Managing Capital Flows: The Case of the Philippines

During the past five years or so, most East Asian economies including the Philippines experienced a rising level of foreign exchange reserves and rapidly appreciating currencies both in nominal and real terms. One cause has been the resurgence of capital flows, which makes the issue of how to manage them relevant. However, the experience with regard to capital flows among East Asian economies is mixed and the level of capital flows to the region is proportionally less than that prior to the 1997 crisis. Another reason is the rise in current account surpluses.

The Philippines has experienced both a return of capital inflows and a more favorable current account balance, with the latter largely due to remittances from overseas workers. However, like many other regional currencies, the appreciation of the peso is not commensurate to movements of the BOP accounts. Currencies in the region are reacting primarily to the general weakness of the US dollar, and global uncertainties have contributed to weak investment which in turn is another major reason behind the current account surplus of several economies including the Philippines. Policy measures at the domestic level can focus on reviving private investment, particularly channeling overseas remittances to more productive investment. Meanwhile, East Asian financial and monetary cooperation can also result in a unified front aimed at overhauling the unipolar global financial system.

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1. Crystal Balls
   (posted 29 October 2008 / 06:22:16 AM)
   
   Just to add...in the past inflow episode (2005 to 2007), some of the major measures employed by the BSP were through participation in the FX swaps market and the introduction of Special Deposit Accounts (SDAs).
   
   - At the height of this episode, BSP was "lending" the equivalent of as much as $9.0Bn in the FX swap market while outstanding SDAs reached 600Bn or about 10% of the economy's nominal GDP at that time.
   
   - Sizeable foreign obligations of the National Government and some of the bigger publicly owned corporations could have been paid ahead of schedule even if it meant incurring pre-termination penalties.
   
   - Unfortunately, our "crisis-oriented" policy makers are not predisposed to such an initiative.
   
   Cheers!