MADRID, Spain—If the Philippines wants to avoid the financial risks brought about by high capital inflows, the peso should be allowed to be more flexible and interventions must be muted, according to a new policy brief by the Tokyo-based Asian Development Bank Institute (ADBI).

The draft policy brief on “Managing Capital Flows in Asia: Policy Issues and Challenges,” coauthored by ADBI dean Masahiro Kawai and director for research Mario Lamberte, was discussed in Madrid, venue for the ADB Governors’ Meeting, on Saturday.

In his presentation, Kawai said high capital inflows sometimes result in high macroeconomic risks, increase the vulnerability of the financial sector and thrust countries to an overall difficult economic position.

Lamberte told the BusinessMirror that in the case of the Philippines, these ill effects caused by high capital inflows can be avoided through a more flexible peso.

However, Lamberte said the Bangko Sentral ng Pilipinas (BSP) should stop its interventions and that the Philippines should sit down with other Asian countries to discuss the impact of stronger currencies on trade.

“We’re on the right track [in allowing the peso to appreciate], but [like the] other countries, we’re intervening too much,” Lamberte said in an interview after the presentation of the discussion paper.

“High capital inflows is not a national problem, it’s regional,” he added.

In the Philippines, capital inflows take the form of overseas Filipino workers’ remittances, exports and investments, which are considered “permanent” forms of capital inflows and not “hot money.”

Lamberte said making the peso more flexible could also mean that the peso can appreciate further. While this may be a problem for exporters, Lamberte said sitting down with trading partners would be a means to finding a solution to this problem.

“There must be regional coordination. There is a need to agree among themselves [a means to achieve] coordinated adjustments in the exchange rates,” Lamberte said.

Besides, Lamberte said, a strong peso is not all that bad since it allows the country to buy imports at a cheaper rate, particularly rice.

He said that rice, now sold at $1,000 per ton, may be bought for around P40,000 per ton at the current exchange rate, cheaper than if the exchange rate were at P55 to the greenback.

On the other hand, Lamberte said that if the BSP implements interventions, there is a danger that its funds will be depleted.

Intervention can be done, he stressed, but if its sole purpose is to appreciate the currency, it would not be a wise move.

The paper said that high capital inflows have been experienced by Asian countries, particularly the Philippines, China, India, Indonesia, Korea, Malaysia, Singapore, Thailand and Vietnam.

High capital inflows, Kawai said, could cause an increase in credit and inflation, may lead to overheating and create a financial bubble.

Per Kawai’s presentation, if this is not managed properly, capital inflows may be reversed and may thrust many countries into difficult economic positions.

MADRID, Spain—If the Philippines wants to avoid the financial risks brought about by high capital inflows, the peso should be allowed to be more flexible and interventions must be muted, according to a new policy brief by the Tokyo-based Asian Development Bank Institute (ADBI).

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