Philippine Officials Brace for Inflows as Investment Grade Won

Philippine officials are preparing to counter the impact of capital inflows after the nation won its first investment-grade debt rating.

The central bank will probably unveil next quarter a new set of measures that will give investors easier access to foreign currencies and encourage outflows, Governor Amando Tetangco said in Bloomberg Television interview with Rishaad Salamat. The rules may be ready as early as April, he said. The monetary authority is also considering banning overseas funds in its reverse repurchase facility, Tetangco said.

“We have the traditional tools such as the interest-rate policy, and on the other hand we have macrprudential tools which we have used recently in trying to minimize the adverse impact of capital inflows on domestic liquidity and therefore inflation,” Tetangco said. “We would continue to use these tools to make sure that we remain faithful to the inflation target and that we also maintain financial stability.”

The Philippines Stock Exchange Index surged to a record and the peso climbed the most since September after Fitch Ratings raised its assessment of the nation’s long-term foreign-currency-denominated debt to BBB- from BB+ yesterday. Foreign portfolio inflows into the $225 billion economy climbed to $2.1 billion in February, about 40 percent higher from a year earlier, after surging to a 10-year high in 2012.

Asset Bubbles

The upgrade may boost capital inflows further and complicate the job of policy makers as they try to rein in an appreciating peso and curb asset bubbles. At the same time, President Benigno Aquino is seeking more than $17 billion of infrastructure investments to spur growth to as much as 7 percent this year.

The Philippines is still rated one step below investment grade at Moody’s Investors Service and Standard & Poor’s. The country’s financial markets are shut today and tomorrow for the Easter holiday.

Gains will probably extend when markets resume trading on April 1, Tetangco told ABS-CBN News Channel yesterday. Funds that require investment-grade assets can now put money in the Philippines, broadening the investor base, he said.

After the Fitch upgrade, S&P and Moody’s should follow suit, which will “add fuel to the fire of confidence,” Mark Mobius, the head of Templeton Emerging Markets Group, said in an interview in Singapore today. He said he likes Philippine telecommunication companies, property, consumer and consumer banking stocks.

All Tools

“On the part of the central bank, they’re looking at all the tools in their repertoire to make sure that the peso will remain within a reasonable band among competitor currencies,” Finance Secretary Cesar Purisima said in a separate Bloomberg Television interview with Susan Li today.

Bangko Sentral ng Pilipinas had earlier capped lenders’ currency forward positions, banned overseas funds from special deposit accounts and expanded monitoring of banks’ real-estate exposure. It has cut the rate on special deposit accounts twice this year and signaled further reductions while holding its benchmark rate at a record-low 3.5 percent.

“We have not maxed out our traditional tools,” Tetangco said in an e-mail yesterday. “We also still have macro prudential tools that can be lined up.”

Consumer prices may rise 2.8 percent to 3.7 percent this month, compared with 3.4 percent in February, Tetangco said this week. He forecast faster economic growth in 2013 amid inflation that will stay within a 3 percent-to-5 percent target, supported by low interest rates. The Philippine economy expanded 6.6 percent in 2012.

Directing Flows

“The major economies of the world are flooding the world capital markets with liquidity,” Purisima said. “Our challenge now is to make sure we direct this to the more productive areas. We are trying to direct it to our infrastructure program.”

The upgrade improves the Philippines’ access to low-cost funds that it can use to expand economic stimulus, social services and defense, President Aquino said yesterday. Borrowing costs of companies will also tend to drop, enabling them to expand and generate more jobs, he said.

“One of the key assumptions that we do have underpinning this rating is that the Aquino administration will persist with its current policy agenda, which is focusing on good governance,” Philip McNicholas, director of Asia-Pacific Sovereigns at Fitch, told Bloomberg Television’s Li and David Ingles today.

“We will continue to focus on making sure we have fiscal space and that infrastructure improves as well as the policies continue to open up so that more and more businesses can be invited to the country,” Purisima said.

Before it's here, it's on the Bloomberg Terminal.