BSP keeping liberal policy on capital outflow

The Bangko Sentral ng Pilipinas said there was no need to restrict the outflow of capital despite the recent contraction in the inflow of foreign portfolio investments.

The BSP expressed confidence that the drop in portfolio investments would soon be reversed given the country’s “strong macroeconomic fundamentals.”

BSP Deputy Governor Diwa Guinigundo said the recent contraction in “hot money” inflows to emerging markets like the Philippines was expected. The prolonged debt crisis in the euro zone, he said, would naturally cause risk aversion.

In the case of the Philippines, he said, there were factors that could help reverse the decline.

“We have the pull factor of strong macroeconomic fundamentals… especially in the light of the continued search for yields and safe haven,” Guinigundo said.

The central bank official said portfolio fund owners would soon be convinced to invest more of their money in the Philippines given its favorable economic performance.

As they seek higher yields, he said, they would focus on better-performing Asian economies over troubled ones in the euro zone or the volatile US economy.

In the first five months of the year, the net inflow of foreign portfolio investments to the Philippines amounted to only $722.4 million, down by 56 percent drop from $1.65 billion in the same period last year.

The decline—traced to both a decline in gross inflows and an increase in outflows—was blamed on the uncertain global economic climate.

Economists said that in tough times, portfolio fund owners liquefy their assets and hold on to their dollars.

Instead of imposing restrictions on capital outflows, the BSP even further liberalized the foreign exchange environment. BSP officials said the move was aimed at winning the confidence in the Philippines of foreign fund owners.

With a relaxed foreign exchange environment, they said, investors would be encouraged to keep their money in the country.

Officials said imposing restrictions would only scare fund owners and force them to bring more of their money out of the Philippines.

“I don’t think we should contemplate on additional measures [besides liberalization of foreign exchange rules] to prevent foreign exchange outflows,” Guinigundo said.

He said improving the fiscal situation in the country, a robust economic growth rate, benign inflation, a stable banking sector and a healthy level of foreign currency reserves should attract more foreign investors to the Philippines.