Are capital inflows expansionary or contractionary in the Philippines?

Abstract

This paper sets out to assess whether gross capital inflows to the Philippines are expansionary or contractionary in line with the model predictions and empirical findings of Blanchard et al. (2015).The results indicate that gross inflows are expansionary to output and credit growth. But contrary to the model predictions and empirical findings of Blanchard et al. (2015), we find that private bond inflows to the Philippines are expansionary. Bond inflows may have expansionary impact on output and credit growth if the exchange rate is managed, if the domestic capital market is underdeveloped, if the country receives small bond inflows, and if proceeds from debt issuance are channelled to productive investments. Similar to Blanchard et al. (2015), non-bond inflows have a positive overall impact on output and credit growth despite receiving relatively small foreign direct investment inflows.

The Influence of ASEAN Bond Market Integration in the Philippines’ Inflationary Pressures, Credit Expansions, and its Challenges

“…On the other hand, both types of inflows had significant positive effects on the private sector credit. Mercado (2020) argued that such results contradict the "BOGC" model, a model proposed by Blanchard, Ostry, Ghosh, and Chamon (2015), that bond inflows had a contractionary effect, while non-bond inflows had an expansionary effect.…”

“…According to Mercado (2020), the Philippines attracted less FDI and relied less on FDI. This further highlights the need to implement policies and regulations for developing capital allocation (both domestic and foreign) and for controlling more long-term steady inflows.…”

“…Additionally, the significant positive effects from the private sector credit can be justified by the fact that most foreign purchases of the private sector came from real estate, manufacturing, utilities, mining, and the banking sectors. According to Mercado (2020), debt issuance of said sectors can be accompanied by domestic financing, thus increasing bank credit and having an expansionary effect on output. However, findings also suggested that foreign direct investment in the Philippines had positive but insignificant effects.…”

“…According to Mercado (2020), the opposing results can be attributed to: first, Mercado (2020) study's timeline started from 1977 when the Philippines had a managed exchange rate; while Blanchard et al (2015) started from 2000 when emerging countries began to adopt more flexible exchange rate regimes. The difference in the chosen timeline may be because the contractionary impact of bond inflows on output growth depended on a flexible exchange rate.…”