THE BANGKO Sentral ng Pilipinas said it was prepared to implement more bank regulations to ensure the stability of the financial sector.
BSP Governor Amando Tetangco Jr. said the central bank would exercise flexibility in imposing more regulations in the event foreign capital inflows would become excessive and destabilizing to the local financial markets.
“We would continue reviewing our policy settings and see if there is a need to put in place other prudential measures to ensure price and financial stability,” Tetangco said Friday.
He made the comment after the peso closed at 40.77 to the US dollar on Thursday, its strongest finish in nearly five years.
The peso further strengthened as foreign investments in peso-denominated securities continued to rise.
The Philippine Stock Exchange Index had been registering new highs during the first three trading days of 2013.
Monetary officials said foreign portfolio investments helped make the country’s capital markets vibrant.
However, they stressed that a sharp and sudden increase in “hot money” also had adverse consequences on the economy. For instance, a steep appreciation of the peso makes Philippine-made goods expensive in dollar terms and, therefore, less competitive in the export market.
It also results in the shrinking of the peso value of remittances from overseas Filipinos.
A sudden surge in the inflows of foreign portfolio investments, which could be due to euphoria over developments that may be short-lived, could be easily reversed, causing volatility in the financial markets.
Last year, the BSP revived a regulation prohibiting foreign funds from investing in the central bank’s special deposit accounts. It also slapped a higher capital requirement on banks’ holdings of nondeliverable forwards (NDFs), which are hedging instruments that are suspected to be used for currency speculation.
At the start of this year, a new central bank regulation putting a cap on the NDF exposure of banks took effect. Specifically, domestic banks must keep their NDF holdings at the equivalent of 20 percent of their capital or less; foreign banks must limit theirs at an amount not exceeding their capital.
Although several measures already have already been put in place, Tetangco said the BSP would not hesitate to do more should indicators point to potential market volatility.
In the meantime, Tetangco said the BSP was also working on ensuring that the inflation rate would remain benign.