The risk aversion of foreign investors should not be allowed to spill over to local investors whose loss of confidence could trigger a drastic drop in economic activity, the country’s top banker said.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said monetary and fiscal officials would have to intervene at strategic points to ensure that complications would not precipitate the worst case scenario.
“No one yet knows how deep and how long this current global downturn would last,” Tetangco said. “But a complication that could arise is if not only foreign investors leave the country but resident investors as well because of regulatory arbitrage opportunities.”
According to Tetangco, capital flight by local investors would have to be prevented by ensuring that it would remain worth their while to stay invested in the Philippines.
“That’s why we keep monitoring developments in the global regulatory environment to ensure that ours remains appropriate for our investors’ needs and responsive to global changes,” Tetangco said. “We also regularly review the regulatory framework for foreign exchange transactions.”
He said the worst case scenario would involve freezing of the financial markets with market aversion spilling over into an inability to provide needed financial services to the real economy.
This, Tetangco said, would result in a drastic drop in economic activity, which would then further fuel the tightening of financial market conditions since both creditors and borrowers would have little interest in transacting.
“In other words, situations wherein the negative feedback into the real economy from the financial sector that feeds back again to the financial sector,” Tetangco said.
According to the central bank chief, policymakers are still debating on whether such a scenario could be precipitated by the financial crisis that eventually affected growth or the other way around.
“But for now, it is important to understand the symbiotic relationship between these two,” he said. “We cannot afford a loss of confidence in one to spill over into the other.”
According to Tetangco, this vicious spiral could take considerable time to unwind because it is often not an issue of structural reforms but more of managing abstract perceptions and expectations.
“To cope, we have been careful to ensure that communication is clear,” Tetangco said. “We let the markets and other economic agents understand the rationale for our policies, while at the same time we keep our ears to the ground and listen to the market’s requirements.”
“We consider how these needs could be addressed within the framework of our macroeconomic objectives,” he said.
Tetangco said the initiatives included the recent moves of the BSP to deal with what he called “perceived or real peso and dollar liquidity problems”. He said addressing both the level and the distribution of liquidity would ensure that the financial markets continue to function efficiently.
“On the part of banks, they have cooperated in reviewing their internal risk management structures, including being more prudent in evaluating client demands for foreign exchange,” Tetangco said.–Des Ferriols, Philippine Star