Funds will continue flow to Asia if US debt agreement short

by Coco Alcuaz, ANC

Posted at Jul 29 2011 02:09 AM | Updated as of Jul 30 2011 01:53 AM

MANILA, Philippines - Funds will continue to flow to Asia – including the Philippines -- if the debt ceiling agreement U.S. congressmen need to approve by August 2 is seen as a short-term fix, Security Bank Treasurer Rafael Algarra said.
 
The flow has already boosted stocks, bonds and the peso.

The U.S. needs to raise its debt ceiling by August 2. If not, it can’t borrow more, which it needs to do to pay outstanding debt and avoid a default. While both sides want to raise the ceiling, Republicans are demanding spending cuts while Democrats are pushing tax increases.
 
"If a debt ceiling resolution is actually achieved before August 2, there will still be uncertainty depending on what the resolution will be," Algarra said in an ABS-CBN News Channel interview. "If it’s a short stop-gap measure, we still expect it will be very negative for U.S. currency and U.S. assets and even we may see more flows into Asia including the Philippines."
 
He said the central bank is raising reserve requirements instead of raising interest rates because the latter would attract more funds, possibly stoking inflation.

"There are worries that the continuous foreign exchange inflows will fuel domestic liquidity which in turn will lead to inflation thus raising interest rates," Algarra said.

"Higher rates will attract more of these inflows and thus exacerbate the liquidity situation and eventually it will be inflationary."
 
Bangko Sentral ng Pilipinas raised reserve requirements – the percentage of deposits banks have to hold and cannot lend – for a second time in as many monetary policy meetings. It’s now at 21%. It kept its overnight borrowing rate at 4.5%.
 
Inflation accelerated to 5.2% in June and the central bank estimates it may hold there this month. It’s targeting 5% for the year.
 
Lending rose 18.8% in May, the fastest pace in two years while money supply growth jumped to 8% from 7.3%.