SDA funds surge to P1.5T

MANILA, Philippines—Funds parked in the special deposit account (SDA) facility of the central bank hit a new record high of P1.5 trillion as of end-January, from P1.2 trillion at the end of last year.

Officials from the Bangko Sentral ng Pilipinas said the growth in SDA deposits was expected given the strength of the banking sector, which continued to enjoy increasing resources, including deposits from the public.

SDA placements continued to grow despite the fact that the yield on SDA deposits has remained at a record low of 4 percent.

Some analysts predict that funds placed in the SDA facility would continue to expand as banks improve profitability and as the central bank is expected to soon raise its key policy rates to combat rising inflation.

Currently, the key policy rates are at 4 and 6 percent for overnight borrowing and lending, respectively.

The SDA rate is equivalent to the overnight borrowing rate. An increase in the latter, therefore, would mean an increase in the SDA rate.

Some analysts, however, said the central bank may opt to keep its key policy rates for some time to prevent a further surge in deposits to the SDA facility.

An increase in the SDA rate would encourage banks to park more of their excess funds in the risk-free facility.

First Metro Investments Corp. and University of Asia and the Pacific said in a joint report that the BSP may instead choose to raise the reserve requirement, which is currently at 19 percent of deposits in banks, to fight inflation.

The reserve requirement is the percentage of deposits in banks that must be kept at the BSP as reserves.

A higher reserve requirement reduces the amount of money in circulation, thereby tempering growth in demand and slowing down inflation, or the increase in the prices of basic commodities.

“Monetary policy will likely tighten early in Q2 [second quarter] but this will not be in the form of an increase in the policy rate from the present 4 percent, but rather an increase in the reserve requirement,” FMIC and UA&P said.

The steep rise in deposits to the SDA facility of the central bank has become a cause for concern for some economists, who said a substantial portion of the parked funds should instead be used by the banks for more lending to boost economic growth.

The BSP has been urged to discourage banks from placing too much of their funds in the SDA facility either by reducing the yield. Some have even suggested that it be dissolved.

Monetary officials said, however, that the SDA facility is an essential tool to help fight inflation.