BSP allays fears of credit crunch
By Doris Dumlao
Philippine Daily Inquirer
First Posted 20:15:00 09/28/2008
THE BANGKO Sentral ng Pilipinas said it would provide enough supply of money to oil the domestic economy given a worsening global financial shakeout that is creating ripples across the globe.
“There’s sufficient peso and foreign exchange liquidity,” BSP Deputy Governor Diwa Guinigundo told reporters.
“There will be less inflows, no doubt about that, because of risk aversion, but to me, the fact we are still getting inflows from exports, overseas remittances and BPOs (business process outsourcing), there’s enough liquidity in the system,” Guinigundo said when asked about the impact of the lingering global financial turmoil.
He said there was currently a strong demand for dollars at the Philippine Dealing System due to the importation season.
Importers usually beef up their stocks in the third quarter in preparation for the Christmas season, the Filipinos’ longest and most extravagant holiday season.
“It’s a matter of time before remittances start coming in,” he said. “So there’s sufficient liquidity for both domestic and peso (money markets).”
The central bank has raised its overnight borrowing rate by a total of 100 basis points from July to August to temper rising inflation expectations brought by the upswing in global oil and food prices.
But despite the BSP’s monetary tightening over the past three months, money locked up in the central bank’s vaults in the form of short-term instruments, such as overnight borrowings (reverse repurchase agreements) and the high-yield special deposit accounts, have not substantially increased.
The BSP has mopped up about P263 billion using its overnight borrowings, not too far from levels in previous months prior to its monetary tightening through an increase in the overnight borrowing rate.
“It’s because of the implementation of the tax,” Guinigundo said. The BSP started imposing on Aug. 22 a 20-percent withholding tax on banks’ overnight transactions in compliance with a Bureau of Internal Revenue directive, causing investors to shift to longer-dated instruments in search of better yields.
In its circular, it said the reverse repurchase agreements it had entered into with banks were now included in the definition of the term “deposit substitutes” and subject to the withholding tax.
In the past, the central bank contested the imposition of such a tax because its functions as a monetary authority were different from that of a regular commercial bank, which is in the business of making money. There were concerns that the imposition of the tax would make its overnight borrowings less attractive as a tool to mop up excess liquidity in the financial system.
Asked about the impact of the new imposition, a treasury official said it would initially cause investors to buy bonds on the longer end of the curve. The official said some investors thought that the imposition was effectively a reduction in the yields of these short-term instruments.
While the recent global turmoil will likely prompt Asian banks to slow down on lending, thereby dampening regional economic growth, the region isn’t likely to slide into a credit crunch—or sharp cutback in lending that would starve Asia’s corporations of much needed cash, British banking giant HSBC said in a recent research.
Wall Street has already lost three of its biggest investment banks—Bear Stearns, Merrill Lynch and Lehman Brothers. Merrill Lynch was swallowed by Bank of America, while Lehman recently declared bankruptcy. After the crisis in Wall Street, many expect the shakeout to spread to “main street” banks in the United States.
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