To curb speculative inflows: BSP bans foreign funds in SDAs

SUBIC BAY FREEPORT, Philippines – Foreign funds will be officially banned in the special deposit accounts (SDAs) of the Bangko Sentral ng Pilipinas (BSP) under “refinements” made by monetary authorities to combat speculative inflows, the central bank chief said yesterday.

“Existing regulations on SDA do not provide restrictions on non-resident investors,” BSP Governor Amando Tetangco Jr. told reporters during the BSP’s annual media seminar held here.

“The (Monetary) Board then approved at its last meeting a refinement to the manner in which SDA is traded. This will be effective immediately upon publication,” he explained.

“We will now require counter parties of the BSP to accomplish an undertaking, duly notarized, that none of the funds invested in the SDA – both by the bank and the trust arm of banks – have been sourced directly or indirectly from non-residents,” he added.

SDAs are part of the BSP’s policy toolkit to siphon off excess domestic liquidity from the financial system, which may stoke inflation. However, Tetangco said these have become “entry points” for foreign funds seeking higher yields in emerging markets.

BSP Deputy Governor Diwa Guinigundo said in the same seminar: “The SDA is a monetary instrument meant for funds already here in the Philippines. If you allow the SDA to be accessible to foreign money, that is defeating the purpose.”

Interest paid to SDAs are peg to BSP’s overnight borrowing rate of four percent, much higher than the near zero rates in Europe, which has experienced rate cuts by monetary authorities in order to support growth amid the debt crisis.

SDA deposits ballooned to P1.645 trillion as of the first quarter of this year, BSP data showed, contributing to the peso’s appreciation.

Tetangco said given recent developments in Europe, “we want to forestall any increase in the use of facility.”

The SDA reform followed last January’s raising of charges – to 15 percent from 10 percent – on non-deliverable forwards (NDF) – investments that allow investors to book profits by calculating the difference between the agreed exchange rate and the prevailing market rate.

“We are monitoring capital flows. There could be an increase in these flows again. There have been new developments so we need to watch it some more,” he explained.

The European Central Bank last week cut its key rate to new record-low of 0.75 percent as the Bank of England also announced an extension of its quantitative easing (QE) or bond-buying program aimed at providing funds to the financial system.

Guinigundo said such measures may be both beneficial and detrimental to the local economy.

“If QE lowers long term bond yields in the advanced economies, investors could turn to emerging markets of similar maturities but of higher rates. This would boost capital flows, which would abet asset price inflation,” he explained.

“Positive interest rate differentials between the developed and emerging markets can be expected to persist because the problems in the US and Europe, it may take years for these to be solved,” Guinigundo said.

This may prove to be a challenge to the economy, he explained, especially if it does not have the “absorption capacity” required to utilize these flows.

“We would expect the fiscal sector would continue to do more, to spend more, so that there will be more demand for liquidity, those parked at the SDAs will be reduced,” Guinigundo said.