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- Category: Top News
- Published on Saturday, 29 December 2012 19:43
- Written by Jun Vallecera / Reporter
THE capital injection of another P20 billion by the government to the Bangko Sentral ng Pilipinas (BSP) capped a year of outstanding performance by the monetary sector that, going forward, will help the central bank keep the monetary aggregates well within check.
Well-behaved aggregate targets help ensure accelerated growth already averaging 6.5 percent in nine months in terms of the gross domestic product and sustained growth will be sustained in 2013, according to BSP Governor Amando M. Tetangco Jr.
“One can expect sustained economic growth next year as even now the monetary aggregates are under control. This explains why inflation and inflation expectations remain benign,” he said on Friday.
The relationship between central-bank capital and economic growth is complex but one of utmost importance for Tetangco and six other members of the policy-making monetary board whose collective work centers on stability of prices.
A key player in monetary-policy crafting is board member and Finance Secretary Cesar V. Purisima, whose own success at steering stakeholders into crafting a credible revenue-reform program ultimately convinced Budget Secretary Florencio Abad to release a huge chunk of the revenue savings thus far this year to fortify the capital base of the central bank.
No one understands the value of the gesture more than Tetangco himself, whose own pursuit of the additional capital injection started 17 years earlier when the national government first failed to honor its commitment to make the revitalized central bank a source of strength for the then-struggling economy.
“We welcome this move by the national government to pay up additional P20-billion capitalization of the BSP. We need this additional capital given the challenges of monetary stabilization made more imperative by sustained capital flows,” BSP Deputy Governor Diwa C. Guinigundo said, when the capital boost was announced in Malacañang.
The financial strength of the BSP, while acknowledged as considerable, is not absolute, and thus the need for a strong capital foundation.
The commitment of the national government was also long overdue, the original goal of having the full P50 billion in place by 1995 receding farther and further each year as a result of the passage of Republic Act 7653 that gave birth to the New Central Bank Act of 1993, also known as the BSP Charter.
Although still short of the full capital requirement by P10 billion, the injection comes at a time when managing the economy has euphemistically become challenging.
Central bank policy crafting is in many respects “much like pushing on a string,” according to Tetangco.
Top of mind is the inflow of foreign funds that, while useful in projecting the image of an attractive and continuously expanding economy, boosts liquidity levels that at some point become counterintuitive.
The BSP has managed that liquidity boost through a special deposit account (SDA) window that captures most of the excess peso funds that would have flooded the banking system and push growth-busting inflation higher up the scale.
Like all things economic, the SDA facility has its cost that in this case translates to P50 billion or P60 billion a year in interest expenses just for the SDA alone.
This is why the BSP continues to pursue several other avenues to fortify itself, including a petition sent many times to the legislature to allow the central bank to issue its own promissory notes.
Tetangco said SDAs, while useful, are inferior to so-called promissory notes (PNs), which allow the central bank to issue its own debt notes once again.
Tetangco, Guinigundo and BSP Deputy Governor Nestor A. Espenilla Jr. have repeatedly told Congress that SDAs are not only expensive but inferior to PNs, which are tradable, and thus much more attractive for the banking community and its never-ending quest for yield.
The 3.5 percent paid on the banks’ special deposits cost an arm and a leg and best indicated by nine-month losses totaling P68.36
billion.
Tetangco said maintaining the SDA window, as with several other measures that have the same monetary implications, is key toward ensuring that inflation does not get out of hand.
Eleven-month inflation averaged only 3.2 percent or near the low end of target range for the year even as growth averaged 7.1 percent in the third quarter.
“High growth and low inflation” affirms that we have once again achieved the ideal convergence of high growth and stable inflation. The confluence of nimble monetary policy, steadfast fiscal action and swift government responses has sustained the economy on this path.
“Going forward, the BSP will be careful to calibrate the use of its enhanced monetary tool kit to help ensure that domestic aggregate demands price pressures [as the economy continues on this high growth path] and risks from capital flows [as more investors become convinced that the country is a value investment] are managed,” Tetangco said.
Clearly, capital flows and inflation are top priority issues among monetary policy-makers.
The BSP recently moved to impose a higher capital charge on the forward and swap transactions of commercial banks involving volumes that had more to do with speculation than the currency hedge it was designed for.
“There is no honor among speculators,” Tetangco said in jest, when the capital charge went up from 12.5 percent of the capital for local banks and 100 percent for foreign-owned banks just last week.
Hedging is a legitimate market strategy to keep the cost of obtaining foreign exchange down the line from getting out of hand, a tack that for some banks is also an avenue for profitable speculation.
The speculative frenzy was fed by the notion that the peso would continue to gain on the US dollar as foreign capital continues to pour in massive amounts.
Such flows have allowed the BSP to accumulate a stock of foreign currency equal to more or less a year’s worth of imports for services and goods or four times the global practice of just three months.
Actual 11-month foreign-currency reserves already total $84.1 billion, sharply up from last year’s total of only $75.3 billion and more than enough to fund the country’s foreign currency-denominated debts of just $62 billion.
The country’s newfound image as net lender instead of net borrower has caught the attention not just of fund managers, whose billion-dollar investment decisions make or break small economies, but also of debt watchers as Standard & Poor’s, Moody’s Investor Service and even London-based Fitch Ratings seen looking to raise the country’s debt rating to investment grade over the short term.
Such is the optimism about the country’s future that the markets have responded by anticipating the exchange rate, no longer volatile as in the recent past, to be stable at P41 up to P41.60 per dollar over the next few months.
Actual exchange rate in December averaged 11.5 centavos higher to P41.007 from P41.122 in November, based on BSP data.
The balance of payments, whose surplus or deficit state determines how much the local currency the peso is valued overseas, already posted a surplus worth $8.6 billion, or way above forecast level of just $6.8 billion for the year.
The excess indicates a surfeit of foreign-currency earnings derived from trade, tourism receipts, remittances, investments and loan proceeds than the country was paying for the same.
This development, Tetangco said, even as the banking system has not only fortified itself against global headwinds presented by sovereign debt issues hounding countries under the European Union but the prospect of slowing growth in the US as consequence of the impact of an economic event known as the fiscal cliff.
“Everybody is focused on [the] fiscal cliff. Personally, I think they will come up with an agreement because if they don’t, then that will be a negative event for the US, its constituents and for the rest of the world. A significant part of volatility now is due to these discussions,” Tetangco said of a potentially sudden drop in US economic activity as a result of the failure of US legislators to reach an agreement.
Taxes are set to rise in the US next year just as its spending capacity is curtailed by legislative inaction.
Such forces will tend to drag down the economy of the US, still the No. 1 trading partner of the Philippines.
In Photo: A trader blows a horn during the last day of trading this year at the Philippine Stock Exchange in Makati City on Friday. The PSE index was up 0.31 percent or 17.84 points to close at 5,812.73. (AP)
