BSP eyeing forex liberalization moves to temper peso rise

Posted at 02/06/13 5:28 PM

MANILA - The Philippines may ease rules on foreign exchange transactions to dampen a strong peso that is hurting exports, the central bank governor said on Wednesday, in remarks suggesting authorities expect more inflows into Asia's fastest growing economy after China.

But the central bank is not keen on using policy rates to slow down the currency's appreciation, Amando Tetangco said, adding there is no major threat to the inflation outlook even as growth is expected to hit 7 percent this year.

"We have more degrees of freedom these days and we can tweak the existing measures that we have or we can add to the toolkit that we are currently using," Tetangco told Reuters in an interview.

Bangko Sentral ng Pilipinas (BSP) is studying more forex liberalization measures, such as allowing companies to buy dollars from the banking system to pay off unregistered foreign loans. This was allowed for a limited period of three months last year, but Tetangco said it can be permitted again for an extended period.

The Philippine central bank's approach contrasts with that of other countries such as South Korea and Indonesia also struggling with stronger currencies as a result of inflows from the developed world because of easy monetary conditions there.

South Korea has introduced capital controls to prevent a sudden reversal of fund inflows from hurting the won or causing a currency crunch. It has also suggested a need for coordinated action among central banks in the region.

"We are more on the liberalization mode," Tetangco said.

Emilio Neri, an economist at the Bank of the Philippine Islands, said the governor's remarks suggested the bank anticipated even more inflows in the next few months.

"There is low inflation, growth is break-neck speed, and there is the potential of credit rating upgrade. So these are good things that can pose a challenge to them," he said.

Manila is targeting growth of 6 to 7 percent this year, after 6.6 percent growth in 2012, the fastest in Asia after China so far.

The central bank last month kept its policy rate at a record low of 3.5 percent.


Strong capital inflows have driven an 11 percent rise in the stock market index so far this year, making it Asia's second best performing bourse after Vietnam, with the peso rising 1 percent against the dollar this year after surging nearly 7 percent in 2012.

The latest Reuters poll show further gains in the peso currency were expected, with a median forecast of 39.78 to the dollar by end-January 2014.

To curb speculative activity that has led to increased currency volatility, the central bank had asked banks to set aside more funds to cover trades in non-deliverable forwards (NDFs). In December, it imposed limits on local and foreign banks' forward positions in currencies.

Policymakers also tightened rules on its short-term special deposit account (SDA) window to keep foreign funds out of the facility, and lowered the rate its pays on these deposits last month.

Tetangco said he cannot rule out further adjustments in NDFs and the short-term deposit facility.

But the central bank was not considering revisions in its current policy on reserve requirements, especially on banks' trust products, though he said it remains an option.

"There is no definite plan to impose or change reserve requirements on specific instruments," Tetangco said.

The monetary authority has required banks to submit more information on their real estate-related lending and investments, but there was limited evidence so far of stretched market valuations in the property market despite the sector's rapid expansion, he said.