Capital inflows remains biggest concern: No changes seen in BSP policy rates

MANILA, Philippines - Capital inflows continue to be the biggest concern of the Bangko Sentral ng Pilipinas (BSP), which ahead of its policy meeting this week, reiterated the economy remains on good footing without the need for further monetary support.

“The strong economic growth was achieved with inflation remaining low and stable. This tells us that our monetary policy settings remain supportive of non-inflationary economic growth,” BSP Governor Amando Tetangco Jr. told the banking community last Friday.

“Now, our challenge is dealing with this apparent success. In particular, surges in capital inflows,” he added.

BSP’s policymaking Monetary Board will conduct its first rate meeting for the year on Jan. 24 with analysts expecting no changes to the overnight borrowing and lending rates of 3.5 percent and 5.5 percent, respectively.

Rates were slashed four times last year, lowering bank loan rates to encourage more lending and boost consumption and investment. As a result of the country’s strong fundamentals however, foreign investors swamped local financial markets worrying regulators.

“The biggest concern now remains to be capital inflows as there is a natural attraction to the Philippine financial markets,” BSP deputy governor Diwa Guinigundo told reporters.

BSP, he said, has remained “vigilant” against possible asset bubble formation, overheating or excessive peso appreciation, all of which are caused by speculative inflows seen detrimental to the economy.

Tetangco acknowledged some inflows could be driven by speculation of more gains in the financial markets, thus causing volatility. BSP, he said, has approached the matter with “great care and balance.”

“A balance to contain speculative actions but not to discourage investments … And balance to maintain financial and macroeconomic stability, but not to stifle competition and growth,” he explained.

“The issue here is not individual risks of products and transactions. Instead, it is about the risks to the system from the possible build-up of risks – risks that could eventually spill over across stakeholders, products, transactions and sub-markets,” he pointed out.

Due to these worries, macroprudential measures were put in place last year by BSP, including a ban on foreign funds in special deposit accounts, tighter real estate exposure computations and a cap on banks’ non-deliverable forwards to begin on March.

For Guinigundo, BSP has done enough, at least for now. “We do not see any evidence we should act more decisively at this point,” he stressed.

Guinigundo said the economy has increased its growth potentials and can, therefore, “very well absorb” the amount of money flowing in the system, at this point.

Sought for comment, DBS economist Eugene Leow ruled out a rate cut in the coming meeting and instead said more capital flow measures could be underway as the peso continues to strengthen.

“Coping with the excessive inflows remains the key challenge,” he said in an e-mail. A strong peso trims the value of dollar export earnings and remittances from overseas Filipinos.

Nomura Singapore Ltd. economist Euben Paracuelles agreed, saying it has been clear the “BSP will not hesitate to use macroprudential tools when it is deemed necessary.”