BSP sees more challenges in keeping peso stable

MANILA, Philippines - An investment grade could trigger a new wave of capital inflows to the country, giving the Bangko Sentral ng Pilipinas (BSP) “more challenge” in maintaining a competitive peso, a senior BSP official said.

“Capital flows from (potential) credit rating upgrade will give us more challenge in terms of keeping the peso stable and to minimize volatility,” BSP Deputy Governor Diwa Guinigundo told reporters Friday.

On Thursday, debt watcher Standard & Poor’s Rating Services upgraded the country’s credit outlook to “positive” which indicates that its BB+ rating could be improved in the next 12 to 18 months. If this happens, the country would notch its first-ever investment grade rating.

The Aquino administration has expressed optimism the country will attain an investment grade status next year, which is seen to further lower debt interest payments and help attract foreign investments.

Foreign inflows can come in as “structural and speculative,” Guinigundo said, thus warranting BSP to intervene in the foreign exchange market – by buying dollars – if necessary.

Structural flows are those that come in the form of direct investment, export or remittances. Speculative flows are usually associated with “hot money” placed in bond and equity markets.

These inflows increase demand for pesos, thus strengthening the currency. A strong peso, which has appreciated 5.13 percent as of the third quarter, trims the value of dollar export earnings and remittances from overseas Filipinos.

But Guinigundo was quick to defend the BSP. “Without the BSP’s participation in the foreign exchange market, the peso could have been firmer,” he said.

“But we really have to allow fundamentals to determine the peso-dollar rate, and that is what happened in the first nine or 10 months of 2012, even up to the end of November,” he explained. 

Analysts have mixed views on the investment grade’s effect to investor inflows and the peso.