End of market exuberance to lessen risk of asset price bubbles, says BSPBy Paolo G. Montecillo
Philippine Daily Inquirer
The US Federal Reserve’s signal to end easy money policies may have sent emerging economy asset values crashing, but the Bangko Sentral ng Pilipinas (BSP) sees a silver lining.
While many investors gnash their teeth at the amount of red ink in their portfolios, the BSP said an end to the market’s “exuberance” was a welcome development because it reduced the risk of price bubbles that could cause more harm in the long run.
“This market price action is a good thing. It is good because it helps put a brake somehow on the exuberance,” BSP Governor Amando M. Tetangco Jr. said.
Speaking at the 2nd annual Philippine Financial Market Forum by Singapore’s The Asset Magazine, Tetangco said Fed Chairman Ben Bernanke’s statements on May 22 conveniently gave Philippine financial markets the correction it needed.
“(This) reduced some of the risks from bubble formation in certain asset classes that could lead to more financial market imbalances,” he said.
The central bank previously kept its eye on the property sector, in particular. Real estate firms have been able to borrow cheap from local banks amid huge demand for new homes, supported by billions of dollars in remittances that the country receives from its migrant workers. This helped inflate property prices, especially in the high-end sector, enough for the BSP to raise fears of the possibility of a bubble forming.
Low interest rates also contributed significantly to the increase in banks’ exposure to the property sector.
In the meantime, Tetangco declined to comment on whether he thought the peso’s depreciation and stock market crash had been excessive. Instead, he said today’s market conditions could help “separate the wheat from the chaff.”
“When these separations are completed, the process could actually create opportunities for those who keep their eye on the ball,” Tetangco said.
As foreign investors leave emerging markets like the Philippines in favor of safer havens like the US, which remains the world’s largest economy despite its subprime woes, Tetangco said locals should not lose faith in the country’s underlying fundamentals.
“The Philippine fundamentals are intact… this is not a cliché. It is not meant to be a bumper sticker,” Tetangco said, citing the economy’s first-quarter growth of 7.8 percent, supported by capital formation among locals and infrastructure spending by the government.
“The economy is being buoyed by expenditures that would cement the growth to a sustainable level,” Tetangco said.
“At the same time, year-to-date average inflation of 3 percent is at the lower end of our inflation target range,” he added.