S&P warns of reversal of capital flows

Flight of funds seen with recovery in US, Europe

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11:41 PM March 8th, 2013

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By: Michelle V. Remo, March 8th, 2013 11:41 PM

Standard & Poor’s has cautioned emerging markets in the Asia-Pacific region, including the Philippines, against a potential flight of capital back to the United States and Europe once these advanced economies show more solid signs of recovery.

In one of its latest reports, S&P said the reversal of the current trend of surging foreign portfolio investments to the Philippines and its neighbors was a possibility facing those countries.

“Highly expansionary monetary policies in advanced economies are spurring very strong capital flows into Asia Pacific, which can just quickly exit if conditions improve closer to      home,” the credit-rating firm said in the report on its outlook for Asia Pacific.

S&P said the problem with a sudden and sharp reversal of flows was that it could create significant volatility in the exchange rate, which could affect prices and the competitiveness of an economy. In particular, sharp and sudden outflows could cause a steep depreciation of the peso against the dollar.

Documents from the Bangko Sentral ng Pilipinas showed that gross inflow of foreign portfolio investments hit $2.8 billion in the first month of the year, more than double the $1.2 billion registered in the same period last year.

In terms of net inflow (gross inflow less total outflow), foreign hot money reached $1.27 billion, also more than double the $586 million recorded a year ago.

The growth in foreign portfolio investments was welcome, according to the BSP, but this posed the challenge of proper liquidity management. In a bid to avoid a much faster inflation and an even sharper appreciation of the peso resulting from the surge in inflows, the BSP has implemented measures to tame these effects.

For instance, the BSP has prohibited investments of foreign funds in its special deposit accounts (SDAs) and has slapped a higher capital requirement for banks’ holdings of non-deliverable forwards (NDFs), which are hedging instruments meant to shield exporters and importers from foreign-exchange risks but were reportedly being used by some banks and investors for currency speculation.

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