Financial Situation in the Philippines. Joseph Anthony Lim. The Philippines continued its capital account openness and free floating exchange rate despite the bad experiences in the Asian crisis and the global financial crash.
Joseph Anthony Lim
The Philippines continued its capital account opennessand free floating exchange rate despite the bad experiences in the Asian crisis and the global financial crash.
The real economy recovered strongly in 2010 (from 1% GDP growth in 2009 to around more than 7% growth in 2010).
The investment upgrade was due to the improvement of the fiscal position, especially with the imposition of taxes on cigarettes and alcohol (‘sin’ taxes) and declining deficits
Since then till now, the Philippines is now the darling of the foreign investors and rating agencies.
The high inflows of ‘hot money’ is such that even the rating agencies and multilateral agencies have warned of a growing bubble and its possible bursting. But except for UN ESCAP, none are calling for capital controls.
Stock market is now overvalued and a bubble is growing. It is not clear if a property bubble is occurring but construction of condominiums is growing tremendously, its prices are soaring and loans to real estate is outpacing loans to manufacturing. Loans are also growing at a fast pace and a financial bubble may also be forming.
But what worries the Central Bank and mainstream academics more is the sharp appreciation of the peso.
The CB also put foreign exchange borrowing limits on financial institutions to limit foreign exchange entry into the country.
The attempt to stem foreign inflows is laudable but massive capital inflows is due to quantitative easing in the developed countries, especially the US, and the Philippines’ own low interest rates contributing to the stock market bubble and continuing appreciation of the peso. The attraction of portfolio investors is the stock market prices that just keeps on going up.
Some suggests that the dollar fund can be used to guarantee loans for vital infrastructure projects (e.g. telecommunications, toll roads) as Abu Dhabi Investment Co. had done.