THE BANGKO SENTRAL NG PILIPINAS (BSP) vowed to maintain a liberal foreign exchange policy even in the midst of rising capital inflows to emerging markets and despite fears that these would lead to sharp appreciation of Asian currencies, including the peso.

BSP Deputy Governor Diwa Guinigundo said the monetary authority would not impose restrictions on the entry of foreign capital into the Philippines.

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

Putting restrictions on inflows of foreign direct and portfolio investments would create more disadvantages than advantages at the end of the day, the central bank official stressed.

Speculations that Asian central banks, including the BSP, might be forced to implement measures restricting the entry of foreign capital came amid the increasing inflows to developing economies. Monetary officials said the rising inflows were brought about by renewed optimism among foreign investors in view of a consensus that the worst of the global economic turmoil was over.

Analysts said news about recovery had increased the risk appetite of investors again. Emerging markets like the Philippines are attractive to investors not only because their interest rates are higher than in industrialized countries, but also because of the resiliency they showed during the crisis.

The latest global economic downturn is caused mainly by contractions in developed nations, led by the United States and countries in Europe.

Inflows of foreign capital helped boost domestic economic activity. The downside, however, is the potential drastic appreciation of the local currency.

A sharp rise in the peso, for instance, will adversely affect income of Filipino exporters. Their products will be more expensive and, therefore, less competitive. The dollars and other foreign currencies sent by overseas Filipinos to their families in the Philippines will also be lower in peso value, thus reducing the purchasing power of the households.

There is a benefit to a strong peso. It makes imported goods cheaper and helps trim the peso value of debts denominated in foreign currencies, thereby lowering the borrowing costs for private and public sector borrowers.

However, economists said the depreciation of the peso was needed more by the Philippines at the moment. This is because the economic downturn would be addressed by a recovery in exports and increase in consumption, especially by households partly or fully dependent on remittances.