Excess money

A lot of cash is available in the system to finance productive ventures that can sustain the country’s economic growth. But banks choose to park these funds at the Bangko Sentral ng Pilipinas than risk lending them. As of the latest count, nearly P2 trillion is with the central bank’s special deposit accounts (SDAs). That’s almost equivalent to the national government’s budget of P2.01 billion for the entire 2013.

The reason banks put as much money as they can in SDAs is that the central bank pays a high rate on these deposits. The SDA facility was introduced in November 1998 as a tool for the BSP to manage liquidity, specifically the amount of money circulating in the system that affects inflation. In April 2007, the BSP expanded access to the facility to siphon excess pesos arising from strong foreign exchange inflows (dollars, when converted to pesos, increase money supply and pose inflationary risk). Interest rates on SDAs were then set at a high-enough level of about 6 percent to attract funds.

Since last year, the big amounts going to SDAs had worried the central bank. Foreign funds seeking higher returns have found their way to SDAs—through the local banking system. The interest payments on the SDAs have contributed to huge losses for the central bank, which last year hit P95 billion—the biggest since it was set up in the 1990s. The central bank has lowered the SDA rate by more than 150 basis points since July 2012 to a record-low 2 percent. But the impact of the cuts was hardly felt as the amount of money parked in the SDAs remained sizeable. Most investors are still attracted to the facility because its interest rate is still higher than the yields of short-term government securities.

Last week, the central bank moved to drastically cut the amount of funds in SDAs. Under BSP Memorandum 21-2013, only money placed in trust accounts of unit investment trust funds (UITFs) managed by banks will have access to the SDA facility. This means that money placed in mutual funds and other investment instruments will no longer be allowed as SDAs. More than half of the nearly P2 trillion deposited in the SDAs is in the form of investment management accounts placed by banks on behalf of their individual clients. Per the memorandum, banks should start withdrawing funds so that at least 30 percent of the amount deposited would be out of the SDAs by July 30. All funds covered in the memorandum must be withdrawn by Nov. 30; by January 2014, noncompliant banks will have their access to the SDA facility revoked.

Central bank officials said the new SDA restriction imposed on banks should encourage them to lend more money to businesses that generate jobs. They said the huge liquidity should be injected into the real economy so that more people, especially those from the low-income sector, would be employed. Limited access to SDAs may also temper foreign-exchange inflows and, in the process, ease the appreciation of the peso. Part of the BSP losses had been due to its activities in the foreign-exchange market to prevent a sharp strengthening of the peso, which has been hurting exporters and Filipinos overseas sending money to their families here.

But BSP Governor Amando Tetangco Jr. himself admitted that no drastic reduction in the amount of funds placed in SDAs was expected because a significant portion of the funds was likely to simply shift to UITFs. As for the funds that would be pulled out from the SDAs, Tetangco said some of these could turn into regular bank deposits. This means that banks will have more resources for lending to businesses.

Shanaka Peiris, resident representative of the International Monetary Fund, has raised the need for measures to help ensure that funds leaving the SDA facility would be used to support job-generating investments. Peiris said that while the BSP’s latest directive to limit access to its SDA facility was prudent, it should be complemented by measures that would help direct the funds to priority sectors. He said it was crucial that the funds be used for direct investments, especially in manufacturing and other industries, and not for buying stocks or making speculative investments in real estate.

The BSP must now draw up measures to prompt banks to lend the funds to sectors that can generate jobs and boost the economy. Tourism and agriculture are two of the sectors that need those excess funds.