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By Diane Claire J. Jiao, Senior Reporter


Losses seen influencing central bank moves




Posted on March 25, 2013


THE CENTRAL BANK could turn to a fresh round of special deposit account (SDA) rate cuts or a reserve requirement increase to manage the peso’s strengthening, economists said.

“As we have said previously, the Bangko Sentral ng Pilipinas (BSP) will likely favor instruments and policies that limit its losses, including measures that reduce the running losses on its negative carry...,” Romeo L. Bernardo and Marie-Christine Tang said in a GlobalSource Partners report.

These options, they said in a market brief issued by the New York-based consultancy, include trimming SDA rates further or tweaking reserve requirements -- hiking the existing ratio or imposing new ones on trust products.

Given the burden of heavy losses, the BSP could have limited firepower in managing the movement of the peso via dollar purchases, the economists said. The central bank maintains a presence in the forex market to control demand for the local currency and ensure its smooth movement.

The peso’s appreciation has pushed the BSP to buy more dollars and incur losses. The losses have worsened since the purchases are kept as part of reserves and their value continues to go down due to the dollar’s weakness.

BSP losses had reached P86.31 billion as of November last year, inching closer to 2007’s all-time high of P86.94 billion. Foreign exchange fluctuations contributed P46.34 billion, while interest payments added P83.7 billion.

Cutting SDA rates would free up some money as the central bank would have to pay out less interest on the P1.8 trillion deposited in the facility, the GlobalSource economists said. Monetary authorities have lowered SDA rates by more than 100 basis points this year, taking these down to 2.5%. They have also hinted that future cuts “cannot be ruled out.”

“The risk with bringing the SDA rate even lower is the potential for asset bubbles in the already frothy stock and property markets,” the GlobalSource report notes.

The volume of SDA deposits even rose after a cut in January, the economists pointed out, indicating that lower rates will not necessarily push funds out easily especially with bond yields also dropping. Any money moving out, they said, will likely be shifted to high-yielding sectors like equities and real estate.

“Still, if the lower rates induce banks to lend too aggressively, the BSP may then switch to raising reserve requirements apart from tightening prudential limits further,” the economists said.

Banks are currently mandated to keep 18% of their deposits and deposit substitutes -- promissory notes, certificates of assignment, bankers acceptances and other papers -- with the BSP as reserves. The central bank does not pay interest and the money can be used to fund dollar purchases.

Monetary authorities have said that reserve requirements are “on the table” as one of the means to temper the peso’s rise. Among the proposals are an increase in the current ratio or the creation of a new one on trust products.

Should these still prove ineffective, GlobalSource said the BSP could end up reducing its dollar purchases and simply “tolerate a larger peso appreciation.”

“Already, it has passed some of the burden of keeping the exchange rate competitive, a public policy objective, to the national government with the latter prepared to exclusively tap the local market for its financing requirements this year,” it noted.

The government can do even more to help in easing the peso appreciation, the consultancy added. It can speed up infrastructure investment, which will raise demand for dollars, and encourage the state-run Government Service Insurance System and the Social Security System to invest abroad.

The BSP has insisted that while it evaluates tools such as SDA rates and reserve requirements, it is doing so only to control liquidity and manage inflation, not improve its bottom line. Savings from the SDA rate cuts -- estimated at P18 billion -- are only a “side effect.”

The GlobalSource economists, however, said the balance sheet may be a prime consideration.

“[The SDA rate cut] and signals of more cuts ahead suggest to us that indeed, its losses have entered the policy equation,” they said.

“But given the above, this is unlikely to have been driven by economic considerations but, due to its history, by political and reputational risks of being perceived as having weak finances.”