BSP prefers weak peso - report

Posted at 07/12/12 8:11 AM

MANILA, Philippines - The move by the Bangko Sentral ng Pilipinas (BSP) to tighten regulations on special deposit accounts (SDA) showed the BSP’s preference for a weak peso, the research unit of Citi said in a report dated July 9.

“Preference for a ‘weak’ peso continues to be BSP’s main tool for policy accommodation,” Citi Research said on its Emerging Markets Daily report.

A weak peso will benefit exporters by making their products cheaper abroad. It will also raise the amount being received by families of overseas Filipino workers.

The report outlined the possible implications of last week’s announcement by the BSP banning foreign funds in SDAs, saying those accounts were meant to manage domestic liquidity and not inflows from abroad.

SDA is part of the BSP’s policy tool kit to siphon off excess domestic liquidity which may stoke inflation. There were worries foreign funds are taking advantage of the high interest rate charged on SDAs relative to those prevailing in the developed markets which are currently enduring record-low interest rates due to a prevailing debt crisis.

As of June 15, SDA deposits, whose rate is pegged to the BSP’s overnight borrowing rate of four percent, have ballooned to P1.657 trillion.

Citi said the BSP’s move could “spur short-term capital outflows” from the SDAs “that can trigger peso correction in the near-term and deter strong peso appreciation.”

Renewed risk appetite has caused the local currency to reach a four-year high Thursday last week, closing at P41.68 to a dollar.

The peso closed at P41.860 Tuesday, slightly stronger than the P41.945 closing last Monday.

Citi economist Jun Trinidad told The STAR in a phone interview that though measures such as the SDA regulations tightening were meant “to improve efficiency and transparency in market transactions,” they could have an “indirect” effect or the peso.

“They cannot directly intervene, but you know the BSP can buy or sell dollars, for example,” Trinidad said.

“The move of the BSP then to make transactions a lot more transparent may have an impact on the exchange rate on the near-term,” he explained.

Under the refinements made on the SDA, parties that will park their funds in the facility shall be required to sign an agreement that none of the funds to be invested are foreign in nature.

“Beyond the tightening of rules, both fiscal and monetary authorities have the growth objective in the near-term. That is why they would prefer a stance with accommodative bias,” Trinidad said.

Trinidad dismissed the possibility that a weak peso may be inflationary, saying oil prices have since tamed down due to lack of demand from developing nations.

Inflation has averaged three percent as of June this year, hitting the lower end of the BSP’s three- to five-percent target for the year.

“What the government and the BSP do not want is a rapid appreciating of the peso and with this move (to tighten SDA regulations), we can see their preference for a weak currency,” Trinidad said.