Call off bets on galloping peso, BAP urged

Published on Wednesday, 05 December 2012 21:28

Written by Jun Vallecera

The strong likelihood for the local currency the peso to gain strength against the US dollar and similarly strong speculation that this would become reality soon has forced regulators to ask the banks yet again to go slow in the use of non-deliverable forwards (NDFs).

This was learned on Wednesday from Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr.,  who told reporters he has asked the influential Bankers Association of the Philippines (BAP) to cooperate and urge its members to refrain from making speculative bets that the peso would gain even more strength down the line.

The view that the peso would strengthen further to P38.50 per dollar in one or two months lifted NDF transactions in recent weeks and in volumes that the BSP considers inordinately higher than warranted by dollar-demand conditions.

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“We are talking with the BAP on the merit of imposing a cap on NDF transaction volumes,” Tetangco said without citing a particular number.

Around mid-2011, when currency traders made bets that the peso would strengthen further, the BSP governor—exercising considerable moral influence—persuaded the banks to trim NDF transactions by 20 percent.

Banks craft NDF contracts as part of a menu of services for importers and other clients, whose future dollar requirements need to be assured as and when shipment obligations become due.

It works by ensuring the availability of dollars at a future date and at a pre-agreed exchange rate.

From a larger perspective, hedging one’s future dollar needs is a legitimate activity although the point at
which such contracts become a money-market tool and turn speculative requires judgment on the part of the regulators. Thus the need to use “moral suasion” on the banks, Tetangco said.

There were past pacts between the BSP and market players on the volume of NDF transactions that may be transacted during particular periods but such agreements did not address the risks involved when the foreign exchange trend reverses course.

Because a reversal of existing trends has the potential to put the safety and soundness of the banking system at risk, NDFs were imposed a higher capital charge of 15 percent at the start of the year from 10 percent previously to encourage only the legitimate pursuit of NDF contracts.

The country’s solid macro-economic underpinnings have made the Philippines a favorite destination of portfolio funds also known as “hot” or speculative money.

Philippine assets yielding returns in excess of 3 percent, when most markets including Japan and the United States have close to zero returns, encourages foreign inflows even more.

Some analysts have recommended an interest-rate cut at the December 13 monetary board meeting of the BSP next week, for instance, to curb future foreign inflows that encourage volatility in the markets.

Others propose doing a Brazil, Thailand or South Korea whose governments have imposed capital gains, a tax on interest income or withhold such altogether on foreign bond holdings.

Indonesia, in an effort to slow foreign capital flows, has imposed a one-month holding period for IOU purchases apart from capping short-term foreign borrowings to no more than 30 percent of capital.

South Korea also has limits on the banks’ foreign-currency forwards and the build-up of derivatives contracts.

BSP Deputy Governor Diwa C. Guinigundo, when asked on whether comparable measures are planned, simply said, “No.”

(Jun Vallecera)