Capital inflows to remain a problem for emerging countries

MANILA, Philippines - Capital inflows will continue to pose “implications” to emerging countries such as the Philippines, the Institute for International Finance (IIF) said.

 â€œMonetary easing in the mature world has so far failed to jumpstart domestic demand, reflecting ongoing problems of monetary transmission,” the IIF said yesterday.

 â€œConditions, therefore, should remain low for longer than originally thought, which has important implications for emerging markets,” the agency explained.

In its latest Global Economic Monitor, the IIF said poor returns in crisis-stricken US and Europe are “pushing” funds out of these countries, putting pressure on developing nations, particularly those from Asia.

Combined with higher interest rate returns as “pull” factors, IIF said emerging markets could attract private capital of as much as $1.118 trillion in 2013, representing the first increase since 2010.

This, in turn, would create demand for currencies, putting them on an upward trend in terms of value. As a result, central banks will respond by lowering policy rates further in a bid to shun inflows.

In particular, the peso could average 40 to a dollar this year, before inching up to as much as 39.20 next year. The local unit, which closed at 40.690 to $1 yesterday, was Asia’s second best performer last year.

The equity market is also likely to benefit, IIF said. The benchmark Philippine Stock Exchange index, which hit 15 record-highs this year, closed 0.03 percent or 1.92 points higher at 6,459.930 yesterday.

 â€œGoing forward, equity investments are forecast to benefit in particular as growth prospects in emerging economies continue to be more favorable than in mature markets…,” the agency said.

On Monday, the Bangko Sentral ng Pilipinas (BSP) admitted a surge on portfolio inflows – which hit a 26-month high in January – could later on provide more reason for the peso to appreciate.

The BSP, which has generally kept a market-determined exchange rate, has maintained recent peso gains have been driven by structural current account inflows, which, in turn, is grounded on the country’s strong fundamentals.

It has rejected putting in place outright capital controls, relying instead on its dollar purchases from time to time to temper market volatility. Aside from that, it lowered policy rates by 100 basis points last year and imposed several macroprudential measures.