STOCK markets around the world plunged in August, while capital started fleeing emerging markets because of the economic slowdown and stock-market crash in China and the strengthening of the United States economy.
The reversal of roles of the two countries has been unexpected, but the impact is not surprising, considering that the US and China are the largest and second-largest economies in the world, respectively.
The release of reports showing the contraction of China’s manufacturing industry and the bleak outlook of its economy triggered sell-offs in various stock markets, from Hong Kong to New York.
The International Monetary Fund (IMF) said on September 3 that the impact of China’s economic slowdown was wider and larger than originally expected.
In a report for the finance ministers of the Group of 20 developed countries who were meeting in Turkey, the IMF said, “China’s transition to lower growth, while broadly in line with forecasts, appears to have larger-than-previously-envisaged cross-border repercussions, reflected in weakening commodity prices and stock prices.”
Emerging economies like the Philippines are feeling the impact, both from China’s slowdown and from the US rebound. The Associated Press (AP), in a report on September 1, recalled that after the US-led financial crisis of 2008, capital from developed countries flowed into emerging economies.
From 2009 to 2013, an estimated $104 billion went to stock funds in emerging markets. The AP said investors were attracted by the higher interest rates in emerging markets compared to the US rates after the 2008 financial crisis. Now, investors are pulling back. About $40 billion were withdrawn from emerging markets this year.
In a separate report on June 13, the Wall Street Journal cited analysts who said equity fund managers were feeling the adverse impact of plunging currencies in Asia, which was reducing investors’ profits from stocks and bonds.
The Philippines, touted as one of the best performers among Asian economies, also feels the impact of the changes in the economies of China and the US. The global economy, of which the Philippines is a part, is like a body of water. When the water level rises, everybody rises; when it goes down, everybody goes down.
With its strong fundamentals and resilience, the Philippines may be the least affected, but it will still be affected by what is happening in other economies, particularly in the US and China.
The Philippine Stock Exchange index (PSEi) ended 2014 at 7,230.76 points and was hailed as the best performer in Asia. The local stock market was supposed to celebrate in 2015 its sixth year of bull run. Analysts were also predicting the PSEi would end 2015 at 8,000 points.
Actually, the PSEi, which tracks the behavior of stock prices, breached the 8,000-point-mark on April 6, when it closed at 8,053.74 points.
The fall came not long afterward. The PSEi dropped by 6.7 percent to close at 6,791.01 points on August 23, reflecting the global panic over the impact of China’s slowdown and currency devaluation. The drop erased PSEi’s entire gains in 2015, and in a single day, about P764 billion in market capitalization was wiped out, based on PSE estimate.
For its part, the Bangko Sentral ng Pilipinas (BSP) reported that registered portfolio investments, 88.7 percent of which were in PSE-listed securities, fell 21.4 percent to $1.1 billion in August from $1.4 billion in July.
The August level of foreign portfolio investments was also 38 percent lower than the $2.1 billion recorded in August 2014. Transactions during the month resulted in net outflows of $543 million, more than thrice the outflows of $160 million in July, and a reversal of the net inflow of $483 million in August 2014.
The statistics indicate the sudden shift in investors’ perception of the Philippines, from an attractive destination for stock investments to an undesirable haven, disregarding the country’s strengths and its track record at defying crises. But this is the reason portfolio investments are also called “hot” money. They are mainly for quick profits, and are quick to fly away even at the slightest indication of possible losses. Among billionaires, falling stock prices are only on paper, unless they affect their companies’ viability.
Foreign direct investments (FDI) are different because they are made for the long term, and are used to build and operate factories or to develop industries. Because of their lack of capital, emerging economies try to attract foreign investors to help finance the development of domestic industries.
Unfortunately for the Philippines, net FDI inflows in June 2015 fell 44.6 percent to $383 million from $554 million in the same month last year. For the first half of 2015, net FDI inflows plunged 40.1 percent to $2 billion, compared with $3.4 billion for the same period in 2014.
This is lamentable because nothing has changed as far as the growth drivers of the Philippine economy are concerned: continuing inflow of remittances, the growing tourism and business-process outsourcing industry, low interest rates and a strong domestic market.
What changed is the perception of investors, and that has affected us. It’s a reminder that despite our strengths, we remain vulnerable to what is happening around us.
To be continued
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