Business World, Introspective
In its latest attempt to deal with speculative inflows, the Bangko Sentral ng Pilipinas (BSP) capped in the last days of last year, individual banks’ ability to enter into non-deliverable forwards (NDF) and announced that it has also set a system-wide limit for internal monitoring. This is just the latest serving in the BSP’s menu of options for managing the pressures of an appreciating currency.
The BSP has been wrestling with capital inflows all year round,
supplementing its use of policy rate cuts (total of 100bp this year) and
reserve accumulation (GIR up $8.6B to $84B as of November) with more
unconventional tools aimed at speculators. In January, it applied a
higher risk weight on NDFs, successfully slashing NDF volumes from a reported
high of $16 billion in mid-2011 to only $4 billion, and in July, banned
foreigners from its special deposit accounts (SDA) but with less apparent
success.
As it is, market sentiment on the peso is for further appreciation
on top of the over 7% gain last year, among the highest in the region. This
will attract more inflows as yields in mature markets are expected to remain
low, and positive Philippine credit ratings outlook fuels expectation for
investment grade rating this year. Likewise, forecast surpluses in the
current account due to growing remittances, BPO service exports and electronic
export recovery will continue to provide the peso fundamental support.
This is creating serious concern, not only for OFW workers,
exporters and BPO players, but also manufacturers threatened by cheaper
imports. Socio-economic Planning Secretary Balisacan has also publicly shared
his worries on a further appreciation's broader impact on the economy.
An investment revival, including in government’s PPP program, may
boost dollar demand and ease appreciation pressure as spending in
import-intensive mass transport, water, power and other infrastructure projects
suck up some of the foreign exchange inflows. While financing from
foreign equity investors as well as our traditional development partners can be
expected to bring in dollars, something that should be encouraged considering a
more long-term strategic perspective, a major part of the infrastructure
investments will be done via local borrowing under the current favorable
borrowing environment abundant liquidity and lengthening maturities.
Pending such pick up in domestically financed capital imports, the
Department of Finance can be more aggressive in cutting down its foreign
borrowings from capital markets in favor of local financing and source payments
for maturing dollar debts from the country’s international reserves.
Should portfolio flows continue unabated, the BSP has other
measures it can consider, or likely already considering, which it can implement
in a calibrated manner to respond to actual developments.
The record high level of reserves which earn very low interest
rates vs. the SDA rate means the pressure on the BSP’s balance sheet has grown,
and indeed, snowballs over time. Just for the first three quarters of
last year, it incurred a whooping P 68 billion in losses. It may try to
reduce the cost of that negative carry by lowering the policy/SDA rate, and
rely more on less market based measures to mop up the liquidity that its dollar
purchases generate.
Such non-market based measures can include raising the
reserve requirement on deposits or impose reserves on heretofore reserve-free
holdings of banks, such as trust accounts under management. This would spread
the cost to the banks which in turn will be passed on to savers. Care will need
to be taken that this does not contribute to disintermediation, i.e.
discourage savings in banks.
As allowed under its charter, the BSP may also try to earn a
higher yield from the reserves by investing these in higher yielding
securities, given the paltry returns it gets in the most prime ones it
currently invests in for maximum safety. The current yield on five year US
Treasury notes for example is under 1 percent, compared to the 3.75 percent
that the BSP pays for SDA’s.
There have also been proposals in Congress to set up a sovereign
wealth fund to carve out a portion of the “excess reserves”
to invest in development projects, including for state lending
to small and medium scale industries. Unless carefully structured, and
under an ideal administration, this may give rise to a host of governance/moral
hazard concerns. Besides, we already have the SSS and the GSIS that are allowed
under their charters to invest overseas. Urging these institutions to place a
small fraction, say ten percent, of their investible funds to overseas
investments will help the BSP in sucking up dollar flows, even as they
align with global pension fund management best practice by diversifying their
portfolio holdings.
If push comes to shove, the government can take stronger measures
to control capital flows by way of a tax on short term placements, the
so-called Tobin tax, as has been pioneered by Chile in the 90's, and which has
been more recently used in Brazil on and off to manage foreign currency inflows
and their impact on the exchange rate. However, I do not think our
BSP is anywhere close to supporting such at this time.
Part of this column came from GlobalSource Market Brief, Stemming
the Tide, 28th December 2012, written by Christine Tang and the
columnist. Romeo Bernardo is a Board Director of IDEA. He served as
Undersecretary of Finance during the Aquino 1 and Ramos administrations.
