BSP sees capital flows as threats

Although emerging economies in Asia, including the Philippines, have coped well with capital inflows, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco has reiterated the need to closely monitor the funds surge.

Capital inflows, or money from foreign investors that flows into the local stock market, government securities and other money market instruments, remain to be the biggest threat to the economy, Tetangco  said.

Capital flows are being watched closely.  Tetanco said they  they have the tendency to raise the risks of asset price bubbles and the currency exchange rate which can also potentially undermine financial stability.

Equally important, because capital can just as freely and quickly flow out of the country, such sudden stops and abrupt reversals can threaten the real economy.

Tetangco explained that the surge of capital to emerging market economies is a major consequence of the financial crisis in the United States and the Euro Zone.

The easy monetary policy and risk appetite in advanced countries are “pushing” money out of their markets, and the favorable macroeconomic prospects of and interest rate differential with emerging market economies are “pulling” in the funds.

Analysts say that with the recent credit rating upgrades given by Standard and Poor’s and Fitch Ratings, the rate of capital inflows may increase.

Tetangco said emerging Asian countries have also used macro-prudential and capital account measures to manage capital inflows and contain the build-up of excesses in specific sectors and in the banking system.
They have employed macro-prudential policies as the first line of defense against financial stability risks, especially since the relatively shallower nature of their financial markets means that asset price bubbles could form rather quickly.

But he added that policymakers should also be cautious about the use of macroprudential measures.
“At the BSP, we look at macroprudential measures to help maintain stability in the financial system while we work on the further development of the financial market,” Tetangco said in an article in Emerging Markets, a Euromoney publication distributed during the Asian Development Bank annual meeting.

Tetangco stressed that “the nexus between macro-prudential and monetary policies should be duly considered.”

For example, Tetangco said macro-prudential restrictions on borrowing may affect expenditures in other sectors and, subsequently, economic output.

They may also weaken the transmission of monetary policy by influencing credit supply conditions.

“Monetary policy, in turn, may impinge on financial stability. Policy rates affect the cost of borrowing with subsequent impacts on how market agents decide on leverage and composition of assets and liabilities,” Tetangco said.

“Efficiency dictates that we should have a clear assignment of tools to policy objectives - monetary policy should be focused on ensuring price stability, and macro-prudential tools should be used to manage potential build-up of systemic risks.

In many instances, both policies can be mutually reinforcing, such as when they both lean against the business and financial cycles,” Tetangco explained.

Since 2010, Tetangco said that emerging market economies have been receiving more than a trillion dollars of capital flows a year, with emerging Asia getting about half.

“While the potential benefits of capital flows are well recognized, the size and volatility of these flows create risks to financial stability. They also present challenges to the conduct of monetary policy,” Tetangco said.
In most of the emerging economies, he said the amount of capital exceeds the absorptive capacity.

“Liquidity management becomes a huge hurdle to monetary authorities. Subsequently, there is a risk of build-up of financial imbalances due to rapid credit growth and rising asset prices,” he added.

“The reversal of flows is the other side of this risk.  There is no doubt these may have a destabilizing impact on emerging market economies,” he said.

Tetangco stressed that the BSP has tried to make effective use of monetary policy instruments.
“We were able to reduce policy rates because of the benign inflation environment, and we have rationalized our reserve requirements. In general, Asian currencies have appreciated as a consequence of the flows. Sterilized interventions were mainly to temper volatility of currency movements, although these actions have resulted in rising costs of stabilization. In the case of the peso, the appreciation has been at 9 percent since 2009,” Tetangco said.

Although capital inflows to Asean countries including the Philippines have increased over the past few years, Bank of America Merrill Lynch (BofAML) said that the magnitude and volatility of inflows have not, however, reached previous peaks.

The US-based banking giant even cited the moves done by the Bangko Sentral ng Pilipinas (BSP) which include cutting SDA rates, banning foreign funds in special deposit accounts, and imposing a cap on banks’ non-deliverable forward holdings to temper capital inflows and ease upward pressure on the peso.

“Overall, we see further risk of more FX intervention and macro-prudential measures to contain bubble risks, while capital controls are less likely,” BofAML said.

But the BSP has said that should capital flows reach high point, possibly resulting to disruptions in asset prices and inflation, they are ready to combat these flows.

source:  Malaya

BSP considers changes to real estate financing

The Philippine central bank is considering changes to guidelines for real estate lending to avoid an asset-price bubble in the property market, Governor Amando Tetangco said yesterday,after data showed a rise in activity.
Tetangco said Bangko Sentral ng Pilipinas’s (BSP) monitoring of banks’ exposure to the property market confirmed an increase in activity, although growth in real estate loans remained consistent with overall credit expansion.

Late last year, the central bank asked banks to provide more information on their real estate-related lending and investments. Data suggest that the non-performing real estate loan ratio for banks as a whole continues to be “stable.”

“Despite such front-line indicators, however, the BSP will be studying possible policy adjustments that may be warranted, both on a per institution basis, and across the system as a whole,” Tetangco told Reuters through email.

“We are not yet ready to announce the exact form of such adjustments but we will certainly do so as soon as we firm these up,” he said.

Tetangco also said the central bank was closely monitoring banks’ credit underwriting standards to ensure that “standards have not been sacrificed in order to help real estate developers move their growing inventory.”

At present, banks are allowed to lend only up to 20 percent of their total loan portfolio to the property sector, and the central bank has previously said the ceiling is being reviewed.

Banks’ exposure to the sector reached 561.6 billion pesos ($13.73 billion) at the end of June 2012, up almost 19 percent from a year ago, according to the latest central bank data.

source:  Malaya

Philippine Daily Inquirer Editorial: Investments and Ratings

International credit watchdog Standard & Poor’s Ratings Services affirmed last week the Philippines’ investment-grade status, a month after Fitch Ratings gave it its first investment-grade credit rating. Malacañang spokesperson Edwin Lacierda, Finance Secretary Cesar Purisima and Bangko Sentral ng Pilipinas Governor Amando Tetangco all credited the good governance platform of President Aquino for the upgrade. They said the S&P action would trigger an influx of investments that, in turn, would fuel and sustain the economy’s stellar growth. Will it, really?

The term “investment grade” historically referred to bonds and other debt securities that bank regulators and investors viewed as suitable investment outlets. Now, the term is broadly used to describe issuers like governments or corporations with relatively high levels of credit-worthiness and credit quality.

In its latest ratings action, S&P cited the Philippines’ increased ability to pay its foreign debts, as evidenced by its dollar reserves that currently stand at about $84 billion and are driven largely by remittances from Filipinos overseas, foreign investments in the business process outsourcing sector, and “hot money” (foreign investments mainly in the local stock market). S&P also noted the Philippine government’s declining debt burden, which it attributed to a nearly decade-long effort to improve tax collection. After peaking at 74 percent in 2004, the ratio of the government’s outstanding debt to the country’s gross domestic product declined to about 50 percent by the end of 2012 and is projected to fall further to 47 percent by yearend. “The current and previous administrations improved fiscal flexibility through restraining expenditures, reducing the share of foreign currency debt , deepening domestic capital markets and more recently through modest revenue gains,” S&P said.

But S&P did not say that foreign direct investments would start flowing to the Philippines. What exactly do credit ratings mean? Here is what S&P has to say: Credit ratings are opinions about credit risk. S&P ratings express the agency’s opinion about the ability and willingness of an issuer, in this case the Philippine government, to meet its financial obligations in full and on time. They are just one factor investors may consider in making investment decisions. Credit ratings are not guarantees of credit quality or of future credit risk.

While the forward-looking opinions of rating agencies can be of use to investors and market participants who are making long- or short-term investment and business decisions, S&P pointed out that credit ratings are not a guarantee that an investment will pay out or that it will not default. While investors may use credit ratings in making investment decisions, S&P said, its ratings are not indications of investment merit. In other words, the ratings are not buy, sell, or hold recommendations, or a measure of asset value. They speak to one aspect of an investment decision—credit quality—and, in some cases, may also address what investors can expect to recover in the event of default, it added.

“In evaluating an investment, investors should consider, in addition to credit quality, the current makeup of their portfolios, their investment strategy and time horizon, their tolerance for risk, and an estimation of the security’s relative value in comparison to other securities they might choose. By way of analogy, while reputation for dependability may be an important consideration in buying a car, it is not the sole criterion on which drivers normally base their purchase decisions,” S&P said.

Foreign investors entered the banking sector in the 1990s and the retail sector starting in 2000 when the Philippines was not investment-grade. They also recently entered the mining industry when the Philippines was not investment-grade. They did so because the government allowed them to—by removing restrictions andother barriers that were provided in the Constitution and in laws and regulations.

Purisima said something very significant when he was asked to comment on the S&P upgrade last week. In a TV interview, he said the Aquino administration was preparing measures that would open up certain sectors of the economy to foreign investors, economic activities that would not need time-consuming congressional action to amend the Constitution.

Now that—and not a ratings upgrade—will really excite investors.