S&P: Asia needs policies on foreign capital inflows

Central banks in Asia, which include the Bangko Sentral ng Pilipinas (BSP), need to have in place policies that address impact of foreign capital flows, New York-based Standard & Poor's (S&P) said in a report. In the report — "Asia's central banks struggle over how to deal with capital inflows" — S&P credit analyst Kim Eng Tan said monetary authorities should create policies that prevent instability from excess liquidity in the market, asset price bubbles, potential withdrawal of invested funds, and currency appreciation. In the past, the idea of imposing capital control has elicited overreaction from investors because this results in economic volatility, Tan said. The analyst believes that Asian central banks should provide "sufficient reaction time" before implementing policies that resolve the impact of foreign capital surges into the market. BSP data showed that foreign portfolio investments hit a record $4.61 billion last year, up nearly 12 times from $388.02 million in 2009. More than half, or $8.5 billion, of the portfolio money was invested in the country's stock market, pushing the Philippine Stock Exchange (PSE) index to an all-time high 4,397.30 last year. Peso-denominated government securities, time deposits, and money market instruments also gained from last year's placements by foreign portfolio managers. Tan said that Asian central banks continue to face policy dilemma as foreign capital continue to flow into the region. In Singapore and Hong Kong, strong foreign capital inflows helped fuel a sharp increase in real estate prices, according to the S&P analyst. Tan said the abrupt reversal of strong capital inflows could spur financial disruptions, and immediately stemming the inflows could slow financial development and delay necessary structural reforms, he added. "Since a large amount of foreign funds are invested in liquid assets such as government bonds, a capital flow reversal can happen easily," Tan said. Capital controls will likely have a "limited impact" on sovereign credit worthiness, Tan also said. No asset price bubble BSP Gov. Amando Tetangco Jr. earlier said there are no signs of asset price bubble in the Philippines. "I believe that asset valuations in the Philippines have not reached bubble-like proportions." Monetary authorities have "provided safety valves in ensuring that resources are not misallocated to building asset bubbles. So far, there is no evidence of overheating in the credit market," he said. The annual increase in the PSE index remains comparable with other markets in the region, he added. — JE/VS, GMA News