(STAR) By Des Ferriols - Net foreign portfolio inflows will soar to $4.3 billion this year but Bangko Sentral ng Pilipinas (BSP) officials said they expect ‘hot money’ flows to slow down to $2.7 billion in 2008.

BSP Deputy Diwa Guinigundo told reporters that the year will have a strong finish in terms of portfolio inflows, topping over $4 billion as investors bought up favored stocks in anticipation of better yields this year.

According to Guinigundo, however, the momentum is likely to slowdown in 2008 under the shadow of a credit crunch in the US which is expected to start affecting most developed economies with significant exposures to the US subprime mortgage market.

Guinigundo said that in 2008, the BSP is anticipating a possible slowdown not just in the US economy but possibly in other economies where huge financial institutions are taking a big hit from the collapse in the US housing industry.

According to Guinigundo, this might translate to persistent risk-aversion where investors could end up dumping their investments in emerging markets like the Philippines.

The problems in the US housing industry was proving to be more serious than originally anticipated and according to another monetary official, this could mean hard days for emerging markets as the US Federal Reserve Board struggled to contain the problem.

The US Fed has been cutting its interest rates in the hope of easing the tension allowing more liquidity to pour into the market. However, should this fuel a rise in inflation, the official said US monetary officials could eventually start increasing its interest rates.

When this happens, it is expected that emerging markets would fall as the first casualties of fund reallocation as investors go back to US instruments where yields would be better because of rate hikes by the US Fed.

Guinigundo for his part said that the credit crunch in the US was far from over but expressed optimism that the country’s economy was resilient enough to weather the fall-out.

Guinigundo explained earlier that the central bank was not so worried about a repeat of the 1997 financial crisis that led to serious problems in the financial sector.

According to Guinigundo, the robust growth in the economy puts the country in a better position to survive the fall-out, buffered by a strong reserve position that was not present in 1997.

“We have not seen the worst of the credit crunch,” Guinigundo told reporters when asked whether the BSP thought the US crisis has bottomed out after the successive cuts in US interest rates.

Guinigundo said the BSP expects more financial institutions to announce heavy losses as a result of the credit crisis that stemmed from the long-brewing problems in the US home mortgage market.

“More losses could be announced by key investments banks and this is something that could affect risk aversion of foreign investors in their investments in emerging market,” Guinigundo said.

The reluctance of investors to put their money in emerging market would mean a slowdown in foreign exchange inflows since investors would be wanting to put their money in safer investments.

Nevertheless, Guinigundo said an edgy market would do less harm to the country’s financial sector now than it did in 1997 when the stock market all but crashed as investors pulled out.

“The financial sector is much stronger today than it was years ago,” he said. “Rules are also better on structured products and that means our regulatory environment has contemplated more possibilities than it used to in the past.”

Chief News Editor: Sol Jose Vanzi

All rights reserved