Standard & Poor’s has warned that the Philippines faced risks of overheating that could materialize unless surging foreign capital inflows were properly managed.
The warning came after the country recently attained investment-grade credit ratings from S&P and Fitch and in light of concerns that the favorable ratings, although a very welcome development, could result in the excessive inflow of foreign portfolio investments.
Agost Bernard, associate director for sovereigns rating at S&P, said there should be strict policies on managing growing liquidity in the economy to ensure this would not result in financial-sector instability and an overheating economy.
“The immediate risk [for the Philippines] is the increasing capital inflows. These flows are going to accelerate only if these are not managed properly. These can lead to an overheating economy and put pressure on the banking sector,” Bernard said in a video commentary posted by S&P on its website.
Following the ratings upgrade from Fitch and S&P, the Philippine Stock Exchange index (PSEi) has risen to new highs. Interest rates on government securities also eased on the back of heightened demand.
Economists have warned that the Philippines was vulnerable to rising foreign investments in real estate since real-estate regulations in the country were more relaxed compared with those in China, Hong Kong and Singapore.
Although foreign portfolio and real-estate investments were welcome, economists said excessive amounts have a tendency to accelerate asset price inflation and cause bubbles.
The Philippines last year grew by 6.6 percent, beating most projections and registering one of the fastest growth rates in Asia.