Philippines May Require Trust Product Reserves to Avert Bubbles

The Philippine central bank is studying expanding reserve requirements on bank trust products as it seeks to guard against asset inflation, Assistant Governor Cyd Amador said.

“Some trust products already have reserves, some don’t so we need to rationalize it,” Amador told reporters during Bangko Sentral ng Pilipinas’ annual bankers reception on Jan. 18. “This is for inflation management, to moderate possible formation of asset bubbles.”

Amador’s comment indicates policy makers are preparing to ward off price pressures that may arise from the strongest inflows to the nation’s capital markets in 10 years. Rapid capital inflows that spurred peso gains may stoke inflation, Governor Amando Tetangco said last week as the peso climbed to its highest level in almost five years even after central bank intervention and prudential measures implemented in 2012.

Domestic trust business was worth 3.09 trillion pesos ($76 billion) as of September, the latest available data from the central bank show. At that time, 48 percent of the amount was deposited in BSP’s special deposit accounts or SDA that currently pay 3.656 percent on a one-month placement. The nation’s 91-day Treasury bill yield fell to a record low of 0.05 percent on Jan. 7.

“This could achieve a lot of things in one shot,” said Ricky Cebrero, head of treasury at Philippine National Bank in Manila. “It’s a good way of containing money-supply growth and should also lessen the cost of BSP in the SDA. Bank deposit rates that tend to compete with the SDA will drop, costs should go down and hopefully that will spur lending.”

Money Supply

Money-supply growth quickened to 9.8 percent in November, the fastest since June 2011, according to data compiled by Bloomberg. Lending expansion slowed.

Portfolio inflows reached $18.5 billion in 2012, rising 12 percent from the previous year, BSP reported on Jan. 17.

The peso, last year Asia’s best performer after the Korean won, advanced to 40.55 per dollar on Jan. 14, the strongest since March 2008. It closed at 40.575 on Jan. 18.

“Now, our challenge is dealing with the consequences of this apparent success,” central bank Governor Amando Tetangco said in a speech during the reception. “In particular, surges in capital flows. The ideal scenario is to convert these surges in capital flows into real economic assets, such as factories in the manufacturing sector or storage facilities in the agricultural sector.”

‘Excessive Volatility’

The $225 billion economy expanded 7.1 percent from a year earlier in the third quarter, the fastest pace in two years. Inflation averaged 3.2 percent in 2012, within the bank’s target range of 3 percent to 5 percent.

“We are watchful of market conduct and will implement further macroprudential measures, including refinements to those we have already put in place to keep excessive volatility in market prices in check,” Tetangco said in a Jan. 14 e-mail.

The Philippines joined South Korea last month in clamping down on currency-forward positions, imposing ceilings on non- deliverable currency forwards at 20 percent of capital for local lenders, and 100 percent for foreign entities. At the start of 2012, it ordered lenders to provide more funds to cover risks on those hedges, and in July banned foreign funds from the special accounts to limit inflows.

Banks already provide reserves for some trust products such as common trust and unit investment trust funds, Amador said.

BSP expanded the SDA in May 2007 to accept funds from banks’ trust units and state-owned pension funds after monetary growth peaked at 28 percent a month earlier.

‘Industry Setback’

Philippine banks currently set aside 18 centavos for every deposited peso, an 18 percent reserve ratio.

The central bank will keep its benchmark overnight rate at a record low 3.5 percent on Jan. 24, according to all 19 economists in a Bloomberg News survey. It reduced the rate four times in 2012. Tetangco said authorities have scope to keep borrowing costs low this year as inflation is seen within target.

The BSP and Bankers Association of the Philippines are working out the mechanics of a new loan benchmark based on the central bank’s overnight rate, Antonio Moncupa, head of the bankers’ Open Markets Committee told reporters on Jan. 18.

Monetary policy should maintain stability “while not stifling competition and growth,” Tetangco said in his speech, noting that near-zero interest rates in advanced economies are also behind the strong inflows. “Monetary policy making requires great care and balance. As the central monetary authority, we need to find this delicate point of policy equilibrium.”

To contact the reporters on this story: Max Estayo in Manila at mestayo@bloomberg.net; Clarissa Batino at cbatino@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net Paul Tighe at ptighe@bloomberg.net

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