Some like it hot

Like the meteoric rise of a rock star attracting adoring crowds, an economy too can be hot... until it’s not.

Foreign buying of local stocks is considered a sort of anomaly. Smart money is supposed to stay in its more developed home country, especially when the global stock rally is led by the first world. Why would they come to a volatile market such as ours? Well, emerging markets do have their appeal. Are these funds just parked and looking for a permanent place? Is the rally they engender meant to be short-lived?

Economists designate the temporary flow of outside funds as “hot money.” As in the movie with Tony Curtis regarding fugitives and gender benders, some investors like it hot.

“Hot money” is defined as fund flows from outside that seek temporary havens in search of high returns in the short run. Economic planners are uncomfortable with these motel-like guests that check in using probably fictitious names, do their thing, and then check out without staying for the breakfast buffet.

The ease with which such funds enter and exit the local bourse causes concern as they tend to inflate currency and stock values only to let them fall back in a hard crash when other investment opportunities beckon elsewhere. Critics of hot money liken such portfolio investors to those dealing with the oldest profession (after landscape architecture). The metaphors can get mixed. It is after all the customer looking for fleeting pleasure and not the host providing the opportunity that describes the socalled hot money. The heat (or friction, in this case the lack of it) in this economic application is provided by the customer. Hot money should not invite comparison then to temporary partnerships, but to parking space.

The term “hot” has overtones of desire. The expression, “having the hots” for somebody, uses the word in its slang meaning of physical, in this case fiscal, attraction. As in all things hot, the interest, as well as the interest rate, is short term. Portfolio investments can make money for the investor. But do they create jobs outside of the researchers that push certain stocks and fund managers that make money (or lose it) for their clients?

The critics of hot money prefer the longer staying funds invested in factories, call centers, manufacturing, casinos, and resort hotels. These are not really called “cool” money. Economists refer to this type of funds more drily as Foreign Direct Investment (FDI). These amounts are used more handily to gauge the attractiveness of a country as an economic “hot spot,” though not in the sense of a troubled place that attracts foreign correspondents and travel advisories.

In the matter of FDIs, the November 2017 ASEAN Business and Investment Summit held in Manila, cites the Philippines as having registered the highest increase of 41.6%, from $5.6B in 2015 to $7.9B in 2016. The other gainers after the Philippines were Cambodia, Myanmar, Malaysia, and Vietnam. This metric seems to be considered more reliable in terms of designating a hot economy.

The difference between hot money in local stocks and bonds, and finds going to FDIs can be likened to a tryst for the former and a long engagement (even marriage) for the latter. As one will note, the two need not be mutually exclusive. A date, even a hot one, can sometimes lead to a more permanent arrangement. Thus, hot money may be the introduction to a longer type of romance, beyond mere fleeting fascination in the economic sense.

There’s nothing wrong with designating certain economies, like we seem to be at this time, as “sexy.” The imagery of having some fiscal appeal may be a passing thing that generates enough allure to attract hot money. Is that so bad?

Achieving investment grade status, and even improving it, is apt to turn the once hot tomato into a respectable date. She can be introduced to the staid investors taking care of the retirement fund of public school teachers and municipal workers.

There is also a “ripple effect” when the country somehow gets into the radar screen of first world investors. The foreign interest goes beyond the stock portfolio and spills over to Philippine art auctions as well as local tourist destinations. The slogan then for the tourist industry of it being more fun here can be heated up — it’s hotter in the Philippines. And we’re not talking about the weather or the traffic.

Like the meteoric rise of a rock star attracting adoring crowds, an economy too can be hot... until it’s not.