Philippine economy seen to withstand capital flight

The Philippines can withstand potential capital flight resulting from uncertainties in the global economy, aided by its reserves of foreign currencies that have grown significantly over the past few years.

This was the view of Citi, which cited the Philippines among other emerging Asian countries as having the resources needed to counter the ill-effects of a pullout of portfolio capital by foreign investors.

“China, Taiwan, Malaysia, the Philippines and Thailand have strong reserve coverage,” the international financial institution said, noting that the reserves of the Philippines have registered notable improvement in recent years.

Citi gave this comment in a paper on its analysis of the strength of selected Asian economies in terms of weathering a speculated capital flight.

The bank cited growing reserves of foreign currencies of some countries in the region. In the case of the Philippines, its gross international reserves (GIR) stood at a new historic high of $71 billion as of end-July.

According to the Bangko Sentral ng Pilipinas, the amount was sufficient to cover 10.6 months’ worth of the country’s imports and was 6.1 times the country’s foreign currency denominated debts maturing within a year.

A rule of thumb says that foreign exchange reserves equivalent to at least four months’ worth of a country’s imports are considered comfortable.

In Citi’s view, the Philippines and similarly situated emerging Asian economies would still be able to promptly meet their foreign currency-denominated obligations and import requirements even under a scenario of foreign capital flight because of their comfortable levels of GIR.

Since last year, the Philippines and other emerging markets in the region have witnessed a surge in inflows of foreign portfolio investments following the huge gap in the growth performance between industrialized countries in the West and developing economies in the East.

The fact that developing countries in Asia have driven global growth in recent years has enticed foreign portfolio investors to place funds in this part of the world.

In the case of the Philippines, net inflow of foreign portfolio investments reached $299.55 million in July, rising more than 20 times from the $14.33 million recorded in the same month last year.

However, some economists are of the view that the steep rise in foreign portfolio investments in emerging markets may be reversed given the lingering uncertainties in the global environment, led by the anemic growth performance of the United States and some countries in the euro zone.

The US Federal Reserve earlier this month said it might keep interest rates at record lows until 2013, citing the need for more stimulus for the American economy amid its lingering problems of high unemployment and anemic consumer spending.

Countries in the eurozone are confronted with burgeoning debts that have necessitated bailout packages from the European Union and the International Monetary Fund.

Some economists said that should these problems in the global economy persist, foreign portfolio investors might eventually decide to keep their funds safe by staying liquid and by pulling out investments even from emerging markets.