Buffers need to be stronger


DOF asks will cash go to US instead of PH?

The Department of Finance (DOF) yesterday said the country needs to strengthen buffers against the impact of the eurozone quantitative easing.

The agency is asking will the cash from Europe go to the US or the Philippines and other emerging markets?

Earlier, the European Central Bank announced that it will inject 60 billion euros a month into the eurozone by buying government, institutional and private sector bonds from March this year until September 2016.

“Thus, the natural question to be asked is will eurozone money also flow to EMs? Or will eurozone money flow to the US instead where interest rates are speculated to be increased by the Fed?” the agency said in an economic bulletin released Tuesday.

The DOF noted that the greater issue the Philippines faces, however, will be the reaction of investors to the developments in the US.

It said the US was the destination of more than 80 percent of portfolio investment outflows from the country in 2014 because of the QE tapering. In contrast, portfolio investment inflows from the eurozone does not appear to be very significantly large.

It cited data from the central bank which showed that in 2014, outflows bound to the US accounted for more than 82.2 percent of total outflows while inflows from the United Kingdom, US, Singapore, Malaysia and Luxembourg accounted for 77.2 percent of inflows.

Despite this, the DOF still sees the ECB QE program will generate additional portfolio flows equivalent to a fraction of the levels that benefited the country under US QE program.

“It will probably approximate the net portfolio flows from EU (about 2 percent of gross domestic product annually or $3 billion from 2007 to 2009, the only years when EU data are available from BSP [Bangko Sentral ng Pilipinas],” it said.

“However, when QE tapering occurs, the same flows may reverse. In the case of the US QE tapering, however, the year-end 2014 net portfolio tally appears to be minimal at -0.11 percent of GDP although a one-month outflows may be as high as the $1.8 billion in January 2014,” it further explained.

To handle volatilities that may arise from these developments, the DOF said Philippines should raise its gross international reserves (GIR) level during the years that international economic conditions are favorable.

“Under the US QE, the Philippines increased GIR level from 22.5 percent of GDP in 2008 to a peak 33.6 percent of GDP in 2011. Thus, the country’s credibility was not affected by withdrawals,” it noted.

The Philippines should also adjust monetary policy flexibly to narrow the interest rate differentials between the peso and euro/dollar, as needed.

“This will trim the net outflows to more manageable levels,” it said.

The DOF also urged the country to continue to develop other sources of investments so that outflows from one country will be offset by inflows from another.

“This occurred during the period 2007 to 2009 when negative flows from USA were almost totally offset by Europe inflows,” it explained.


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