Capital flows to SEA still below pre-crisis levels

MANILA, Philippines - Capital flows to Southeast Asia have not reached pre-crisis levels, but central banks in the region would likely impose more measures to temper them and prevent a repeat of the financial crises in 1997 and 2008, an investment bank said.

The Philippines, together with nine other countries in the region, have seen a surge in inflows as investors sought refuge in Asia where interest rates are higher than crisis-stricken Europe and the US.

“Bond flows have become larger compared to equity flows and are now the major driver of capital inflows. This is quite a contrast to pre-Asian crisis, when equity dominated bond flows,” Bank of America-Merrill Lynch (BofA-ML) said in a research note.

“The magnitude and volatility of recent capital inflows have not, however, reached previous peaks,” it added.

From 2011 to 2012, BofA-ML estimated bond inflows accounted for 37 percent of total inflows to the Philippines, while only 16.9 percent went to the equity market. A total 23.7 percent were in the form of foreign direct investments.

“Again, even with the rising capital flows, the degree of portfolio inflows has not reached the peak of about 13 percent of GDP (gross domestic product) seen during 2005,” the bank pointed out.

The remaining 22.3 percent went to other avenues such as the peso, explaining the strengthening of the local unit versus the dollar for the past months.

The region’s monetary authorities have been on guard against potential risks brought about by the influx of capital to their countries, on worries it could provoke a repeat of the Asian and global financial crises, the research note said.

BofA-ML noted that in Thailand and the Philippines, central banks have been focused on how to temper capital inflows to protect the competitiveness of their currencies using various macroprudential measures.

The Bangko Sentral ng Pilipinas (BSP), in particular, has slashed its special deposit account rate by a total of 100 basis points in a bid to curb the surge in foreign capital inflows.

It also put a cap on banks’ exposure to non-deliverable forwards (NDF) after its examination showed NDFs have been used for speculation the peso will rise further.

“Overall, we see further risk of more (foreign exchange) intervention and macroprudential measures (to contain bubble risks), while capital controls are less likely,” BofA-ML said.