MANILA, Philippines—The Bangko Sentral ng Pilipinas said the healthy appetite for peso-denominated securities, which had pushed the Philippine Stock Exchange Index to new highs in the first three trading days of 2013, may be boosted by the US Federal Reserve’s plan to end its stimulus program.
Although strong demand for Philippine stocks and debt paper was anchored partly on the favorable outlook on the domestic economy, BSP Governor Amando Tetangco Jr. said it was also influenced by external factors, such as policies of foreign central banks.
One such policy is the expected end to the US Federal Reserve’s bond-buying program. This move is seen affecting demand for emerging-market securities, including Philippine portfolio assets.
“Decisions of major central banks, including the Fed, affect the risk assessment of global investors, which could then affect capital flows to the country,” Tetangco told reporters on Saturday.
Under the Fed’s bond-buying program, it purchases $85 billion worth of bonds every month to boost liquidity in the US financial market and fuel faster economic growth in the United States.
But according to reports on the minutes of the latest meeting of US Fed officials, the Fed intends to end the stimulus program this year.
Tetangco said the effect on the Philippines of a decision to end the bond purchases would depend on how global investors will evaluate the Fed’s plan.
If global investors believe that the US Fed’s intention to end the stimulus program is due to projections that the US economy is significantly improving, then risk taking will increase and demand for peso-denominated securities will grow further, Tetangco said.
However, if investors think that the plan of the Fed to end its bond-buying program is due to concerns over potential instability in the US financial markets (excessive liquidity in a financial market may cause volatility in asset prices), then this would cause risk aversion. In turn, demand for emerging-market assets will decline.
“The market will try to understand why the Fed would act. Sometimes markets overreact. This is why BSP is watchful of the conduct of domestic market participants and will try to refine regulation so they become more aware of the inherent riskiness of transactions they enter into,” he said.
Tetangco reiterated earlier statements that the BSP was ready to implement more regulations aimed at helping maintain stability in the domestic financial sector, especially if destabilizing threats become significant.
At the start of this year, a new BSP ruling imposing a cap on banks’ holdings of nondeliverable forwards (NDFs) took effect.
In particular, domestic banks can hold on to NDFs in the amount not exceeding 20 percent of their capital; foreign banks must limit their exposure to NDFs at an amount equal to or lower than their capitalization.
In the first three trading days of 2013, the peso strengthened back to the 40-to-a-dollar level amid significant demand for Philippine stocks and bonds.
The PSEi registered new highs in the first three trading days of the year, ending at 5,971.45 on Friday.