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BSP lists measures to counter volatility

Preparing for impact of capital flow reversal


BSP Deputy Governor Diwa Guinigundo. INQUIRER FILE PHOTO

The Bangko Sentral ng Pilipinas (BSP) has identified contingency measures that could be deployed to counter spikes in financial markets that may undermine the stability of the real economy.

BSP Deputy Governor Diwa C. Guinigundo said that providing foreign exchange liquidity through spot and swap markets, the creation of hedging facilities and the relaxation of certain rules were being considered amid the current heightened uncertainty and risk aversion that has affected emerging markets.

“The BSP could deploy various contingency measures as needed to minimize the impact of capital flows and ensure that liquidity remains adequate to fuel the economy’s requirements,” Guinigundo said.

Other measures being considered included the temporary relaxation of certain regulations to give banks more flexibility, relaxing access of banks to the BSP’s rediscounting facility and adjustments in the industry’s reserve requirements.

Guinigundo said these contingency measures were being prepared following the expected shift in monetary policy settings in advanced economies like the United States, which will inevitably affect local market conditions.

“The transition could prove to be thorny especially if the unwinding proves to be messy,” Guinigundo said.

Potential spikes in the peso’s value as the dollar continues to rally are among the major sources of risk for the Philippines.

Last week, the peso reached a 30-month low of 44.26 against the greenback amid talks of the US Federal Reserve’s tapering of its bond-buying program. The peso was down 1.4 percent from the previous week’s close of 43.64:$1.

“As we have seen, volatile capital flows could expose the currency to instability,” Guinigundo said. He said the key concern was that a sharp depreciation of the peso could affect the spending and investment plans of both the government and the corporate sector.

At the same time, a weak peso, which makes imported goods more expensive, could undermine the BSP’s inflation outlook, “thereby diminishing the BSP’s flexibility to threats to price and financial stability.”

Guinigundo said that while the general policy was to let market forces determine the peso’s value, the central bank has “some room for responding to foreign exchange movements” to protect the inflation target.

The BSP has set an inflation target of 3 to 5 percent for 2013 and 2014. The 2015 target is lower at 2 to 4 percent.

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Tags: Business , capital outflow , contingency measures , volatility

  • eight_log

    Creating an environment ideal for business is a more effective measure to counter volatility rather than playing with policies like those concerning rediscounting and the likes.

  • eight_log

    Rediscounting facility without strict controls can induce more volatility … especially when banks have high NPLs. What I have observed … it is when BSP stay put then things get smoother. Ill-timed decisions only bring about shock waves contributing to volatility!!!! Increasing interest puts pressures on NPLs!!!

  • pabulaka

    The Philippines is one of the countries in Asia that benefitted when the US implemented their shifts in monetary policies. Now that they are gradually shifting it back, investments placed in these countries are beginning to be pulled out. Indonesia and India are greatly affected, Thailand and Malaysia is slightly affected, but the Philippines is doing okay despite the strength of the dollar versus the peso. OFW’s remittances and exports are beneficiaries of this dollar strength.

  • pabulaka

    And despite increases in inflation, retirees never got a raise in their pensions to minimize price increases. It is more fun retiring in the Philippines.

  • carlcid

    Just a couple of months ago, Malacañang was boasting about the strong peso and about the Philippines being an investment oasis, free from economic turbulence. How quickly the tune has changed!

    Now, it’s about hedging against “current heightened uncertainty and risk aversion” that has affected emerging markets such as the Philippines. And of minimizing the impact of capital outflows and ensuring that liquidity remains adequate to fuel the economy’s requirements.

    While the BSP should be commended for undertaking these prudent measures, its acknowledgement that monetary tapering will result in capital outflows and volatile markets belies the administration line that capital inflows and surging markets were the results of PNoy’s governance.

    • RedvD

      I admire the work of the BSP through the last 5-10 years.

      But Pnoy? He is a big credit grabber and number one blame passer.

  • gisingpinas

    pag tungkol sa economy at banking walang nag co comment.

    • pinoyreacts

      Gujab BSP, gujab! (ayan nagcomment na ako.)

    • Mang Kosme

      Only a scholar or should i say an interested scholar would read and could understand this. The words/ideas are too technical to be understood by ‘common’ people e.g. volatile capital flows, shifting monetary policy, foreign exchange liquidity, spot and swap markets, hedging facilities, relaxation of certain rules etc. I am a commoner and I do not really understand most of the themes discussed.

      • Bantayanon

        Correct and not only scholars but biz people who have backgrounds in economics. Some of the terms are Greek to me but I try to read them so that I may one day truly understand biz news.

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