Philippines Cuts Special Deposit Account Rate on Bubble Risk

The Philippines cut the rate it pays on special deposit accounts for a third time this year, boosting efforts to curb capital inflows that have spurred peso gains and increased the risk of asset bubbles.

Bangko Sentral ng Pilipinas lowered the rate on all SDAs to 2 percent from 2.5 percent effective immediately, according to a statement in Manila today. The decision was predicted by 12 of 16 economists surveyed by Bloomberg News. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, as forecast by all 19 economists surveyed.

“The SDA rate cut will give the central bank more flexibility to intervene in the currency market and fight inflows,” said Emilio Neri, an economist at Bank of the Philippine Islands. The central bank could lower the SDA rate to 1.5 percent this year while keeping the benchmark unchanged “because inflation is very much within their target.”

The Philippines, which won its first investment-grade ranking from Fitch Ratings last month, is seeking to slow a surge in capital inflows that has boosted property prices and lifted stocks to a record this week. The central bank will deploy “prudential measures” as needed to ward off asset bubbles, Deputy Governor Nestor Espenilla said today.

Philippine stock valuations surged to an all-time high of 20.4 times projected 12-month profits on April 22, or twice the MSCI Emerging Markets Index multiple, data compiled by Bloomberg show. The index closed 0.3 percent higher today before the decision. The peso has fallen about 0.7 percent against the U.S. dollar this year after trading near a five-year high in March.

Limited Options

The earlier SDA-rate cuts totaling 100 basis points “have not resulted in significant outflows,” Deputy Governor Diwa Guinigundo said at a briefing today. While there were short-term withdrawals after foreign funds were banned from SDAs, the “volume has resumed, there’s limited options for these funds.”

Bangko Sentral last week relaxed curbs on dollar purchases to restrain the peso, doubling the amount of dollars residents can freely buy and broadening the range of approved outward investments to encourage outflows. It had earlier imposed limits on lenders’ currency forward positions, banned overseas funds from SDAs and expanded monitoring of banks’ real-estate exposure.

The monetary authority is also considering prohibiting overseas funds from its reverse repurchase facility, Governor Amando Tetangco has said. The SDA accounts held 1.9 trillion pesos ($46 billion) as of March 27.

Philippine foreign portfolio inflows climbed to $7.3 billion last quarter, 79 percent higher from a year earlier. The value of land in the Makati business district in the capital has surpassed its 2008 peak, and will rise a further 5 percent to 8 percent in the next 12 months, Colliers International UK Plc has predicted. Ayala Land Inc., DMCI Holdings Inc., and Megaworld Corp. are constructing homes and offices in the area.

Initial Step

BSP is shifting to an interest-rate corridor method for greater flexibility. Tetangco called the first SDA rate cut in January an “initial step towards transitioning.”

Neighboring Thailand is also battling currency gains, with the baht on April 22 touching the strongest level since its devaluation in July 1997 sparked the Asian financial crisis. The central bank kept borrowing costs unchanged earlier this month, resisting calls by the government to ease monetary policy.

Philippine President Benigno Aquino is increasing spending to a record this year while seeking more than $17 billion of investments in highways and ports to spur annual growth to as much as 7 percent. Fitch upgraded the nation on March 27, citing moderate budget deficits and a “strong” policy making framework, including efforts to manage capital inflows.

The Southeast Asian nation’s economy grew 6.8 percent in the fourth quarter from the same period a year earlier. Consumer prices rose 3.2 percent in March, and the central bank today cut its inflation forecast for this year to 3.2 percent from 3.3 percent, citing lower oil prices. Price gains may accelerate to 3.4 percent next year on increased liquidity, Guinigundo said.

Exports are expected to recover, and may grow 8 percent this year if the global economy improves, Guinigundo said. Exports fell 15.6 percent in February from a year earlier, the biggest drop in 14 months.

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