SPECIAL REPORT
BSP tolerates losses to keep inflation at bay
By Daxim Lucas
Philippine Daily Inquirer
First Posted 19:18:00 03/27/2008
MANILA, Philippines--The large losses incurred by the Bangko Sentral ng Pilipinas (BSP, the Philippine central bank) last year happened in the course of its performance of its main goal to keep the prices of local goods and services from rising too fast.
Because of this, its losses of P62.5 billion--on top of the P6.8 billion it also lost in 2006--were justified as acceptable, according to a widely respected former central bank governor.
"If I were in their place, I would do the same thing," said Gabriel C. Singson, former BSP governor.
Singson was the first governor of the BSP when the monetary authority was recapitalized in 1993, having gone bankrupt the year before due to large subsidies to the pre-deregulation oil price stabilization fund.
Earlier this month, the BSP came under attack from influential lawmaker Rep. Luis Villafuerte, who scored the central bank's policy of using so-called "special deposit accounts" (SDAs) to keep domestic inflation in check.
According to Villafuerte, the SDAs were costly because they offered higher yields for banks, which deposit their funds with the BSP, while at the same time diverting the market's attention away from government securities, which offer lower returns.
Strangely, Villafuerte's wife--Nelly Favis-Villafuerte--sits on the central bank's policy-making Monetary Board, which approved the use of SDAs to keep liquidity growth in the financial system in check.
According to Singson, the use of SDAs to rein in inflationary pressure is provided for by the law that created the central bank, and is one of the tools available to the BSP governor for him to be able to perform his mandate well.
"According to the law, the central bank can receive deposits from banks," he said. "SDAs are deposits, and the law explicitly says that BSP can pay interest on deposits of banks."
Singson, who won praise for his handling of the BSP during the 1997 East Asian financial crisis, also defended the losses incurred by the central bank due to the sharp appreciation of the peso against the US dollar last year.
He pointed out that bulk of the BSP's losses, in fact, came about due to the weak dollar, which prompted a 19-percent rise in the value of the local currency last year.
As the BSP had accumulated close to $36 billion in foreign exchange reserves, the value of the holdings in peso terms declined with the weakening of the greenback.
The central bank's situation was aggravated by the fact that it had to buy more dollars as they flooded into the local economy from abroad--all because the law tells the central bank to do so in the pursuit of "price stability."
Despite all this, Singson is not worried for the institution he helped build, saying it can count on its own deep pockets to tide it over.
"The central bank has a large exchange contingency reserve," he said. "I started this practice of setting aside money from the BSP's earnings and it was continued by Governor 'Paeng' [Rafael Buenaventura]."
The amount of the contingency fund now stands at around P200 billion, by his estimate--a fund the central bank can draw on to strengthen its resolve in keeping inflation low.
The former BSP chief said he has experienced enough of financial market gyrations to realize that the situation can--and will--change.
"Will the peso appreciate 19 percent this year? I don't think so," he said. "What makes you think it will stay this way forever?"
And even if it did, Singson pointed out that the main goal of the central bank is to help keep prices steady, allowing Filipinos to enjoy the full value of their hard-earned currency.
"The central bank has been doing a good job, and it has been successful [in performing] their main mandate," Singson said.
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