Philippines Mulls Adjusting Deposit Facility as Peso Climbs

The Philippine central bank is considering adjustments to its so-called special deposit accounts, signaling it may limit access to the facility to cut costs and enhance its scope to cool currency gains.

“We would like to consider ways to make the SDA function more as a monetary instrument rather than an investment vehicle,” Governor Amando Tetangco said on April 27 in an e-mail response to questions. “The exact form of these refinements will be made known in time, but as in our practice, any adjustments we will make will be gradual and phased in.”

The possible change in the SDA, which hold about $46 billion, comes after Bangko Sentral ng Pilipinas on April 25 cut the rate it pays on the deposit facility for a third time this year. The monetary authority has lowered borrowing costs, banned foreign funds from the special accounts and revised rules to spur outflows, joining South Korea and Thailand in stepping up efforts to temper currency appreciation.

“The central bank is trying to manage its costs so it will have greater flexibility to intervene in the currency market,” said Ricky Cebrero, executive vice president and head of treasury at Manila-based Philippine National Bank. “If the BSP limits SDA access through trust accounts in the near future, some funds may shift to bank deposits subject to an 18 percent reserve requirement. That will further reduce BSP’s costs.”

The peso rose 0.1 percent to 41.173 per dollar at the noon trading break in Manila. It has gained 2.8 percent in the past 12 months, the best performance after the Thai baht among 11 regional currencies tracked by Bloomberg. The Philippine Stock Exchange Index climbed for a third day.

Expanded Access

The monetary authority allowed banks’ trust units to place deposits in SDAs in May 2007, after money-supply growth rose to 28 percent the previous month. As of end-2012, 1.27 trillion pesos ($31 billion) of the 3.05 trillion-peso assets of banks’ trust business was due from BSP, according to central bank data.

The BSP kept its benchmark overnight borrowing rate at a record-low 3.5 percent on April 25 after four 25-basis-point cuts in 2012. Lowering the SDA rate is part of the central bank’s shift to an “interest-rate corridor” policy approach, Tetangco said in a Jan. 30 interview after the first reduction.

Funds in SDAs climbed to 1.93 trillion pesos as of April 5 from about 1.7 trillion pesos in January even after the rate on deposits of one week to one month was trimmed to 2 percent last week from more than 3.5 percent at the start of the year.

“The challenge is finding suitable products for investors as they move out of the SDA,” said Paul Joseph Garcia, who helps manage the equivalent of $18.4 billion at Manila-based BPI Asset Management Inc. Some trust accounts will pull out of SDAs by year-end, he said, and investors may consider equities.

‘Mobilize Funds’

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 last week. The 91-day Treasury bill yield fell to a record-low 0.04 percent on April 1.

Asian policy makers must be ready to respond “early and decisively” to overheating risks in their economies stemming from rapid credit growth and rising asset prices, the International Monetary Fund said today. Funds in the SDA must be used to support economic activity as the government bolsters infrastructure and stimulates growth, Tetangco said.

“Weaning investors out of the SDA should encourage banks to develop new products that would mobilize funds,” he said in his e-mail. Banks must follow best practices as they introduce new products and ensure “appropriate underwriting standards.”

President Benigno Aquino is increasing spending to a record this year and seeking more than $17 billion of investments in highways and ports to spur growth to as much as 7 percent. San Miguel Corp., the biggest Philippine company by sales, this month won a contract to upgrade a road from the Manila airport and will partner Incheon International Airport Corp. to bid to modernize the Cebu airport.

“We need to create an operating environment where users and sources of funds have the ‘long term’ in mind,” Tetangco said. “We need to convert this liquidity to projects that will strengthen the base for sustained growth.”

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