MANILA, Sept. 24 – The Bangko Sentral ng Pilipinas (BSP) is now studying its foreign exchange regulations as emerging markets economies (EMEs) like the Philippines are re-experiencing large capital inflows on account of increased risk appetite.
BSP Deputy Governor Diwa Guinigundo told reporters large capital inflows benefits the country as this results to among others strengthening of the peso against the US dollar as well as it boost the country’s foreign reserves.
In the first half of this year alone, the local unit improved by 5.4 percent against the dollar as there are still questions on the recovery path of the world’s largest economy.
The peso averaged at 45.77 to a dollar from January to June this year and is stronger than the 47.8 to a dollar it posted in the first half of last year.
The Philippines' gross international reserves (GIR) further rose to US$ 49.6 billion as of end-August this year due to, among others, central bank’s foreign exchange operations, income from investments abroad and revaluation gains on its gold holdings.
At this level, the foreign reserves is enough to cover 9.2 months of imports of goods and services and income as well as equivalent to 9.5 times the country’s short-term foreign liabilities based on original maturity.
“(Accumulation of GIR) brings additional comfort to the market, particularly to investors,” Guinigundo pointed out.
He, however, cited that strong capital flows is a risk to domestic liquidity (M3), which after some time “will lead to a build-up in inflation pressures and at the same time to possible asset price inflation.”
Monetary officials said a 10-12 percent M3 growth is still a comfortable level but not so if higher than this.
As of last June, M3 grew by 10.3 percent year-on-year, slower than the previous month’s 10.7 percent. On a monthly basis, it expanded by 0.3 percent, also slower than the previous month’s 2.2 percent.
The central bank said the continued strong growth in M3 is in line with the increase in demand on account of the global economic recovery but noted that M3 growth is closely being monitored in “view of promoting monetary stability and ensuring well-functioning financial markets.”
Guinigundo said these factors concerning capital flows are being studied carefully by the central bank and would surely be discussed once its policy-making Monetary Board (MB) meets for the rate setting in October.
He said they have “always believed in market driven initiatives and measures to address the issue of large capital flows” noting that “what is important is that we maintain the fundamental strength of the domestic economy so that we avoid and minimize those very disruptive reversal of capital flows.”
“It is easy for capital to come in but if there is ground for speculation or doubts on the strength of both the domestic economy and the financial market, it is easy for those capital flow reversal,” he added. (PNA)
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