The Philippines may have emerged on the radar screen of foreign portfolio investors, but it is now being weighed down by too much liquidity in its financial system, the Bangko Sentral ng Pilipinas.
The rise in the inflow of foreign portfolio capital and growth in internal resources of the country’s financial system may be welcome, but they also have their fair share of risks, BSP Governor Amando Tetangco Jr. said.
According to the BSP chief, while rising liquidity in the system makes the local financial sector vibrant, the presence of excess cash may lead to unmanageable inflation.
“For us [BSP], there is that added issue of domestic liquidity that is building up and looking for suitable outlets. Some say it is a positive problem that is preferable to the case of liquidity drying up. That may be true, but to central bankers, it is still a concern, positive or otherwise,” Tetangco said Thursday in a speech during a banking forum organized by The Asian Banker.
With too much money in the financial market, economists said, investors may engage in excessive speculative investment activities, such as on currency, which can destabilize the economy in general.
Too much money also may cause banks to lend carelessly, even to borrowers who may not be considered credit-worthy.
High liquidity may also lead to an increase in demand for various products, thereby fueling faster inflation, Tetangco said.
The BSP chief said that the monetary authority is prepared to implement more measures to ensure that the Philippine financial system will not suffer from the destabilizing effects of growing liquidity.
Recently, the BSP issued a rule prohibiting foreign funds from being deposited in the central bank’s special deposit account (SDA) facility, where placements earn yields.
Tetangco said the BSP is keen on maintaining a stable financial system in the Philippines.
The BSP earlier reported that net foreign portfolio investments hit a net inflow of over $900 million in July—about three times more than the estimated $300 million posted in the same period the previous year.
Moreover, placements in SDA facility of the BSP recently hit a record high of P1.8 trillion.