Capital flow risks ‘low
All of the BSP’s moves have so far been limited to macroprudential measures and the IMF validated this strategy, despite a recent concession that capital controls can be used by countries under certain circumstances.
“Capital controls could be justified by unusual or extremely volatile conditions. We do not see that the situation is so grave in the Philippines,” Mr. Singh said.
The BSP has maintained that capital controls are a last resort, relying instead on macroprudential measures — tools that address specific risks in the financial system.
Countries should be wary of capital controls, especially since the flows could prove beneficial, Mr. Singh said.
“Asia needs more investment, and the government cannot be expected to supply everything. Capital is already coming in, so the task now is to course it to foreign direct investments instead of short-term hot money,” he pointed out.
The Philippines must open its economy and develop its industries to make sure that capital has more sustainable areas to flow to, he added.
The influx of capital flows has also sparked a sharp appreciation of the peso but the BSP has been able to strike a balance so far in managing the currency’s movements, the IMF official said.
“Its intervention is based on avoiding extreme volatility. This comes with costs, such as sterilization, interest payments on assets,” Mr. Singh said.
“But the Philippines remains competitive in various sectors. The balance of payments also remains favorable,” he added. “The balance the BSP has struck is right.” The peso was one of the strongest performers in the region in 2012, appreciating by 6.8% to close at P41.05 against the dollar by yearend. It has traded within P40- per- dollar territory so far this year, much stronger than the P42- 45 exchange rate assumed by the central bank.
Dollar earners, such as the export and business process outsourcing industry, have urged a weakening to maintain their competitiveness. Monetary authorities, however, have only stepped in to smooth out the movements of the peso, arguing that there are winners and losers whether the peso appreciates or depreciates.