BSP seen to slash SDA yield, keep key rates

Analysts expect outbound trade to be firmer this year

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The Bangko Sentral ng Pilipinas may reduce the interest rates on special deposit accounts (SDAs) by another 100 basis points this year to curb costs and stabilize the peso as inflation is expected to remain benign, economists from JP Morgan Chase and Bank of the Philippine Islands said.

In separate research reports, economists from the two banks also said the BSP would likely keep the overnight borrowing rate steady at 3.5 percent for the rest of the year.

The rate on SDAs—a powerful mopping up tool that allows the central bank to borrow from a broader market—has been cut by a total of 100 basis points so far this year. The rate now stands at 2.5 percent.

On the BSP’s key policy, a lower (overnight borrowing) rate “is unlikely at this point as it would leave the real policy rate negative and potentially fuel property price bubbles, a concern that is just starting to register on the BSP’s radar,” JP Morgan economist Matt Hildebrandt said in a research note dated March 22.

The BSP’s overnight borrowing rate now stands at 3.5 percent.

In a separate research note, BPI economist Emilio Neri Jr. said the primary motivation for the last two SDA rate cuts was still to temper the peso’s appreciation.

Neri said the BSP would also benefit from the lower SDA rates since it would be able to save up on interest expenses.

Citing BSP estimates, Neri said that if SDA rates were to be kept at 2.5 percent of the balance in 2013, the central bank could save as much as P20 billion on interest expenses alone. Should the volume of SDA placements drop, he said, the BSP could save even more.

“With headline inflation expected to remain in the lower half of the BSP’s target range throughout most of 2013, the BSP has enough space to implement its planned corridor interest rate mechanism,” Neri said, noting that this was in line with BPI’s view that the main policy rate would be kept at 3.5 percent for the rest of the year.

Neri said the pace of both money supply and credit growth have also remained manageable that the BSP would have enough room to cut the SDA rate  without fueling a credit boom.

He expects the SDA rate to be reduced to 1.5 percent before the end of 2013.

Meanwhile, JP Morgan’s Hildebrandt said the Philippines’ growth last year reflected a recovery-related boost to exports.

The Philippines’ outbound trade suffered a setback due to the disasters in Japan and the flooding in Thailand in 2011.

The economist expects a more modest economic growth of 5.3 percent for the Philippines this year—lower than the market consensus of 6.1 percent and the government’s goal of 6 to 7 percent.

“Exports should be firmer in 2013, from 2012, due to improved global demand,” Hildebrandt said.

On the other hand, the economist noted that the government’s debt to gross domestic product ratio is still on a declining trend even after ending last year at 2.3 percent—better than the 2 percent seen in 2011.

Hildebrandt said the increase in the proportion of debt to GDP last year reflected an unusually large rise in government debt, at P486 billion, even as the deficit stood at P243 billion.

In effect, the government took advantage of low financing rates, which is why its cash balance surged, he explained.

“The change in the government’s cash balance last year was P292 billion compared to an average of P5 billion in the previous 10 years. This means that debt-to-GDP will likely fall faster than the fiscal deficit figures would suggest in the coming years as the government draws down on its excessively large cash balance rather than issue new debt,” Hildebrandt said.

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