IMF: Allow for some peso appreciation

Countries expecting increases in foreign fund inflows, particularly the Philipines, should allow some appreciation in their local currencies, the International Monetary Fund believes.

Shanaka Peiris, IMF resident representative, said yesterday that the peso’s recent appreciation is backed by strong economic fundamentals.

“To the extent inflows are largely affected by structural ones, IMF advises countries to allow for some appreciation,” Peiris said in a forum on the peso sponsored by the Management Association of the Philippines.

He said countries may also use other macroprudential tools and foreign exchange measures if the flows affect the country’s financial stability.

“Without the BSP’s forex operations, it is likely the peso would have exhibited more volatility,” Peiris said.

Yesterday, the peso closed at P40.69 to the US dollar, slightly changed from Friday’s P40.68.

Since the start of 2013, the peso has so far appreciated by nearly 1 percent, making it one of the strongest currencies in Asia.

Last year, the peso appreciated by nearly 7 percent, rating as the second strongest currency in Asia after the South Korean won.

Peiris’ remarks echoed the result of the latest Staff Mission of the IMF to the Philippines which urged authorities to allow the peso to appreciate with the expected increase in the inflow of dollars this year on the back of expected higher foreign direct investments and remittances from overseas Filipinos.

“The exchange rate should move in line with structural flows,” Rachel Van Elkan, chief of the IMF mission to the Philippines, said.

She said efforts to keep currencies artificially weak or measures against currency appreciation have adverse consequences on the global economy.

The IMF said the continued weakness in the advanced economies such as the United States and the eurozone could eventually have a more significant impact on emerging economies given the interrelation of economies.

In Van Elkan’s view, the BSP has so far not resorted to implementing measures aimed at reversing the trend of a rising peso.

The IMF said it would be prudent for the BSP to keep its current stance on the exchange rate amid an environment of rising foreign-exchange inflow.

BSP officials have said that the central bank would allow the peso to trade along a market-determined rate but only if the appreciation pressures would be due to structural inflows like FDI and remittances.

BSP officials also said they would not tolerate appreciation pressures brought about by portfolio investments, or “hot money.”

IMF has also softened its stance on dealing with these types of flows by allowing countries to “further work on a comprehensive, flexible, and balanced approach for the management of capital flows, drawing on country experiences.”

IMF noted that capital flows have increased significantly in recent years and are a key aspect of the global monetary system.

“They offer potential benefits to countries, but their size and volatility can also pose policy challenges,” the Fund said.

Because of this, the IMF said that it needs to be in a position to provide clear and consistent advice with respect to capital flows and policies related to them.

“There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times,” IMF said.

This is a reversal of their earlier stance calling for full-liberalization of control when it comes to dealing capital flows.

According to the IMF, capital flows can have substantial benefits for countries, including by enhancing efficiency, promoting financial sector competitiveness, and facilitating greater productive investment and consumption smoothing.

At the same time, capital flows also carry risks, which can be magnified by gaps in countries’ financial and institutional infrastructure, the Fund added.

“Capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or “thresholds” of financial and institutional development. In turn, liberalization can spur financial and institutional development,” IMF said.

It added that liberalization needs to be “well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs, as it could have significant domestic and multilateral effects.” Countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner.

During her visit to the Philippines late last year, IMF Managing Director Christine Lagarde said that capital flows were an “important one because we have seen capital flows in and out of countries and significant consequences as a result, particularly in terms of appreciation.”

“Measures have been taken by countries, particularly macro-prudential measures and more when necessary. And certainly, our position is very much based on the latest development that we are observing at the moment and will be settled very shortly, probably with a view to being more flexible than we have been historically,” Lagarde said.

IMF said that policymakers in all countries, including countries that generate large capital flows, should take into account how their policies may affect global economic and financial stability. Cross-border coordination of policies would help to mitigate the riskiness of capital flows. –JIMMY CALAPATI, Malaya