Phl financial system sound, stable amid strong capital flows

MANILA, Philippines – The country’s financial system remained sound and stable amid the strong capital inflows being experienced by emerging markets including the Philippines, monetary authorities said over the weekend.

Bangko Sentral ng Pilipinas Deputy Gov. Diwa Guinigundo said the amount of fundamental inflows including export earnings, remittances from Filipinos overseas, revenues of the business process outsourcing (BPO) sector, and other services continue to outpace foreign portfolio investments or ‘hot money’ flowing into the country.

“Much of the exchange rate movement cannot be primarily ascribed to these short-term flows,” Guinigundo stressed.

Latest data showed that foreign portfolio investments or ‘hot money’ reached $3.77 billion as of the third week of November, exceeding the full year target of $2.9 billion.

He pointed out that monetary authorities acted correctly by allowing the foreign exchange rate to absorb the shocks allowing the central bank to build up its gross international reserves that is expected to hit $60 billion this year.

The prompt action, he explained, also helped temper sudden, prolonged, and large swings in the movement of the peso against the dollar.

Likewise, he added that this resulted in the reasonable growth in domestic liquidity or M3 as well as the moderate growth in bank lending.

According to him, foreign exchange inflow continued to be driven by positive factors including excess liquidity abroad, search for yield and risk appetite as well as pull factors such as prospects of sustainable growth, favorable exchange rate dynamics, and interest rate differential.

“The peso’s real effective exchange rate indicates continued external competitiveness. Most important, we have enjoyed robust economic growth in an environment of price stability,”Guinigundo said.

The country’s domestic output as measured by the gross domestic product (GDP) expanded by 7.5 percent in the first three quarters of the year or faster than the full year target of between five percent and six percent.

He also clarified that monetary authorities have enough tools to handle the current pace of capital flows in the Philippines.

“Aside from the conventional monetary tools, we have in place a number of complementary macro-prudential measures including the ceilings on the banks’ exposure to the real estate sector and loan-to-value ratios,” he said.

He also reiterated that the BSP would only enforce capital control as a last resort.

“We therefore consider capital controls only as a last resort. We are far from that position. Our exchange rate is broadly reflective of fundamentals, there is still some scope for reserve buildup to ensure we have the resources in the event of a sudden capital stop and reversal, and the economy is not at any risk of overheating,” he said. –Lawrence Agcaoili (The Philippine Star)