Strong inflow surprises BSP

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) was surprised with the strong capital inflows that continue to flood emerging market economies particularly the Philippines but is ready with its enhanced toolkit to prevent the build up of inflation pressures.

BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that foreign exchange inflows into emerging markets including the Philippines heigthened due to the debt crisis in Europe including the recent bail out in Ireland.

“In the case of the capital and financial account it is during this time that the European crisis was followed by the Irish problem and that is the reason why risk aversion even became even more pronounced. Therefore foreign exchange flows to emerging markets including the Philippines even heightened,” Guinigundo said.

He also cited the second round of quantitative easing (QE2) being implemented by the US Federal Reserve to stimulate its sluggish would further translate to higher capital inflows into emerging markets. The US Fed announced it would buy $600 billion in long-term Treasuries over the next eight months and at the same time reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments.

The country’s balance of payments (BOP) surplus surged to hit an all-time high of $13.17 billion in the first 11 months of the year from $5.206 billion in the same period last year while the gross international reserves (GIR) — the sum of all foreign exchange flowing into the country — surged 39 percent to hit a new record level of $61.3 billion from $44.17 billion.

“This means that for the last two months of the year the BOP surplus even strengthened due to stronger performance of those structural flows like exports, remittances, business process outsourcing, and foreign portfolio investments,” he added.

Net inflows of foreign portfolio investments or “hot money” into the Philippines hit a new record level of $4.18 billion as of end-November or almost 10 times the net inflow of $431.4 million in the same period last year and exceeding the full-year target of $2.9 billion.

Meanwhile, the country’s foreign direct investments (FDIs) retreated by 31.8 percent to $1.093 billion in the first nine months of the year from $1.603 billion in the same period last year due to the sharp drop in inflows of large equity capital.

On the other hand, remittances from overseas Filipino workers went up by 7.9 to $15.456 billion in the first 10 months of the year $14.23 billion recorded in the same period last year. The projected growth in OFW remittances was upgraded to 8.0 percent instead of six percent this year. In 2009, remittances went up by 5.4 percent to a new record level of $17.348 billion from $16.426 billion in 2008 and exceeded the revised four percent growth forecast set by the central bank.

Last October, the BSP’s Monetary Board approved certain amendments to the Manual of Foreign Exchange Transactions as part of the central bank’s efforts to keep the foreign exchange regulatory framework responsive to and attuned with current economic conditions and at the same time help temper the strengthening of the peso against the greenback with a minimal impact on domestic liquidity and inflation.

The central bank’s policy-setting body agreed to double the present ceiling on the amount that residents may purchase from authorized agent banks for outward investments including investments in Republic of the Philippines bonds and other debt instruments issued by the Philippine government to $60 million from $30 million.

It lifted the registration requirement for outward investments in excess of $60 million limit and replace this with reporting to the BSP and at the same time extend the periods for inward remittance and conversion to pesos or reinvestment of proceeds and related earnings to 30 banking days from two and seven days.

Likewise, the limit on over-the-counter foreign exchange purchases by residents from banks without documentation for non-trade current account purposes was also doubled to $60,000 from $30,000 to encourage customers to course their transactions through the banking system instead of the unsupervised foreign exchange market.

On the other hand, non-resident tourists or balikbayans could reconvert at airports and other ports of exit without need for proof of sale of foreign exchange for pesos was increase to $5,000 from the present ceiling of $200.

It also raised to $1 million from $100,000 the amount residents could purchase from banks to cover advance payment requirements for import transactions without prior BSP approval and at the same time allowed the private sector to prepay BSP-registered foreign loans to be funded with foreign exchange from banks without prior approval.

“The challenge really is to increase demand for foreign exchange and temper peso appreciation,” Guinigundo said.

Monetary authorities vowed to continue the use of an “enhanced toolkit” to deal withs the ongoing surge in capital flowing into emerging markets including the Philippines from developed economies led by the United States.

The elements of the BSP’s “enhanced toolkit” include the buidling of gross international reserves (GIR), the appreciation of the peso against the US dollar, the prepayment of the country’s foreign debt, and the third wave of reforms in the foreign exchange regulatory framework. –Lawrence Agcaoili (The Philippine Star)