FDI flow to RP stable - Fitch

The flow of foreign direct investment (FDI) to the country has remained largely stable, but the regional situation appears to be changing, with capital inflows to Asia starting to slow down because of risk aversion, Fitch Ratings said in a report.

Fitch Ratings said the slowdown was caused by heightened risk aversion among global investors and the deteriorating economic fundamentals of the region along with the global economy.

Fitch said this year’s first quarter data suggested the region continued to enjoy strong foreign direct investment (FDI) inflows and was still receiving cross-border loans from international banks.

However, Fitch noted that foreign purchases into local equity markets have started showing net withdrawals, while international issuances of debt securities also appeared to have slowed down.

“While capital market flows are bound to be volatile, Fitch doubts the proposition of ‘Asia decoupling’ and believes the sensitive capital market flows could be the forerunner to FDI and loan flows,” says Franklin Poon, director of the agency’s sovereigns group.

Poon explained that Fitch keeps track of four types of capital inflows that have high data frequency: net FDI, net foreign purchases into local equity markets, international banks’ external positions in individual countries, and international issuances of debt securities.

Fitch said the four data series could provide a general picture of net capital inflows into the region.

“There is no sign that net FDI inflows to the region started weakening in the first quarter of 2008,” Fitch said.

Among capital importers in the region, Fitch said the major support came from China, India and Singapore, while net FDI inflows have remained stable for Mongolia, Thailand, Indonesia and the Philippines.

For capital exporters of Hong Kong, Korea, Malaysia and Taiwan, on the other hand, Fitch said net FDI outflows have not shown any clear deteriorating signs.

However, Fitch said foreign funds have “clearly reduced exposure” to local equity markets.

For the first six months of the year, Fitch noted that foreign net selling amounted to $13.7 billion. The agency said this was the worst recording since the data series became available in June 2001.

According to Fitch, outflows have been larger when compared to 2001 when the tech bubble exploded and in 2003 with the outbreak of the SARS epidemic.

Fitch said the biggest withdrawal took place in Taiwan, due to its relatively big market capitalization and its heavy bias towards to the electronics sector.

In terms of net international inter-bank debt, Fitch noted that Asia continued to have a net asset position against international banks.

“Credit risks have remained under control with a continued rise in the region’s overseas assets on the back of the accumulation of official foreign reserves,” Fitch said.

This was in sharp contrast to the pre-1997 situation, when international banks’ claims on Asia were higher than their liabilities, Fitch printed out.

At the same time, international banks have continued expanding their exposure to Asia. Fitch said that in the first quarter, the region actually witnessed net inflows of international inter-bank debt.