ADB warns PHL against asset price bubbles, hot money flight

The Asian Development Bank (ADB) on Monday warned of risks in the form of asset price bubbles and flight of speculative investments out of emerging markets, like the Philippines, as local currency bond markets in East Asia expanded by 12.1 percent year-on-year in 2012. 

 

Finance Secretary and Monetary Board member Cesar Purisima, however, said the Philippine government is doing its best to ensure that asset price increases are backed by fundamental improvements while speculative inflows are funneled into more productive uses for the economy. 

 

“Emerging East Asia... governments still need to be careful that the surge in capital inflows doesn’t fuel excessive rises in asset prices and that they are prepared for a possible reversal in the flows when the economies of the US and Europe pick up again,” Thiam Hee Ng, senior economist ADB Office of Regional Economic Integration, said in a statement tied to the release Monday of the bank's latest Asia Bond Monitor.  

 

According to the report, emerging East Asia—which groups China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam—had $6.5 trillion in outstanding local currency bonds as of end-2012 versus $5.7 trillion a year earlier. 

 

Corporate markets, though smaller than sovereign bond markets, drove the increase, growing 18.6 percent year-on-year to $2.3 trillion in 2012.

 

While noting that investors have been putting their money to work in emerging East Asia since the early 1990s, Manila-based ADB said low interest rates and slow or negative economic growth in developed economies stoked investor sentiment in the region in recent years. 

 

“Investment is increasingly coming from overseas, with foreign ownership in most emerging East Asia local currency bond markets increasing in the second half of 2012,” the bank said.  Profits and valuations

 

The Philippine market grew 20.5 percent to $100 billion last year, according to ADB data. Corporate bonds grew 20.7 percent to $13 billion, while government debt papers increased by 20.5 percent to $87 billion. 

 

The fastest-growing bond market in emerging East Asia in 2012 was Vietnam, 42.7 percent bigger year-on-year as the sovereign bond market expanded at a rapid pace.

 

Japan still has the largest market in Asia at $11.7 trillion, followed by China at $3.8 trillion.

 

“As you know, I am just one member of the [Monetary Board],” Purisima told reporters in an ambush interview at the sidelines of a tax forum in Quezon City on Monday. “But I am confident that the... [authorities] are doing a good job in monitoring these events.” 

 

Noting that the administration do not see any sharp reversal in inflow of hot money happening any time soon, he said, “Our biggest concern right now is the inflow of hot money, and we are taking steps so that we can structurally absorb that and funnel these to investments, like infrastructure.”

 

“Our role is to ensure that we continue to invest in infrastructure, improve doing business and increase tax collections to shore up more structural investments,”  Purisma noted. 

 

For corporates, Purisima noted that inflows will continue as long as companies register higher earnings.  “So long as the corporations increase their profitability, then valuations will be fine,” he said. 

 

Last Friday, the Bangko Sentral ng Pilipinas reported net foreign portfolio investments—also called speculative or “hot money” given the ease with which they enter and exit an economy—dropped to $212 million in February from $1.3 billion in January, reflecting largely profit-taking in the stock market. — VS, GMA News