ADDITIONAL domestic regulatory adjustments may be needed in the near term should the US Federal Reserve discontinue the third phase of its growth-boosting asset-purchase program, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said on Sunday.
That could mean several measures, including still larger capital charges on so-called non-deliverable forwards designed to moderate sudden and large volume withdrawals of foreign funds.
Billions of dollars’ worth of foreign capital flowed into the country in the past many months to take advantage of buoyant returns presented by the local equities, debt and government securities markets that help make the Philippines an attractive investment destination.
In an e-mail, Tetangco said the BSP is closely watching events in Washington and what the US Federal Reserve, or US Fed, will do as a result of more recent indications that the world’s largest economy may no longer require
additional stimulus to sustain growth.
Cessation of the US Federal Reserve’s asset-purchase program requiring the purchase of $85 billion worth of US bonds a month has big implications on the flow of foreign capital to emerging markets like the Philippines, whose
own external sector improved significantly in the years following the initial, then follow-up and finally the third phase of the US bond-buying program.
Tetangco vowed to impose more macro-prudential measures if warranted to ensure against any disorderly flow of foreign funds into or out of the country.
“The markets will try to understand why the US Fed would act. Sometimes markets overreact. This is why the BSP is watchful of the conduct of domestic market participants and will try to refine regulation so they become more aware of the inherent riskiness of transactions they enter into,” he said without being specific.
According to Tetangco, the various financial markets could very well read the US Federal Reserve’s signal as a positive one and convince investors to take on more risk than they have taken since the global financial crisis erupted around 2007.
These markets could also read the signal as a negative development and as a consequence take on lesser risks.
In any case, this risk-on, risk-off event has practical consequences on the flow of foreign funds to and from the Philippines that may, Tetangco reiterated, require appropriate monetary-policy response.
“Decisions of major central banks, including the US Fed, affect the risk assessment of global investors, which could then affect capital flows to the country. Like all prudent decision-makers, the Fed has guideposts for policy programs. The ultimate impact of its decision on the asset purchase on domestic conditions would depend on how foreign investors appreciate the Fed’s actions,” he said. –Jun Vallecera / Reporter, Businessmirror
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