S&P: 2nd investment grade rating heightens PHL concerns over forex

The second investment grade rating the Philippines obtained from Standard & Poor's Ratings Services will expand the inflow of portfolio money into the economy and further challenge the Bangko Sentral ng Pilipinas in handling exchange rate volatility, an official of the debt-watcher said Friday. “More flexibility in managing the foreign exchange may be needed as the peso will likely appreciate,” S&P credit analyst Agost Benard told a teleconference with reporters. S&P raised the Philippine credit rating on Thursday, following a similar move by Fitch Ratings last March, giving the country a full-blown investment grade.  While portfolio flows deepen domestic capital markets, Benard noted “this may not directly result in structural investments,” as liquidity conditions “remained favorable” in recent years. Portfolio inflows as of April 12 netted $1.164 billion, up by 112 percent from $549.50 million a year earlier. Analysts have said the second upgrade confirms the country's well-managed economy and could result in more speculative investments pouring into an already liquid financial market. The Philippine Stock Exchange posted new records, while the exchange rate leaped back to the P40 to-dollar level in early trading Friday. The peso was trading around the 43:$1 level last year. Foreign capital inflows have challenged many policymakers across Asia with investors in search of higher yields flocking into region, Reuters reported. Unlike foreign direct investments, portfolio flows are speculative in nature and do not directly strengthen industries and create jobs. These, instead, fuel asset prices higher and cause foreign exchange volatility. Liquidity concerns, said Benard, “underscores the weakness in the architecture of monetary policy in the Philippines. “For this type of economy, monetary policy has been generally favorable, but it has shortcomings. Monetary policy transmission is not as effective,” he said, referring to the impact of various monetary policies on real economic activity and inflation. Monetary authorities may have “to resort to macroprudential measures, which require legal and structural changes,” Benard added. However, in an interview with Reuters in India, Bangko Sentral Governor Amando Tetangco said he was not keen on controlling portfolio inflows for now, noting that Japan's quantitative easing is unlikely to result in a surge of portfolio money into the Philippines. Shielding the peso currency and the economy from the impact of such large inflows has strained the central bank's resources, according to Reuters.  “We're not saying that the central bank should do this or that. The existing monetary policy environment, however, should address the strength of inflows,” said Benard. Monetary Board has kept policy rates at record lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. However, it has rationalized slashed the rate of central bank special deposit account (SDA)—a tool to mop up excess liquidity from the financial system—to 2 percent across all maturities. At the start of the year, SDAs were priced at a premium over policy rates.  — VS, GMA News