The Purisima pronouncement on foreign borrowing

We welcome the recent policy statements and actions of policymakers, especially from the Bangko Sentral ngPilipinas (BSP) and the Department of Finance (DOF). We advocate a pro-Filipino, pro-investment exchange rate policy, and we are happy that the Philippine government through the BSP and the DOF has leaned towards achieving the goal of making the exchange rate conducive to strengthening the real sector of the economy and safeguarding the welfare of the overseas Filipino workers (OFW) and their families.

We commend Finance Secretary Cesar Purisima for his recent statement delivered at an Asian Development Bank (ADB) forum, which expresses the oneness of government policy on managing capital flows. He said that the national government intends “to borrow almost a hundred percent of (its) borrowing from the local market.”

The preference for domestic borrowing will help meet the objective of stemming the appreciation of the Philippine peso, which is hurting industry; agriculture; services, especially business processing, and the families of overseas Filipino workers (OFWs).

And as Secretary Purisima said, focusing on domestic borrowing instead of foreign borrowing, even as government has steadily increased tax effort through major reforms like the sin tax law, contributes to the development of the local capital market.

Secretary Purisima’s pronouncement is significant on at least three counts:

First, it shows the firm cooperation and coordination between the national government and the independent BSP on managing foreign capital flows and correspondingly, the exchange rate.

Second, it signals to investors that the Philippine policymakers lean towards having a competitive exchange rate and that government is assertive in preventing the peso from getting grossly overvalued.

Third, the Purisima statement and the BSP measures prepare the government to tackle the immediate effects of the investment-grade credit rating from Fitch, which will undoubtedly attract portfolio flows.

The national government position, as articulated by Secretary Purisima, complements the measures that the BSP has undertaken, including the sterilization of capital inflow through heavy purchasing of foreign currency, the easing of monetary policy, the pre-payment of foreign debt, the liberalization of capital outflow, the restriction of foreign access to special deposit accounts (SDA), and the continued slashing of SDA interest rates.

To be sure, stemming the appreciation of the peso is a difficult task. This is in light of the huge remittances from OFWs and the surge of short-term flows as portfolio investments in crisis-stricken Europe and the United States move out and seek better returns in attractive emerging economies like the Philippines. Further, the investment grade that the Philippines earned, which is an indicator of investor confidence, has an ironic effect of attracting more portfolio investments. Meantime, the longer-term players await the resolution of major binding constraints.

Arguably, bolder initiatives and new instruments have to be deployed to curb the appreciation.

It is against this background that the consensus in government—taking together the statements and actions of the BSP and DOF—gives us hope and confidence that we will be able to overcome the binding constraint relating to the exchange rate. We are one with government in tackling and resolving this problem.

The authors, from the Ateneo de Manila University Economics Department and Action for Economic Reforms, comprise the initial set of signatories of the statement above. Other signatories being gathered include businessmen, overseas Filipino workers, and other academics.

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