BSP spending within mandate, say economists

MANILA, Philippines - Economists from the private sector said the financial measures by the Bangko Sentral ng Pilipinas (BSP) are within its mandate to take prudential steps to defend the Philippine economy.

ATR KimEng Securities Inc. chief economist Luz L. Lorenzo said that it is within the monetary authority’s mandate to take prudential measures, including spending millions of pesos, to defend the Philippine economy.

“The BSP must put prudential limits to head off any risks such as a strengthening peso that may work against the economy,” Lorenzo said in an economic briefing Thursday.

To shield the Philippine economy from capital inflows, the BSP reportedly spends at least P6 billion monthly.

Thus over time, its net worth shrunk to just over a billion pesos from a surplus of P115 billion in 2012.

The peso, meanwhile, has gained 1.1 percent against the dollar this year, while last year it appreciated 6.8 percent.

“The huge inflows is a good problem as it indicates the economy is very attractive,” Maybank Kim Eng Group head of research and economics Pransenjit Kumar Basu said.

Most forecasts point to the peso appreciating to the 39.90 level to the dollar by the end of the year.

And the huge inflows had also forced revaluations to an estimated $84 billion on its foreign currency vault.

BSP Governor Amando Tetangco said its mandate is for liquidity management and participation in the foreign exchange market to attain monetary and financial stability.

“But it has come at a price,” Tetangco said.

The BSP had to mop up liquidity and revalue to stabilize foreign exchange rates.

But economists and Tetangco himself had said that the problem is not unique as it is being experienced likewise by emerging markets central banks.

Nevertheless, the BSP has been successful so far, as it has remained within its inflation targets over a four-year span.

It has slashed the interest rates on the special deposit accounts (SDAs) in a bid to discourage further hot money inflows.

The move was also seen as encouraging  the market to invest in other instruments such as mutual funds, unit investment trust funds, insurance, retail treasury bonds, corporate debt papers, real estate, and the stock market.

“External liquidity indicators are at record high, and the banking system has remained sound and effective intermediate of funds for productive economic uses,” Tetangco said.