New forex rules out in 2 weeks
MANILA – The Bangko Sentral ng Pilipinas (BSP) is set to release within two weeks the fourth wave of its foreign exchange rules to stem the continued rise of the local currency.
BSP Governor Amando Tetangco Jr. told reporters there is a need to balance the continued strong capital inflows to emerging economies like the Philippines since letting this go on is unhealthy to the domestic economy in general.
He explained that emerging economies remain attractive to investors due mainly to uncertainties in major economies as well as the weakness of the US dollar.
On the other hand, emerging economies continue to prove their strength through, among others, the higher interest rates and better economic performance.
In the case of the Philippines, central bank’s policy rates remain at record low at four percent for the overnight borrowing rate and six percent for the overnight lending rates, which were steady since July 2009.
These are, however, higher than the near zero policy rate of the US’ Federal Reserve.
Also, the domestic economy churned in higher-than-expected growth, as measured by gross domestic product (GDP), in the first half of the year.
It grew by 7.9 percent year-on-year as of end-June this year, from 7.8 percent and 7.9 percent in the first two quarters.
These are higher than the five to six percent revised full-year growth target set by economic managers. The previous target is a range between 2.6-3.6 percent.
Tetangco said that because of the wide interest rate differential between major and emerging economies investments continue to pour in to the latter.
He cited that amid the high liquidity in the country these inflows are now placed in hard investments like infrastructure but mostly in foreign portfolio investments or “hot money,” which, as the name implies, can be easily pulled out from the economy as fast as it came in.
As of end-September this year, hot money expanded by 520 percent after it posted US$1.421 billion net inflow as against the US$229.13 million net inflow same period last year.
As a result, the peso appreciates further against the US dollar and is now at the 43-level to a dollar from 46 to a dollar earlier in the year.
As the local unit strengthens against the dollar, Philippines’ exports become less competitive because it is now more expensive for its trading partners to buy its products and vice versa.
Thus, Tetangco said adjustment on policies, among others, should come from both the emerging markets and the major economies.
“It should be both because you will see that the emerging markets have been successful in terms of their economic performance because of the adoption of correct policies…Both of them will have to adjust and this is what organizations like the IMF and the WB are trying to push increased cooperation for an adjustment of global imbalances,” he said.
Among the adjustment that BSP implemented are allowing some appreciation on the local currency, building up of dollar reserves, pre-paying foreign loans, and easing of foreign exchange rules, the last of which was made in January last year.
Tetangco said the public-private partnership (PPP) initiative of the government would help put these large inflows into hard investments but admitted that it takes years before these investments are placed into more productive purposes.
He added that banks should lend more to ensure that the domestic economy really benefits from large capital investments because this is the “most productive and useful way to deal with this increase in liquidity.”* PNA
