittances from overseas Filipino workers and income from Philippine-owned firms abroad resulted in a whooping increase in the country's gross international reserves (GIR) to $68.997 billion as of end-June, up by 42 percent from $48.704 billion posted in the same period last year.

Tetangco said that the latest GIR figure prompted the BSP to rethink its earlier forecast of $70 billion in reserves by the end of 2011. BSP officials are now saying that the GIR could exceed the target amount in the next few months.

The BSP said that because of the below-par performance of the United States and Europe, foreign portfolio investments found their way to the Philippines, pushing the country's foreign exchange reserves to record levels.

The BSP said the latest GIR figure would be enough to cover 10. 4 months' worth of the country's usual imports.

Based on international standards, a country's foreign exchange reserve can be considered comfortable if it can account for at least four months' worth of imports.

According to the BSP, the GIR figure could further boost the country's credit image because it shows that the Philippines has the ability to settle its maturing obligations.

Another significant macroeconomic indicator is the country's balance of payments (BOP) surplus, which, for the first five months of 2011, reached $4.8 billion supported by inflows from portfolio investments, exports and remittances.

The BSP has revised its estimate for BOP surplus this year from $6 billion to $8 billion. The Philippines posted a record BOP surplus of $14.4 billion in 2010, also boosted by strong portfolio inflows.