The Bangko Sentral ng Pilipinas said it was prepared to implement measures that will help keep stability in the country’s financial sector in the event full recovery of the United States and euro zone economies lead to a flight of capital away from Asia.
BSP Governor Amando Tetangco Jr. said that while the central bank was preoccupied with managing the growing liquidity brought by rising foreign portfolio investments, it also has in mind the possibility of a reversal of the ongoing trend.
“Should inflows ease or reverse, we could refine the macroprudential measures that are currently in place. As appropriate and depending, among others, on where the financial stability pressures are, we could also consider new measures,” Tetangco told the Inquirer.
The Philippines and other emerging Asian economies continue to witness an increase in foreign portfolio investments given their much favorable growth performance compared with those of the industrialized countries.
Although rising foreign capital was welcome, the BSP said excessive amounts could have adverse effects on the economy if these were left unmanaged. For instance, too much foreign-exchange inflow creates appreciation pressures on the peso and poses the combined threats of accelerated inflation and of asset price bubbles.
Given this backdrop, the BSP has been prompted to implement several measures to either temper or avoid the adverse effects of rising foreign portfolio investments.
One measure was the prohibition of foreign funds from being invested in special deposit accounts (SDAs) with the central bank. Another was the imposition of a limit and a higher capital charge on banks’ holdings of nondeliverable forwards (NDFs). SDAs and NDFs were believed to have attracted significant foreign portfolio investments.
Meantime, the US and euro zone economies are seen to eventually post a more significant recovery over the medium term as their governments and central banks continue implementing stimulus measures.
Economists said that a more stable global economy resulting from the eventual recovery of the United States and the euro zone might cause some foreign portfolio investments to shift away from Asia.
Should the probability of that scenario increase, Tetangco said the BSP would be keen to implement measures that would ensure outflows would not reach levels that would be excessive and disruptive to the Philippine financial market.
For instance, he said the BSP could adjust existing limits on certain financial transactions involving the outflow of foreign exchange.
“Just as the macroprudential measures we put in place during this period of inflows were targeted and timed, the measures for the period of outflows will likewise consider the nature of the flows. We will be careful in timing any changes also so as not to create confusion and possibly add to market volatility,” Tetangco said.