BSP chief: Surge in foreign capital inflows could slow down emerging economies

The surge of capital to emerging market economies—largely to Asian ones such as the Philippines—can create risks to their financial stability, Bangko Sentral ng Pilipinas Governor Amando Tetangco wrote in a commentary on the website Emerging Markets dated May 5. In the posting, Tetangco said that the amount of capital pouring into these emerging countries could create a “build-up of financial imbalances due to rapid credit growth and rising asset prices,” as the amount of capital inflows exceed the countries' absorptive capacity. Another aspect of the risk, said Tetangco, is the possibility of the abrupt exit of the capital should the advanced economies recover. "There is no doubt these may have a destabilizing impact on emerging market economies," he wrote. However, Tetangco added that emerging Asian economies use macro-prudential measures “as the first line of defense against financial stability risks,” even as he noted that countries should also be careful in implementing these policies. “For example, macro-prudential restrictions on borrowing may affect expenditures in other sectors and, subsequently, economic output. They may also weaken the transmission of monetary policy by influencing credit supply conditions,” he wrote. Tetangco also noted, though, that emerging economies in Asia have been active advocates for multilateral coordination that ocule benefit them. "There is a central role for communication and coordination among capital-receiving economies to help ensure that they do not pursue beggar-thy-neighbor policies that would simply re-route the unwanted surges to each other," he wrote. — BM, GMA News