Philippines running low on intervention funds

THE Philippine central bank has cleaned out its coffers over the past year, spending billions of pesos to shield its currency and economy from the impact of large inflows of foreign money.

Now, as the cash flows to fund market intervention dry up, the Bangko Sentral ng Pilipinas (BSP) knows it is facing tough - and limited - choices.

Stepping aside and letting the peso appreciate is the easiest option, even if highly undesirable at a time when major economies such as Japan and Britain have the economic advantage of easy policies and weak currencies.

"The BSP has experienced losses from the combination of reserve build-up in the face of capital inflows, strong currency appreciation, sterilisation to manage domestic liquidity, and low reinvestment returns on dollar assets relative to cost of sterilisation," Governor Amando Tetangco said this week.

Over the past year, BSP data shows it has spent six billion pesos to 10 billion pesos (RM460.28 million to RM765.06 million) each month, and slashing that expense is the most pressing need.

Part of the outflows were paper losses from revaluing its US$84 billion (RM261.24 billion) currency reserves portfolio of dollars, euros and pounds. The rest was the cost of managing money supply as investors are drawn by strong growth, moderate inflation and a stock market that has risen 3-1/2 times in value in four years.

BSP data shows its net worth included a surplus of 115 billion pesos in January 2012. That had shrunk to 37.9 billion by November, or less than US$1 billion, and may now have disappeared.

Its holdings of FX reserves have climbed US$2 billion since October, while balances in Special Deposit Accounts (SDA), which it uses to mop up cash from the banking system, hit a record 1.86 trillion pesos in mid-February.

"Their sterilisation costs are mounting and conventional policy options are depleted," said Sanjay Mathur, economist with the Royal Bank of Scotland.

"The scale of the balance-of-payments surplus is fairly large in relation to the BSP's capital."

However, RBS still expects the authorities to try to rein in the peso, Mathur said.

Analysts feel the BSP ought to cut the rates on the SDA deposits, possibly as soon as when it has a regular policy review meeting. Reuters