Liquidity outflow from SDAs seen to cap rise in PH interest rates

The rise in domestic interest rates over the short term is expected to be subdued despite the ongoing outflow of foreign portfolio capital, a local investment bank said.

According to First Metro Investments Corp. (FMIC), while the recent capital flight has caused a significant drop in stock prices, this is unlikely to result in a sharp increase in yields of fixed-income securities.

One reason behind this projection is the ongoing exit of funds from the central bank’s special deposit accounts (SDAs).

Because of a recently issued directive by the Bangko Sentral ng Pilipinas prohibiting retail funds from being invested in SDAs, funds are now being withdrawn from the facility and placed in banks as deposits, and eventually invested in Treasury bills, bonds and other fixed-income securities.

“SDA funds would continue to move back to the banking system, ensuring unabated liquidity in the financial system,” FMIC president Roberto Juanchito Dispo told reporters in an e-mail. The same view was reported in the latest issue of The Market Call, which is the joint monthly publication of FMIC and the University of Asia and the Pacific.

At least P1 trillion in retail funds were estimated to have been lodged with the central bank’s SDA facility earlier in the year.

Dispo said fixed-income securities are expected to enjoy higher demand as a result of the exit of funds from the SDA facility.

Another reason cited for a potentially moderate rise in domestic interest rates is the benign inflation level. With consumer prices well managed, Dispo said there is little incentive for bond investors to seek higher yields when they bid for government securities.