Capital controls seen as folly

Following Malaysia down the path of capital controls would be a folly for the Philippines given its liberalized foreign exchange market, high reliance on foreign investment and low savings rate, economists said yesterday.

Philippine President Gloria Macapagal Arroyo startled the local financial community on Thursday when she said she would not rule out possible capital controls, including a currency peg, to defend the peso from further speculative attack.

As of Thursday, the peso had slid 4.06 percent from the end of last year, making it the third-worst performing currency in the region after the yen and the Taiwan dollar. It reached a six-month low of 54.30 to the dollar last month.

Mrs. Arroyo’s remarks, made in Malaysia at the end of a short visit there, prompted heavy selling in the stock market with the main index slumping over two percent to a new nine-month low.

Her later reassurances, however, that such controls were only an option and unlikely to be imposed, brought some calm back into the market yesterday.

Economic Planning Secretary Dante Canlas also said the possibility of capital controls was remote.

The main share index closed up 15.83 points, or 1.24 percent, at 1,294.23 points.

The peso closed stronger at 51.85 to the dollar from Thursday’s close of 53, but most regional currencies had gained following a selldown of the dollar by US investment funds.

Asian Institute of Management economics professor Romulo Neri said Malaysia pegged its currency, the ringgit, to the dollar in September 1998 during the regional financial crisis because it did not want to tap its international reserves or raise interest rates to defend the currency.

But he saw vastly different economic conditions between the two neighboring countries that he said made the use of capital controls a bad proposition for Manila.

High savings rate

"The advantage for Malaysia is that it has a very, very high rate of savings that allowed it to put this money into a lot of projects and to subsidize a lot of leading companies, but in our case, we don’t really have that."

Trying to enforce controls given the Philippines’ "porous state and weak system of government" opens up the possibility of corruption, Neri said.

"The problem with capital controls is that it can lead to corruption because sometimes you can delay the approval (of transactions) so people may be forced to bribe the ones who give the approvals."

Another local economist with a foreign based brokerage, who declined to be named, said slapping controls now on the highly liberalized local foreign exchange (forex) market would only prompt under-the-table deals.

"The only reason it worked in Malaysia is that the country had a very strong domestic economy at that time the controls were imposed...however in the Philippines, where forex transactions were liberalized in 1992, to impose capital controls at this point would be difficult to implement because there are so many channels for converting pesos into dollars."

"It (foreign exchange trading) would be difficult to monitor and I guess it would create a black market or parallel market for foreign currency."

Risk to exports

Neri added that a country with capital controls ran the risk of undermining its export industry.

"In the case of Argentina, for example, its exports became uncompetitive because when its currency was pegged (to the dollar) it didn’t have the flexibility of lower prices when other countries like Brazil and other Latin America currencies decided to let their currencies depreciate...so Argentinian exports went down."

The foreign brokerage economist said the international investment community would clearly frown on any move by the Philippines to restrict capital flows.

"If you limit the ability to repatriate income or dividends or investment it makes it a much higher risk proposal to invest in the Philippines."