ECB plan seen to generate $3-B inflows to Phl

MANILA, Philippines - The European Central Bank’s quantitative easing program is seen to bring about $3 billion in foreign capital inflows to the Phillippines, the Department of Finance said yesterday.

 Imitating its American counterpart, the ECB embarked on a large-scale bond buying program worth more than 1 trillion euros   to stimulate the eurozone economy and solve the region’s gaping unemployment.

Finance Undersecretary Gil Beltran said the ECB initiative is expected to result in a surge of portfolio flows into the financial system of the Philippines, equivalent to about $3 billion or two percent of gross domestic product annually.

“Such ECB QE program will generate additional portfolio flows equivalent to a fraction of the levels that benefited the country under the US QE program. It will probably approximate the net portfolio flows from EU from 2007 to 2009, the only years when EU data are available from BSP,” Beltran said.

Beltran, however, cautioned that if tapering occurs, the same flows could reverse.

“In the case of the US QE tapering, however, the year-end 2014 net portfolio tally appears to be minimal at -0.11 percent of GDP although a one-month outflows may be as high as the $1.8 billion in January 2014.

Emerging markets are affected in several ways by the so-called quantitative easing where  funds move from  low- to high-interest environments.

 Such inflows put upward pressure on exchange rates, making exports less competitive.

 Inflows may also also push up inflation, especially if central banks are reluctant to raise  interest rates.

To fight volatility, Beltran said the Philippines should beef up its total reserves of foreign exchange.  “Under the US QE, the Philippines increased GIR (gross international reserves) level from 22.5 percent of GDP in 2008 to a peak 33.6 percent of GDP in 2011. Thus, the country’s credibility was not affected by withdrawals,” he said.

Beltran said the government must adjust  its monetary policy flexibly to narrow the interest rate differentials between the peso and euro/dollar, as needed. This will trim the net outflows to more manageable levels.

Aside from this, Beltran said the Philippines must continue to develop other sources of investments so that outflows from one country will be offset by inflows from another. This occurred during the period 2007 to 2009 when negative flows from USA (due to the GFC) were almost totally offset by Europe inflows, he noted.

Beltran likewise called for the strengthening of the country’s macroeconomic fundamentals through structural reforms and governance improvements.

He noted that the Philippines has enjoyed continuous net inflow of portfolio investments in the past years. In 2010, portfolio inflows more than doubled from $6.3 billion to nearly $13 billion, making net inflow grow by more than ten-fold.

Since then, net inflow has amounted to about $4 billion a year until 2013. In 2014, however, inflow plunged by nearly a quarter to $21.8 billion, sparked by the tapering off of the US quartitative easing program.

This decrease in inflows resulted in the country seeing net outflows of portfolio investments of $300 million.

Data from the  BSP showed that outflows bound to the US accounted for more than 82.2 percent  of total outflows  in 2014 while inflows from the United Kingdom (UK), US, Singapore, Malaysia and Luxembourg accounted for 77.2 percent of inflows.

“One direct consequence of the euro-zone QE will be the continued weakening of the euro. The euro has been sliding against the dollar since March 2014. The average exchange rate that time was $1.38 to the euro; come December, the rate stood at $1.23 to the euro,” Beltran said.

The Philippine peso has also been appreciating against the euro since March 2014. By the end of the year, the euro lost 10 percent of its January value against the peso.