Inflows may overheat economy, RP warned
Standard & Poor's has warned that the Philippines economy faces risks of overheating, unless surging foreign capital inflows were properly managed.
The warning came after the country recently attained investment-grade credit ratings from S&P and Fitch and in light of concerns that the favourable ratings, though a very welcome development, could result in the excessive inflow of foreign portfolio investments.
Agost Bernard, associate director for sovereigns rating at S&P, said there should be strict policies on managing growing liquidity in the economy to ensure this would not result in financial-sector instability and an overheating economy.
“The immediate risk [for the Philippines] is the increasing capital inflows. These flows are going to accelerate only if they are not managed properly. These can lead to an overheated economy and put pressure on the banking sector,” Bernard said.
Following the ratings upgrade from Fitch and S&P, the Philippine Stock Exchange index (PSEi) has hit new highs. Interest rates on government securities also eased on the back of heightened demand.
Economists have warned that the Philippines was vulnerable to rising foreign investments in real estate since its regulations were more relaxed compared with those in China, Hong Kong and Singapore.
Although foreign portfolio and real-estate investments were welcome, economists said excessive amounts have a tendency to accelerate asset price inflation and cause bubbles.
The Philippines last year grew by 6.6 per cent, beating most projections and registering one of the fastest growth rates in Asia.
