Capital controls should serve only as measure of last resort – BSP

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) should use capital controls as a “last resort” to manage risks of inflows to the local economy, BSP Deputy Governor Diwa Guinigundo said yesterday.

“The monetary authorities have numerous policy tools yet unused to address the capital flow problem...Thus, we consider capital controls as measure of last resort,” Guinigundo said in a text message to The STAR.

In a new policy paper, the IMF has recommended the use of capital controls in scenarios involving an overheating economy, risks on asset bubble formation and overvalued currency and if structural reforms take too long to make their way to the economy.

It also highlighted the need for “country-specific” controls – which should be targeted, transparent and non-discriminatory –  if foreign exchange reserves have already ballooned to excessive levels that taming the currency strength through dollar purchases is already incurring more costs than benefits.

 “To some extent, these conditions appear to be emerging in the Philippines,” Guinigundo said, adding that policymakers still have various tools which they can deploy aside from outright buying of dollars.

BSP, which has generally kept a market-determined exchange rate, has kept scope for intervention to temper an appreciating peso, which closed at 40.87 to a dollar yesterday. A strong peso trims the value of dollar export earnings and remittances from overseas Filipinos.

Aside from this, however, BSP has instituted a number of reforms this year targeted at shunning speculative inflows flooding the country. Among them are the ban on foreign funds on special deposit accounts and increasing capital charges on non-deliverable forwards to 15 percent from 10 percent.

 “We reserve the right to use any one of (these tools), including capital flow management measures and macroprudential measures, depending on actual need and specific macroeconomic situation,” Guinigundo explained.

Guinigundo warned, however, that capital controls tend to have “temporary and diminishing” effects, an observation also stated by IMF in warning against substituting macroeconomic reforms with inflow-controlling measures.

Sought for comment, Emilio Neri, economist at the Bank of the Philippine Islands, said instituting capital controls should already be considered. “At the very least however, feasibility studies on capital controls must already be undertaken,” Neri said in a phone interview.

 “Since it will require policy coordination between fiscal and monetary authorities, studying its pros and cons now will be helpful,” he added.

Neri however acknowledged that BSP’s moves have so far been bearing fruits, noting that “if not for those, peso could have really breached the 40-level already.”

 “We are seeing the biggest appreciation from the peso but I think the BSP has indicated they still have a lot of tools to use. I think they will use them first before they decide to resort to capital controls,” he said.