Philippines Tightens Rules to Stem Speculative Capital Inflows

The Philippines has tightened rules on capital inflows by limiting where foreign funds can put their money after its currency surged to the highest level since before the global financial crisis of 2008.

Bangko Sentral ng Pilipinas will prohibit foreign funds from investing in its special deposit accounts, or SDAs, Governor Amando Tetangco told reporters on July 7 at a conference in Subic, north of Manila. Policy makers will require banks to certify that investments in SDAs are not sourced directly or indirectly from non-residents, he added, without saying when the rule will be implemented.

“While the SDA is principally a tool for managing excess liquidity, it has also become a possible entry-point for foreign monies desiring to participate in the price action in the peso- dollar market,” Tetangco said. “Existing regulations do not provide restrictions on non-resident investors in the SDA. It has, therefore, attracted carry trades.”

Philippine growth was the fastest in Southeast Asia in the first quarter as President Benigno Aquino increases state spending to a record to shield the economy from a faltering global recovery. Standard & Poor’s raised the nation’s debt rating to the highest level since 2003 on July 5, citing its easing fiscal vulnerability and strengthening external position, and helping boost the peso’s gains to almost 5 percent this year.

Stronger Growth

“The government and the BSP are aware of the ill-effects of hot money inflows, so they are being prudent in addressing the problem at this stage,” said Radhika Rao, an economist at Forecast Pte in Singapore. “They want to ensure that the peso is in line with regional currencies to ensure trade competitiveness. Piecemeal steps like these could be undertaken, not rigid capital controls.”

The peso, the best performer among Asia’s 11-most traded currencies tracked by Bloomberg, climbed to 41.6 per dollar on July 4, the highest level since April 2008. The currency has made gains this year in contrast to peers including the Indian rupee and the Indonesian rupiah.

Capital inflows are picking up as investors are attracted by stronger growth conditions in the Philippines as well as its improving credit position, Morgan Stanley currency strategists Stewart Newnham and Yee Wai Chong wrote in a note July 5. The currency is their top pick for 2012, and they estimate it will appreciate to 40.75 to the dollar by the end of this year, and to 39.5 by the end of 2013.

Complicating Policy

The peso fell on July 6 after the central bank pledged to curb excessive volatility in the currency and said it was considering measures to discourage speculative capital flows from overseas.

Bangko Sentral may consider other tools to manage capital flows as a sustained and large-scale easing in the U.S. and Europe will drive funds to search for higher yields in emerging markets, Deputy Governor Diwa Guinigundo said July 7.

“At some point, a simple adjustment in policy rate may not be enough,” Guinigundo said. “It has to be complemented or supported” by other measures, as capital flows complicate monetary policy.

Policy tools include macroprudential measures, the reserve requirement ratio and rediscounting facility, said Guinigundo. Monetary policy remains appropriate as it is, he said. There is no tightness in the Philippine monetary condition, he said, citing economic growth and stable inflation.

Policy makers in other emerging markets are facing a different challenge, as the real, ruble and rupee are among developing-nation currencies weakening the most. The depreciation of the rupee, which has lost about 20 percent in the past 12 months, is “a challenge,” Kaushik Basu, India’s chief economic advisor, said on July 7.

Stocks Surge

Bank Indonesia’s focus now is on keeping the rupiah stable, Perry Warjiyo, director for economic and monetary-policy research, said last week. The country’s currency has slipped more than 9 percent in the past year.

The benchmark Philippine stock exchange index surged to a record last week as foreign funds bought $1.79 billion more shares than they sold this year, more than three times higher compared with the same period in 2011.

Tetangco said in April the central bank was monitoring inflows into the special accounts to prevent speculation, including carry trades. In a carry trade, an investor makes money by borrowing in a country with low interest rates, converting the money to a currency where borrowing costs are higher and lending the amount at that higher rate.

The central bank’s two-week and one-month special accounts, which held 1.66 trillion pesos ($39.7 billion) as of June 15, pay more than the nation’s 91-day Treasury bills.

The one-month SDA yields 4.1875 percent while the three- month Treasury bill yield averaged 2.174 percent at the last sale in April.

The Philippines economy expanded 6.4 percent in the first quarter compared with a year earlier, the fastest pace since 2010, as Aquino aims to transform the $200 billion economy into a manufacturing and services hub to compete with its neighbors.

To contact the reporter on this story: Karl Lester M. Yap in Manila at; Max Estayo in Manila at

To contact the editors responsible for this story: Paul Tighe at; Stephanie Phang in Singapore at

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