PH banks call for freer flow of foreign money

Posted at 10/08/12 9:38 AM

MANILA, Philippines - Some banks believe now is the time to liberalize anew the country’s foreign exchange policy and allow the flow of foreign money in and out of the country with greater ease.

Chamber of Thrift Banks president Pascual M. Garcia III, also President and Chief Executive Officer at the Philippine Savings Bank, even said the unrestricted flow of foreign money should not be a bad idea in the wake of the US Fed’s decision to engage in another round of quantitative monetary policy easing more known as QE3.

“The Bangko Sentral ng Pilipinas should just liberalize it completely,” Garcia said on Sunday as copious volumes of foreign capital in search of safe but high-yield instruments flood emerging Asia markets, the Philippines included.

While foreign fund inflows have fortified the country’s external sector and helped make the Philippines a net creditor country, inflation remains a constant threat no matter that year-to-date inflation is at the low end of target range.

In addition, Citigroup’s Manila unit said, the cost of sterilizing all that dollar liquidity coming into the region as a whole has encouraged central banks to entertain thoughts of encouraging more foreign exchange outflows.

“There had been lots of central bank language in the region in recent months encouraging the outflow of foreign capital,” Citi chief economist for Asia and the Pacific, Johanna Chua, said at a briefing on Thursday.

Chua also said all that dollar liquidity needs to be invested or recycled in safe havens at a time when there are “not enough safe havens anymore.”

For the Philippines, Chua said the monetary authorities are mindful of having a sharply appreciating peso and are likely to cap its rise to protect the country’s weak export sector as well as sustain its foreign remittance-driven consumption economy.

For bankers like Garcia, the likely policy response would be for the BSP to remove or recalibrate existing caps on foreign outflows rather than impose a higher reserve on bank deposits, for example.

“They are not likely to touch the deposit reserves. It’s on the higher limit on [outbound] investments. They should just liberalize it completely,” Garcia said.

Records show the BSP engaging on its fifth round of foreign exchange liberalization just ten months earlier when they lifted, for example, the compulsory peso conversion and prior BSP registration of all foreign direct investments, preapproval on all foreign currency deposit unit loans and similar other measures.

These measures came in the wake of the doubling of permissible over-the-counter forex purchases by Filipinos to $60,000 and for Filipinos living abroad to convert their local currency into US dollars again when leaving up to $5,000 instead of only $200 without showing proof the same have been purchased when they first entered the country.

Citi is convinced central banks in the region were not likely to tolerate currency outperformance, especially for countries like the Philippines whose growth and inflation dynamics remain under threat of inflation no matter existing assessment that financial and asset prices remain benign.

Citi particularly noted that Southeast Asian countries have engaged in an investment revival in recent months as part of the larger effort to recycle foreign capital inflows that threaten that fine balance between growth on one hand and inflation on the other.

Chua said the BSP is one with those looking to deter and “outperforming” currency while being mindful of the mounting cost of sterilizing the foreign capital inflows.

It was noted the BSP already accumulated P1.8 trillion worth of inflation-busting liquidity were these not held hostage under its special deposit account (SDA) window.

The BSP pays the banks more or less 3.75 percent a year on funds that would otherwise be merely sloshing around in the financial system and wreaking havoc on inflation.