S&P urges Asian central banks to be more transparent

MANILA, Philippines - New York-based Standard & Poor’s urged central banks in Asia including the Bangko Sentral ng Pilipinas (BSP) to be transparent in implementing policies on addressing the surge in capital inflows to emerging market economies to minimize market disruptions.

S&P credit analyst Kim Eng Tan said in a report entitled “Asia’s Central Banks Struggle Over How to Deal with Capital Inflows” that policymakers in the region should minimize market disruptions by implementing policies aimed to prevent instability arising from excess liquidity in an investor-friendly manner.

He pointed out that capital controls implemented in the past elicited an overreaction in the markets leading to economic volatility.

“For instance, investors are likely to object less to changes that are announced in advance and that do not affect their prior investments. Conversely, changes that governments implement without providing sufficient reaction time are likely to upset investors and could create market volatility,” Tan stressed.

The analyst explained that strong inflows to developing Asian countries has resulted in currency appreciation and other challenges prompting central banks in the region to impose capital controls.

“In most cases, these policies aimed to prevent instability arising from excess liquidity, asset price bubbles, or a potential disorderly future withdrawal of invested funds. The measures taken recently have usually been targeted, rather than all-encompassing, and were introduced in a reasonably transparent manner,” he added.

Data from the BSP showed that the inflow of foreign portfolio investments or ‘hot money’ hit a new record level of $4.61 billion last year or nearly 12 times the $388.02 million in 2009 as funds continued to flood emerging markets due to the fragile growth in advanced economies led by the US and Europe.

The amount of foreign portfolio investments registered surpassed the full year target of $2.9 billion set by monetary authorities for 2010. These investments are also called hot money because they could be taken out of the country as quickly as they come in.

Statistics showed that inflows more than doubled to $12.997 billion last year from $6.335 billion in 2009 as investments in PSE-listed shares surged by 75 percent to $8.5 billion from $4.8 billion. The stock market cornered 65.2 percent of the total net inflows of foreign portfolio investments.

Major beneficiaries of hot money last year include banks with $1.7 billion followed by property companies with $1.6 billion, holding firms with $1.5 billion, telecommunication companies with $1.3 billion, and utility firms with $930 million while major sources were the US, Singapore, United Kingdom, Luxembourg, and Hong Kong.

On the other hand, outflows jumped 41 percent to $8.386 billion last year from a year-ago level of $5.947 billion. Outflows comprised mainly of withdrawals from interim peso deposits where funds are parked pending repatriation or reinvestment.

However, the inflow of hot money eased to 13.5 percent as it reached $193.09 million in January from $170.13 million in the same month last year as investors started to take profits during the height of the tensions in Egypt, data from the Bangko Sentral ng Pilipinas (BSP) showed.