Preparing for impact of capital flow reversal
By Paolo G. Montecillo
Philippine Daily Inquirer
7:37 pm | Monday, August 26th, 2013
BSP Deputy Governor Diwa Guinigundo. INQUIRER FILE PHOTO
The Bangko Sentral ng Pilipinas (BSP) has identified contingency measures that could be deployed to counter spikes in financial markets that may undermine the stability of the real economy.
BSP Deputy Governor Diwa C. Guinigundo said that providing foreign exchange liquidity through spot and swap markets, the creation of hedging facilities and the relaxation of certain rules were being considered amid the current heightened uncertainty and risk aversion that has affected emerging markets.
“The BSP could deploy various contingency measures as needed to minimize the impact of capital flows and ensure that liquidity remains adequate to fuel the economy’s requirements,” Guinigundo said.
Other measures being considered included the temporary relaxation of certain regulations to give banks more flexibility, relaxing access of banks to the BSP’s rediscounting facility and adjustments in the industry’s reserve requirements.
Guinigundo said these contingency measures were being prepared following the expected shift in monetary policy settings in advanced economies like the United States, which will inevitably affect local market conditions.
“The transition could prove to be thorny especially if the unwinding proves to be messy,” Guinigundo said.
Potential spikes in the peso’s value as the dollar continues to rally are among the major sources of risk for the Philippines.
Last week, the peso reached a 30-month low of 44.26 against the greenback amid talks of the US Federal Reserve’s tapering of its bond-buying program. The peso was down 1.4 percent from the previous week’s close of 43.64:$1.
“As we have seen, volatile capital flows could expose the currency to instability,” Guinigundo said. He said the key concern was that a sharp depreciation of the peso could affect the spending and investment plans of both the government and the corporate sector.
At the same time, a weak peso, which makes imported goods more expensive, could undermine the BSP’s inflation outlook, “thereby diminishing the BSP’s flexibility to threats to price and financial stability.”
Guinigundo said that while the general policy was to let market forces determine the peso’s value, the central bank has “some room for responding to foreign exchange movements” to protect the inflation target.
The BSP has set an inflation target of 3 to 5 percent for 2013 and 2014. The 2015 target is lower at 2 to 4 percent.
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Tags: Business , capital outflow , contingency measures , volatility
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