July 26, 2013

Hot Money

Hot Money is money from abroad commonly invested in government and financial securities that can be easily withdrawn out of the country anytime.

One of the lessons learned after the skid in Philippine Stock Exchange Index last June is that markets are interconnected now a day. The signs of recovery of US market started to reveal when unemployment showed some signs of down trend. In June 19, Fed's Chairman Ben Bernanke announced Fed's purchases of long-term securities might start to decrease as US economy performs better. The announcement of Fed signaled that the US economy is recovering, thus, implicating that Dollar (USD) is heading stronger, thus, would weaken other currencies.

A good foreign exchange market should not be dictated by outside forces. What happened last June, spurred a doubt that the balance of payment (BoP) is dominated by hot money. BoP is a recording of inflow and outflow of foreign currency in a specific period. In other words, the sudden withdrawal of hot money from the market resulted to a significant decline in supply of dollar, thus, weakened the Peso significantly. On the positive side, a weak currency increases the domestic value of exports (if the good is fixed price in USD) and Overseas Filipino Workers (OFW) Remittance.

Even though the impact of flight of investment last June was not "too big", the incident highlighted the importance of improving the export volume in stabilizing the currency.

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