Stops on capital flows can hurt growth: Tetangco

Asian policymakers must take care when using regulatory policies to curb borrowing as they risk crimping economic growth and weakening the ability of monetary policy to tackle inflation, one central bank governor has warned.

Writing in Emerging MarketsAmando Tetangco, governor of the Philippines’ central bank, said it was important that policymakers were “circumspect” in using macro-prudential measures, such as limits on borrowing and lending.

“Macro-prudential restrictions on borrowing may affect expenditures in other sectors and, subsequently, economic output,” he wrote. “They may also weaken the transmission of monetary policy by influencing credit supply conditions.”

He said it was understandable that emerging Asian nations had used both these tools and capital account measures to manage inflows and to contain the build-up of excesses in specific sectors and in the banking system.

Macro-prudential regulation includes tools such as caps on the loan-to-value and debt-to-income ratios for lenders and borrowers as well as capital reserve and liquidity requirements for banks.

Since 2010, emerging market economies have received more than $1 trillion of capital inflows a year, with emerging Asia getting about half of those flows.

“While the potential benefits of capital flows are well recognized, the size and volatility of these flows create risks to financial stability. They also present challenges to the conduct of monetary policy,” Tetangco wrote.

More from Emergingmarkets.org

Read the latest news stories here

Click here to read the latest features

Register for free to receive the weekly newsletter

So far, he said, Asian countries had “put a premium” on structural reforms to improve the capacity of their economies to absorb capital inflows and divert them towards productive investments.

Meanwhile many countries had embarked on financial reforms aimed at deepening domestic bond and equity markets, developing financial products, and strengthening financial regulation and supervision.

“However, it is important that policymakers are circumspect in the use of macro-prudential measures,” Tetangco said. “The nexus between macro-prudential and monetary policies should be duly considered.”

He said that restrictions on borrowing could weaken the transmission of monetary policy by worsening credit supply conditions.

At the same time, changes in interest rates affect the cost of borrowing, which in turn has an impact on the amount that consumers and firms borrow and the types of investments that they make.

“Efficiency dictates that we should have a clear assignment of tools to policy objectives – monetary policy should be focused on ensuring price stability, and macro-prudential tools should be used to manage potential build-up of systemic risks.”

He pointed out that if monetary policy and macro-prudential measures worked together to lean against the business and financial cycles, then the impact would be “mutually reinforcing”.

Tetangco added that Asian economies should resist the temptation to adopt protectionist policies and should continue to find “multilateral” solutions to the economic challenges posed by capital flows.

“There is a central role for communication and coordination among capital-receiving economies to help ensure that they do not pursue beggar-thy-neighbour policies that would simply re-route the unwanted surges to each other,” he said.

His comments came a day after Standard & Poor’s raised its credit rating on the Philippines to BBB- from BB+, the crucial cusp between junk and investment grade. Fitch upgraded the country to the same level in March. 

- Follow us on twitter @emrgingmarkets