Capital Flight

Posted on Updated on


By Miguel Raymundo

NOT just ironic, but unpatriotic as well.

While the government has been hard put wooing foreigners to invest in the capital-starved Philippine economy, the country’s elites are doing the opposite—taking their money abroad. Mind boggling, the capital flight has gone unabated for decades, largely running to billions of pesos in foreign exchange which could have been used to create jobs in an impoverished nation.
Yet, the moneyed few had gone on a splurge as it were coming from a country where average daily wage is a paltry US$7-10 and poverty remains widespread. Based on the latest Bangko Sentral ng Pilipinas (BSP) data, the few rich and famous took out nearly US$7 billion as of December 2012, a figure which has been rising over the past years. Meant for investments in the offshore capital market, the money found its way to the United States, China and other countries where returns are relatively higher than in the home front.

The Taipans

Equity-linked securities and other debt issues accounted for the bulk of the money placements by Filipinos abroad, many of them among the country’s richest such as ethnic Chinese taipans Henry Sy, Lucio Tan and John Gokongwei. The three tycoons, who all trace their roots to China, have sizeable investments in China, ranging from property to retail, banking and finance and manufacturing.

Capital flight is the movement of capital from a resource-scarce developing country to other countries due to political and economic reasons. Statistics showed that capital flight from the Philippines began in the 1970s at the height of martial law which amounted to US$16 billion, rising to US$36 billion in the 1980s, and US$43 billion in the 1990s. Undoubtedly, these figures are significant amounts of lost resources that could have been utilized in the country to generate additional economic output and jobs.

Contingency Measures

Based on some technical studies, capital flight from the Philippines followed a revolving door process–that is, capital inflows were used to finance the capital outflows. This process became more pronounced with government’s adoption of financial liberalization in the 1990s. Thus, it may be argued that capital flight resulted obliquely in the hollowing out of the Philippine economy.
Alarmed by a capital plight that has sapped the economy of its financial strength, the BSP has warned it would enforce “contingency measures” to stem the rising outflow of money. In times of uncertainty, the BSP has standby powers to provide foreign exchange liquidity through the spot and swap markets as well as hedging facilities and granting temporary and limited regulatory forbearance to banks. Under its legal mandate, the BSP may also opt to relax the banks’ access to rediscounting facilities, or tweak reserve requirements, among others.

Tough Task

Overall, the BSP wants to minimize the impact of capital outflows and ensure that liquidity remains adequate to fuel the economy’s requirements. In its analysis, French bank Credit Agricole says the BSP is faced with “a tough task of managing the ripple effects” of the US Federal Reserve’s decision to withdraw its economic stimulus. “We anticipate significant outflows of portfolio capital from the Philippines, which will reduce the availability of funding needed for growth,” it said. Capital flight currently experienced by emerging markets such as the Philippines is due to the US Federal Reserve’s impending tapering of its massive bond buying as the US economy gains traction. The adverse effects of the recent developments abroad have already been felt in the Philippines: The peso depreciated, the stock market wiped out gains, and spreads on Philippine debt widened.

Asset Bubbles

Analysts say these asset market effects are largely temporary and may be viewed as a healthy correction that may have helped defuse the risk of an actual build-up in financial imbalances. However, the bigger concern with capital flows is the “excessive volatility” that could easily impact business activities and even the financial system. The BSP’s strategy has been geared toward increasing the economy’s resilience against the risks posed by both capital inflows and outflows anchored on promoting non-inflationary growth and safeguarding financial stability. It is also keeping an eye on capital inflows in case they might form asset price bubbles. But more revealing are data in the United Nations Conference on Trade and Investments’ World Investment Report 2013 showing the extent of capital fleeing from the Philippines.


In 2012, a whopping US$1,845 million was shipped out of the country, the biggest outflow since 2008. It was more than the US$1,816 million invested by foreigners in the country the previous year. This was despite that the economy chalked up an impressive 6.8 growth rate that prompted foreign credit rating agencies to give the Philippines an investment grade rank. The 2012 capital outflow raised the Filipinos’ stock of investments abroad to a whopping US$9 billion, equivalent to 29 percent of foreign investments in the country. Against that backdrop, one can’t avoid but speculate: Is the Philippines’ elite expecting a political or economic upheaval in the remaining two and a half years of President Aquino? Apparently, they feel that parking their funds abroad is safer than in their own country. Analysts recall two instances in recent history when Filipinos’ capital investments abroad breached the US$1 billion mark. In 1984, the Philippines suffered its worst political and economic crisis sparked by the global debt crisis and the assassination of Senator Benigno Aquino in August of the previous year. There was also a US$579 million blip in 2004 due to the economic elite’s worry that the jailed Joseph Estrada’s proxy, Fernando Poe, Jr., would win the presidential elections that year.


The second was in 2007 when the Asian financial crisis set in, leading to an exodus of capital from the Philippines.
The UNCTAD data also show that while foreign direct investments (FDI) into the Philippines increased to US$2.8 billion in 2012 from US$1.8 billion the previous year, the country lags far behind its Asean neighbors. In that year, Indonesia got $20 billion; Malaysia, $10.1 billion; and Thailand, $8.6 billion. The Philippines’ key rival now as a preferred investment site is Myanmar which nearly had the same FDIs as the Philippines’ US$2.2 billion in 2012. Based on the UNCTAD’s survey of 159 global companies, the Philippines in 2012 was ranked 19th attractive site for investments, way below Indonesia, which is ranked 4th; Thailand, 8th; and Vietnam, 11th. After over three years of Aquino’s daang matuwid rhetoric, the Philippines finds itself sinking deeper in a financial quagmire exacerbated by political uncertainties in the years ahead.