The Philippines should brace itself for more capital outflows this year—which will likely exert downward pressure on the peso—as the continuing recovery in the US prompts fund managers to repatriate their investments back to the world’s largest economy.
The adverse effects of this expected departure of so-called “hot money” would normally be countered by raising domestic interest rates to keep local investments attractive to investors, but Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said he wanted to keep rates as low as possible for as long as they could to help the economy grow.
“The flows are reversing because the US economy is recovering,” he said in an exclusive interview with the Inquirer about the country’s prospects in 2018. “The big challenge for all is the uncertainty about the pace and magnitude of normalization (of US monetary policy). That’s the common problem of all economies.”
These dual—and conflicting —priorities of mitigating the expected outflows while helping the local economy grow is expected to demand from Espenilla a delicate balancing act going into his seventh month as the country’s central bank governor.
“The United States is just beginning its tightening cycle and there’s still a lot of hot money floating around the system,” he said, explaining that excess liquidity that the central bank had to grapple with over the last few years has “not yet” returned to the United States.
The Philippine economy grew 6.9 percent in the third quarter of 2017 and is expected to end that year at a pace of anywhere between 6.5-7.5 percent—a rate that must be sustained to ease the burden on one out of five Filipinos still living below the poverty line.
“The challenge is that we have to keep preparing for the worst case but, at the same time, we shouldn’t stifle the economy from growing,” Espenilla said, while dousing persistent talk about the local economy overheating.
“The Philippine economy is like a car that we want to drive to a destination,” he said. “If we want to get there at a certain speed, of course the engine will heat up. We’re behind, and we have to step on the gas. But there are gauges we monitor to ensure that the engine doesn’t overheat.”
The BSP chief noted that the government’s economic team had, so far, successfully managed the country’s pace of growth while keeping the prices of goods and services in check. Meanwhile, he said outflows that had pushed the balance-of-payments position to a deficit was due to accelerating investments in neglected sectors—a situation mitigated by the reduction in the country’s external debt in recent years.
Espenilla declined to disclose estimates about how much dollar outflows the country should expect over the near to medium term, but pointed to one indicator closely watched by the central bank.