INTRODUCTION

Foreign investment can be of two sorts. The first is when a firm or an individual buys another firm with full, or very substantial, control of its operations. This investment is called Foreign Direct Investment (FDI). The other type of investment is called portfolio investment. In such an investment, investors purchase stocks of a number of companies with the objective not to gain management control, but to construct an investment portfolio. Foreign Portfolio Investment (FPI) which is commonly known as the entry of funds into a country where foreigners make purchases in the countrys stock and bond markets, sometimes for speculation. It is the transaction (both selling and buying) that involves stocks, bonds, money market and other financial instruments in which the investor holds less than 10 percent of ownership or share. Portfolio investment is essentially the capital market. The capital market in the Philippines is not so developed. The stock market operated by the Philippines Stock Exchange (PSE) is the more popular form of portfolio investment. To date, there are some 260 listed companies in the PSE. The stock market is generally bullish because of strong economic figures, renewed optimism in the government, the benign inflation path and rebounding exports. Foreign investors who feel like to invest in a country typically examine the behavior of the Stock market to diversify their Portfolio. This papers will focuses on understanding the behavior of Foreign Portfolio Investment in the Philippines for the year 1999-2010 and characterize the Portfolio investment in the country. Also this paper will provide datas and statistics coming from Bangko Sentral ng Pilipinas

supporting the performance of the said topic. And, finally, this research will determine the benefits of Foreign Portfolio Investment in the Economy.

I.

STATEMENT OF THE PROBLEM

Based on the study the researchers conducted, the following questions were formulated. 1. 2. What is Foreign Portfolio Investment in the Philippines and its classification? Illustrates the behavior of the Portfolio Investment in the Philippines for the year 19992010. 3. What are the factors and the risk that affect the increase and decrease of Portfolio Investment in the Philippines? 4. What are the benefits of Portfolio Investment in the Economy of the Country?

II.

SCOPE AND LIMITATION

In this study the researchers gather data thru the agency who provide relevant statistic and information about the Foreign Investment in the Philippines such as the Bangko Sentral ng Pilipinas from the year 1999-2010, this include the entry of Portfolio Investment in the Balance of payments. The entry of Portfolio investment in the Balance of payment is different from the BSP-registered Foreign Portfolio Investment, having limited years of data in the BSP-registered FPI, the Researchers opt to analyze the entry of FPI in Balance of Payments. The researchers did not include any data about the Foreign Portfolio Investment of the neighbor country and analysis about Foreign Direct Investment in the Philippines.

III.

IV.METHODOLOGY This chapter tackled how the researchers gathered the data and results were made

possible. The researcher will discuss the design, sources of data and data gathering. DESIGN This study made used of descriptive research method which is designed for the researchers to gather information about present existing conditions needed in the chosen field of study. Descriptive method of research involved the collecting of data in order to answer questions concerning current status of the study. This method was designed to gather data and information about present condition and had been a helpful tool in describing the nature of situation, as it exists at the time of the study. Descriptive research as its names implies, aims to describe the characteristics of the phenomena being studied. It is a fact-finding with the intent of using the data gathered to generate more balanced procedure for improving abrupt situation. SOURCES and GATHERING OF DATA To obtained sufficient data needed for this study, the researchers personally went to Bangko Sentral ng Pilipinas to gathered sources. As well to some informative article in websites and some reading materials, this datas provide accurate figures and facts needed for this study.

IV.

PRESENTATION OF DATA AND ANALYSIS

8 PORTFOLIO INVESTMENT in million U.S. dollars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 p/ PORTFOLIO INVESTMENT ASSETS : Residents' Investments Abroad Equity securities Monetary Authorities General Government Banks Other sectors Placements Withdrawals Debt securities Bonds and notes Monetary Authorities General Government Banks Other sectors Money-market instruments Monetary Authorities General Government Banks Other sectors LIABILITIES : Non-residents' Investments in the Phils Equity securities Banks Other sectors Placements Withdrawals Debt securities Bonds and notes Monetary Authorities General Government Banks Other sectors Money-market instruments Monetary Authorities General Government 3315 -553 1027 746 562 -1713 3475 3043 4623 -3627 -625 4018 603 55 0 0 0 55 75 20 548 548 0 0 122 426 0 0 0 0 0 812 57 42 0 0 0 42 219 177 -30 0 0 -3 -27 4 31 628 818 910 8 0 0 1 7 14 7 48 0 0 2 46 46 0 18 0 0 6 12 115 103 146 1567 -834 5 0 0 1 4 4 0 -1 0 0 -2 1 2 1 79 0 0 -5 84 105 21 -789 2715 3442 -75 0 0 -14 -61 102 163 44 0 0 8 36 39 3 11 0 0 0 11 13 2

770 87 770 0 0 341 429 0 0 0 0 0 238 0 0 215 23 -151 0 0 -76 -75

620 770 892 -238 0 0 -314 76 858 0 0 661 197 698 0 0 613 85 72 0 0 -49 121 183 0 0 155 28 709 0 0 668 41

141 1568 -913 428 0 0 -353 781 -287 0 0 -352 65 1272 0 0 1224 48 296 0 0 693 -397 -87 0 0 430 -517 -826 0 0 -758 -68

-714 2671 3431 -160 0 0 -625 465 -554 0 0 -605 51 2089 0 0 465 1624 582 0 0 254 328 3324 0 0 1883 1441 107 0 0 -467 574

3918 259 1084 1374 1380 -803 3621 4610 3789 -4416 2090 7460

489 17 472 12294 11822

-202 -4 -198 3228 3426

125 3 122 1123 1001

227 -10 237 1198 961

500 3 497 1311 814

518 1 517 1917 1400

1465 -1 1466 3827 2361

2525 324 2201 5523 3322

3178 115 3063 12510 9447

-1289 -48 -1241 6262 7503

-1096 18 -1114 4402 5516

481 162 319 8477 8158

3429 461 959 1147 880 -1321 2156 2085 611 3429 1157 2269 -701 704 0 0 0 461 -195 1394 -306 -432 0 0 0 959 141 419 -236 635 0 0 0 1147 -161 1193 -352 467 0 0 0 880 -206 1281 5 -200 0 0 0 -1321 -542 -506 125 -398 0 0 0 2145 -723 2712 225 -69 11 0 0 2055 -41 1272 122 702 30 0 0 629 91 385 -89 242 -18 0 0

-3127 3186 6979 -3126 -34 -1068 -182 -1842 -1 0 0 3139 -102 2846 49 346 47 0 0 6978 -200 6053 652 473 1 0 0

Banks Other sectors Note: Balance is derived by deducting assets from liabilities.

0 0

0 0

0 0

0 0

0 0

0 0

0 11

0 30

0 -18

0 -1

0 47

0 1

TABLE 1. PORTFOLIO INVESTMENT IN THE PHILIPPINES

1999 to 2010 (in million US$)

The table 1 explains the portfolio investment in Philippines in year 1999 to 2010 in million US Dollar. The Foreign portfolio investment (FPI) in the Philippines is based on the fifth edition of Balance of Payments Manual; it covers transactions in equity securities and debt securities. Portfolio investment is part of the balance of payments (BOP) capital and financial account. The BOP refers to the economy's record of transactions with the rest of the world. Its major components are current account, and capital and financial account. Under the Balance of Payments Manual, the major components of portfolio investment, which are classified under assets and liabilities, are equity securities and debt securities. Both are usually traded (or tradable) in organized and other financial markets. Debt securities are subdivided into bonds and notes, money market instruments, and financial derivatives that include a variety of new financial instruments. Equity securities covers all instruments and records acknowledging, after the claims of all creditors have been met, claims to the residual values of incorporated enterprises. Shares, stocks, participation, or similar documents (such as American Depositary Receipts) usually denote ownership of equity. Preferred stock or shares, which also provide for participation in the distribution of the residual value on dissolution of an incorporated enterprise, are included. Mutual funds and investment trusts also are included. Equity and debt securities are further subdivided by institutional sectorof the resident creditor for assets otherwise the Resident Investment Abroad and the resident debtor for liabilities which is the Non-resident in the Philippines. The only distinction of the two sectors is having the

imposition of monetary authorities and general Government under Resident Investment Abroad. The Balance of Portfolio investment is derived by deducting Assets from liabilities, this balance shows the behavior of FPI in the country. It is important to note that liabilities under nonresidents investments in the Philippines should be greater than Assets so that will not cause a negative balance of Portfolio investment see table 1. There are factors and risks that affect the decreasing and increasing of the portfolio investment in the Country. These factors are the tax rates on interest or dividends -investors will normally prefer countries where the tax rates are relatively low, the interest rates-money tends to flow to countries with high interest rates, and the exchange rates-foreign investors may be attracted if the local currency is expected to strengthen. In the researchers study the Philippines tend to strengthen its local currency with the intervention of the government in the managed float exchange rate to attract foreign Investors. The risks associated in portfolio investment primarily are country risk and currency exchange risk. The country risk includes political and economic instability (revolutions, nationalization, tax hikes), and corruption. This country risk is the major reason why many investors full out there investment and keep away from investing in the Philippines. Another foremost risk is the currency exchange risk which occurs when the exchange rate of the country that has been invested in moves sharply against the exchange rate of the home country. It is necessary to note that even if investments are denominated in the home country currency (e.g., U.S. dollars), investors still stand the exchange rate risk to some degree because the cash flows of their investments generate will need to be converted into the home currency and if the

exchange rate has moved substantially, the returns will suffer. This situation happen in the Philippines in the year 2006 where in the value of peso is increased by 56 pesos over a dollar. Portfolio investment, however, has additional risk, namely conflict of interests between portfolio investors and control investors. Investors who have a big enough share of an enterprise can appoint the management of the enterprise that will, accordingly, pursue their interests vigorously, sometimes even acting to the detriment the portfolio investors. Philippines are in fact anguished from this risk that causes the balance of Portfolio investment to swing unpredictably.

Currently, the Philippines are open to foreign portfolio capital investment. Philippine have different debt instrument, such as treasury bonds, and equity which is classify as the common stocks and preferred stock. Foreigners may purchase publicly or privately issued domestic securities, invest in money market instruments, and open peso-denominated savings and time deposits. Portfolio investments in publicly listed firms are, like direct equity investments, constrained by foreign ownership ceilings stipulated under the Constitution and other laws. The Philippine securities market remains small and underdeveloped, and is not able to offer investors a wide range of choices. Except for a few large firms, long-term bonds and commercial paper are not yet major sources of capital. Some firms that are in capital market classify their publicly listed shares as "A" (exclusively for Filipinos) and/or "B" (for foreigners and Filipinos). While the practice of classifying shares was common until the early 1990s, most newly-listed companies no longer classify shares into "A" and/or "B," because the Foreign Investment Act has since lifted the 40 percent general ceiling previously imposed on foreign investments. However, listed firms engaged in activities where foreign investment caps still apply, (i.e., banking, utilities, real estate, exploration of natural resources, etc.) find the classification convenient for compliance purposes.

Portfolio investment in the country is considered hot money because it is volatile- tending to fluctuate sharply and regularly, like all other county around the world. Using the Table 1 and Figure 1- showing the tabular and graphical data of Investment Portfolio (IP) in the Philippines, the Researchers determine the manners of the Portfolio Investment considering the risk associated by the changes of its behavior.

FIGURE 1

Portfolio Investment in the Philippines

6000 BALANCE

5000 4623 4000 M I 3000 L L I 2000 O N 1000 U S 3576 3315 3043 4018

1027 746 562

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -553 -625

D O -1000 L L A -2000 R -3000

-1713

-3627 -4000

-5000 YEARS

Figure 1 illustrates that the portfolio investment behavior is fluctuating; there is no consistency in increasing or decreasing in the line because of different factors that affect Foreign Portfolio Investment. In 1999-2000 there is a decrease in portfolio investment from 3,315 million US Dollar to -553 million US Dollar, due to a dramatic political transition occur in 1998, Joseph Estrada was

elected president. Even with its strong economic team, the Estrada administration failed to capitalize on the gains of the previous administration. His administration was severely criticized for cronyism, incompetence, and corruption, causing it to lose the confidence of foreign investors. Foreign investors' confidence was further damaged when, in his second year, Estrada was accused of exerting influence in an investigation of a friend's involvement in stock market manipulation. Social unrest brought about by numerous bombing threats, actual bombings, kidnappings, and other criminal activities contributed to the economy's troubles. Economic performance was also hurt by climatic disturbance that caused extremes of dry and wet weather. The last quarter of 2000 up to the first week of January 2001 was a period of political and economic uncertainty for the Philippines that affect the Portfolio investment. In January 2001
Estrada was removed from office by a second peaceful "People Power" revolution he was the first Philippine president to be impeached by Congress, and his vice-president, Gloria Macapagal-Arroyo, became the fourteenth President of the Republic, in 2001 there is a positive

portfolio investment from a negative 553 in 2000 to an increase of 1,027 Million US$ because of a high increase in liabilities, more foreign investors invest here in our country in the alleged for a good administration of the new president. Although there is a positive FPI from 2002 to 2003 there still a decline of investment from 746 Million US$ in 2002 to 562 US$ in 2003 due to the political disturbances such as the Oakwood mutiny occurred in the Philippines on July 27, 2003, the SARS outbreak and the lingering security and political concerns, insofar as the foreign investors were concerned, is the reasons in the decline of Portfolio Investment This political instability continues to turn down the portfolio investment. In 2004, portfolio investment drops by negative 1,713 Million US Dollars because many investors withdrew their investment due to a latter issue of country risk such as election predicament. After the depressing year of presidential election rigging allegation, the countrys portfolio investment rapidly increases

because the investment abroad is much lower than the foreign investment in the Philippines which is tremendous in the capital market. Also A controversial expanded value added tax (eVAT) law, considered the centerpiece of the Arroyo administration's economic reform agenda, was implemented in November 2005, This tax measure boosted confidence in the government's fiscal capacity and helped to strengthen the Philippine peso and the forecast of a slowdown in the inflation rate in August helped boost investor assurance safety of investment in the country. However in 2006 a modest decline of Portfolio Investment take place because of Arroyo issued Presidential Proclamation 1017 (PP 1017) and used it as basis in declaring a state of emergency throughout the Philippines. According to Arroyo, this declaration was done to quell the military rebellion, stop lawless violence, and promotes peace and stability but it doesnt thoroughly really affect the investors. The peso strengthened by nearly 20% in 2007, making it by far Asia's best performing currency for the year, a fact attributed to a combination of increased remittances from overseas Filipino workers and a strong domestic economy it. Desolately in 2008 the portfolio investments drop off because it has been affected by the crisis in a decline in three aspects: exports, remittances from overseas Filipino workers, and foreign investments and the result is negative portfolio investment because of negative liability. The freeze in liquidity in US and European financial markets reversed capital flows to developing countries and induced a rise in the price of risk which entailed a drop in equity prices and exchange rate volatility. However, following the effects of an increase in the foreign currency government bond spread, the Philippine stock market was actually one of the least affected by the crisis with the main index of the stock market dropping only by 24 percent, a relatively low percentage change in comparison to those of other countries across Asia. Similarly, from the period between July 2008 and January 2009, the peso devaluated only by 3

percent which explains why the peso was one of the currencies least affected by the crisis. This minimal effect on the stock market and the Philippine peso can be attributed to the recovery of asset prices across the Asia-Pacific region recovered in early 2009 as foreign portfolio investments surged. The global financial shocks and severe typhoon-related damages of 20082009 are expected to have pushed investment down. So far in year 2010 Portfolio Investment recovered from the negative impacts of different catastrophe. A development-oriented 2011 budget, combined with renewed efforts to boost the Government's low revenue base so that it can fund priority development programs and a clear strategy to attract private investment in vital public infrastructure, will help the Philippines' economy to continue to grow. Figure 1 shows that the portfolio investment behavior is fluctuating; there is no consistency in increasing or decreasing in the line because of different factors that affect Foreign Portfolio Investment, as the researcher mentioned earlier. Benefits of Foreign Portfolio Investment Foreign portfolio investment increases the liquidity of domestic capital markets, and can help develop market efficiency as well. As markets become more liquid, as they become deeper and broader, a wider range of investments can be financed. New enterprises, for example, have a greater chance of receiving start-up financing. Savers have more opportunity to invest with the assurance that they will be able to manage their portfolio, or sell their financial securities quickly if they need access to their savings. In this way, liquid markets can also make longer-term investment more attractive. Foreign portfolio investment can also bring discipline and know-how into the domestic capital markets. In a deeper, broader market, investors will have greater incentives to expend

resources in researching new or emerging investment opportunities. As enterprises compete for financing, they will face demands for better information, both in terms of quantity and quality. This push for fuller disclosure will promote transparency, which can have positive spill-over into other economic sectors. Foreign portfolio investors, without the advantage of an insiders knowledge of the investment opportunities, are especially likely to demand a higher level of information disclosure and accounting standards, and bring with them experience utilizing these standards and a knowledge of how they function. Foreign portfolio investment can also help to promote development of equity markets and the shareholders voice in corporate governance. As companies compete for finance the market will reward better performance, better prospects for future performance, and better corporate governance. As the markets liquidity and functionality improves, equity prices will increasingly reflect the underlying values of the firms, enhancing the more efficient allocation of capital flows. Well functioning equity markets will also facilitate takeovers, a point where portfolio and direct investment overlap. Takeovers can turn a poorly functioning firm into an efficient and more profitable firm, strengthening the firm, the financial return to its investors, and the domestic economy. Foreign portfolio investors may also help the domestic capital markets by introducing more sophisticated instruments and technology for managing portfolios. For instance, they may bring with them a facility in using futures, options, swaps and other hedging instruments to manage portfolio risk. Increased demand for these instruments would be conducive to

developing this function in domestic markets, improving risk management opportunities for both foreign and domestic investors. In the various ways outlined above, foreign portfolio investment can help to strengthen domestic capital markets and improve their functioning. This will lead to a better allocation of capital and resources in the domestic economy, and thus a healthier economy. Open capital markets also contribute to worldwide economic development by improving the worldwide allocation of savings and resources. Open markets give foreign investors the opportunity to diversify their portfolios, improving risk management and possibly fostering a higher level of savings and investment. V. CONCLUSION

Portfolio investment is much more volatile than FDI. In periods of crisis, foreign portfolio investments are the first to leave the country, putting downward pressure on the domestic exchange rate, often causing depreciation of the currency of the country from which they are withdrawn. The underlying reason is that the market for portfolio investment is much more liquid, making it easier to take it out of a country (unless the country in question introduces capital controls, which is not good for its reputation).