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Contingency measures in place to cushion economy from capital outflows, BSP says

BSP Deputy Governor Diwa C. Guinigundo. Photo from means BUSINESS

MANILA - The Bangko Sentral ng Pilipinas (BSP) said it has in place contingency measures to ensure adequate liquidity for the economy and minimize the impact of capital outflows.

BSP Deputy Governor Diwa C. Gunigundo said the central bank could provide foreign exchange liquidity through the spot and swap markets, as well as hedging facilities for qualified banks. It can also provide temporary and limited regulatory forbearance for banks, relaxing access to rediscounting facilities, and adjusting reserve requirements.

"We do have the latitude to consider all these options because monetary policy has sufficient space given the favorable inflation outlook and expectations," Guinigundo said.

He said the BSP's first line of defense against foreign exchange outflows has been strong, as the country's balance of position (BOP) remains in surplus and foreign exchange reserves in a comfortable level.

Guinigundo said sound macroeconomic fundamentals continue to underpin market sentiment, pulling in capital seeking security amid turbulent financial conditions. He said the Philippines on net is a recipient of $2.5 billion for the first seven months, a gain of 30 percent year-on-year.

The BSP does not support a certain level for the exchange rate but has some room for responding to foreign exchange movements to the extent that they affect the outlook for inflation.

He said foreign exchange inflows are largely structural in nature driven by remittances from overseas Filipinos, receipts from the business process outsourcing (BPO) industry, and foreign investments in peso-denominated assets.

The peso continues to weaken over investor concern over the US Federal Reserve's withdrawal of its economic stimulus. The local currency closed at P44.260 against the US dollar last Friday, down from the previous session’s P44.170.

"The coming months are likely to bring continued external headwinds. The spillover effects from external market cannot be set aside," Guinigundo said.

But with encouraging signs of global recovery, monetary policy may also start to normalize, as central banks begin to withdraw the extraordinary measures they put in place to support growth and financial markets, he said.

He said the gradual recovery of advanced economies could prove to be beneficial for the Philippines because of strong current account linkages with the US.

"External trade could recover with improvements in demand, while portfolio rebalancing could rekindle market appetite for emerging market assets and thus continue to channel capital toward the country," he added.