BSP in the red for taming peso’s appreciation

The Bangko Sentral ng Pilipinas’ losses ballooned in 2012 for the third straight year largely due to efforts to stem the peso’s appreciation, huge interest payments, and declining revenue from gold sales.

But BSP Governor Amando Tetangco Jr. said the bulk of the losses was a natural consequence of the central bank’s mandate to stabilize the economy.

For instance, he said, the BSP had to engage in heavy dollar buying to prevent the peso from rising too sharply. It also had to accommodate more deposits—which require interest payments—to ensure that inflation remains modest despite the rise in liquidity.

Its latest unaudited financial statement showed that the BSP incurred a net loss of P95.38 billion in 2012, nearly triple the P33.69 billion recorded the previous year. In 2010, the central bank registered a net loss of P59.04 billion.

Last year, the BSP’s revenue totaled P65.73 billion. But the central bank found itself in the red when its expenses reached P110.69 billion, while its foreign exchange losses amounted to P50.38 billion.

“The BSP’s losses resulted from the monetary authority’s conduct of its stabilization function in the face of strong foreign capital inflows and ample liquidity in the system,” Tetangco explained.

The BSP’s revenue in 2012 45-percent lower than that recorded in 2011. The drop was brought on by the significant decline in the volume of gold sold by the BSP to the international market.

“Gold monetization is part of our gold reserve management tools that we use opportunistically to take advantage of favorable international gold prices,” Tetangco said.

The BSP’s expenses last year, although significant, was 5 percent lower than that of 2011. The drop in expenses was due to the central bank’s move to cut its key policy rates last year by a total of 100 basis points.

Because of the cuts, the BSP paid lower interest rates on deposits placed by banks. Still, deposits in its special deposit account (SDA) facility hit a record high of over P1.8 trillion last year.

After the BSP mopped up excess liquidity from the country’s financial system, inflation settled at a modest 3.2 percent last year, well within the official target range of 3 and 5 percent.

The BSP incurred foreign exchange losses because of the peso’s appreciation, which reduced its earnings from placements in foreign financial institutions and investments in foreign currency-denominated instruments.

Also, the foreign exchange losses were driven by the central bank’s dollar purchases, which were meant to temper the peso’s rise. Throughout 2012, the peso rose by nearly 7 percent to close at 41.05:$1 on the last trading day, becoming one of the fastest appreciating currencies against the greenback.