(STAR) By Lawrence Agcaoili - The Bangko Sentral ng Pilipinas (BSP) reiterated that there is no plan to restrict capital inflows into the country to avoid sharp fluctuations in the foreign exchange market.

BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that the imposition of any form of capital controls would scare the market and drive foreign investors away.

“We did not do that (restrain inflows of foreign money) in the past, and we will still not do that. Doing so will only scare the market and drive away foreign investments,” Guinigundo stressed.

He pointed out that there were many ways to help prevent a sharp appreciation of the peso without restricting the entry of foreign capital.

“At this point, I don’t think we need to move to swing to that side of restricting or regulating capital flows. The exchange rate is working, the market is working and we have an automatic stabilizer an exchange rate that adjusts,” the BSP official said.

According to him, one way to prevent sharp fluctuations is for the government to prepay some of its foreign-denominated debt in order to increase the demand for dollars resulting to a weaker peso.

He said another way is for the private sector to be encouraged as well to prepay their foreign debts.

“The BSP also intervenes in the foreign exchange market from time to time. It may buy dollars if it wants to temper the rise of the peso,” Guinigundo added.

He explained that the movement of the exchange rate so far is such that external competitiveness has not been affected in the process.

The BSP has repeatedly ruled out the adoption of tightened capital controls to address the continued influx of funds.

Instead, it vowed to adopt a mixture of policies in dealing with the surge in capital inflows including exchange rate flexibility, the build-up of reserves as buffer against exogenous shocks and prepayment of external obligations where feasible.

The policy framework of BSP is to let the market determine the level of the exchange rate with a view to participating only to reduce excessive volatility or to curb sharp movements in the exchange rate.

Economists and analysts are divided over the possible imposition of capital controls by central banks in the Asia Pacific Region to check excessive capital inflows brought about by rising inflation and strengthening currencies.

Paul Donovan, managing director and global economist of Swiss-owned investment bank UBS, said in an interview with reporters that the imposition of capital controls is not needed due to the strong banking system in the region.

“It is not going to happen. It is unlikely at this stage and the rest of Asia is not going down that route,” Donovan stressed.

On the other hand, Singapore’s largest bank DBS Ltd. said currency appreciation and higher interest rates would help cool regional economies and keep a lid on imported inflation but have the tendency to attract foreign capital.

“And such inflows have the tendency to wreak havoc with the best laid monetary plans. Inflows drive interest rates back down and push currencies further north than officials wanted,” DBS said.

Chief News Editor: Sol Jose Vanzi

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