Moody’s backs limited use of capital controls in SEA

MANILA, Philippines - Capital controls are among the tools Southeast Asian countries could use to temper the appreciation of their currencies seen detrimental to dollar earnings, a unit of debt watcher Moody’s Investors Service said.

“Temporary capital controls such as transaction taxes or curbs on currency derivatives would also help tame currency appreciation,” said Frederick Gibson, associate economist at Moody’s Analytics.

While easing policy rates and building reserves could also come in handy, capital controls were indicated in Gibson’s report as those that could have limited repercussions.

He noted that “aggressive” policy easing in developed economies has driven inflows to Southeast Asia, one of the global economy’s growth drivers in light of the debt crises abroad.

This has caused currency devaluations in Europe and the US, while Asian units “appreciate substantially,” Gibson said. While this has the benefit of fighting inflation, industries such as exports suffered from lower earnings.

“Large-scale quantitative easing in the developed world could keep monetary policy rates on hold across Southeast Asia this year,” he explained.

Monetary officials would be worried of fanning inflation pressures at a time capital flows to cut rates again, Gibson said, while hiking rates could drive them more to their economies.

Building buffer funds, while “more likely,” also bears a “negative” effect on central banks, which has to deal with “significant losses” from its foreign assets.

The Bangko Sentral ng Pilipinas (BSP), which slashed policy rates by one percent last year, has been purchasing dollars to manage the peso’s strength. The local currency rose 6.8 percent against the greenback last year.

The process has contributed to its ballooning losses, which, as of November last year, hit P86.31 billion, nearing a new record-high. The BSP has long rejected the use of outright capital controls.

Instead, it relied heavily on macroprudential measures, including restrictions on foreign funds in special deposit accounts, tighter real estate watch and a cap on bank holdings of non-deliverable forwards.