Challenges Facing the BSP in Challenges Facing the BSP in Conducting Monetary Conducting Monetary
Operations under Excess Operations under Excess LiquidityLiquidityDiwa C. Guinigundo
Deputy GovernorMonetary Stability Sector
Bangko Sentral ng Pilipinas
I. Excess liquidity and foreign exchange inflows
II. Challenges to monetary policyIII. Policy responses IV. Future policy directions
Outline of Presentation Outline of Presentation
I. Excess Liquidity and Foreign Exchange Inflows
Domestic Liquidity (Annual growth rate in percent)
Domestic liquidity growth strong, interest rates Domestic liquidity growth strong, interest rates decliningdeclining
2
3
4
5
6
7
8
9
J M M J S N J M M J S N J M M J S N J M M J0
5
10
15
20
25
30
‘04 ‘05 ‘06 ‘07
LIQUIDITY GROWTH LIQUIDITY GROWTH (RHS)(RHS)
91 DAY TBILL (LHS)91 DAY TBILL (LHS)
Loans Outstanding: Other Depository Corporations (ODCs) (Annual
growth rate in percent)
Credit growth is moderateCredit growth is moderate
2004 2005 2006 2007-4
-2
0
2
4
6
8
J M M J S N J M M J S N J M M J S N J M M J
Domestic liquidity growth driven by Domestic liquidity growth driven by growth in NFAgrowth in NFA
Growth Rates (in%) Dec 2004
Dec 2005
Dec 2006
August 2007
M3 10.3 10.3 22.7 14.9
Net foreign assets 13.4 34.5 49.9 39.7
Net domestic assets 8.8 (0.3) 6.3 (4.6)
BoP(US$Mil) -280 2410 3769 6659*
*Jan-Sept 2007
Are the flows witnessed in recent years sustainable?Are the flows reversible?Are they volatile?
Some issues on foreign exchange flows:
The critical objective is to encourage more stable long-term flows in order to maximize the benefits of additional foreign capital
Current account surpluses rather than capital inflows are the main source of FX inflows
Source: BIS background note for a BIS Working Party Meeting on Monetary Policy in Asia on 7 and 8 June 2007 in Bangkok
Emerging Asia: Balance of Payments and Reserve Accumulation (in percent of GDP)
Source: IMF Regional Economic Outlook: Asia and the Pacific, April 2007
Philippines: Balance of Payments and Reserve Accumulation (in percent of GDP)
Balance of Payments and Reserve Accumulation
in percent of GDP (1999-1st Semester 2007)
-4
-2
0
2
4
6
1999 2000 2001 2002 2003 2004 2005 2006 Jan-Jun2007
051015202530354045
Current Account Balance (LHS)
Capital Account Balance (LHS)
Gross International Reserves (RHS)
For the Philippines, net increases in the current account balance is largely due to
remittances
2006 Jan-Jun 2007
Increase in Trade Balance: $0.8 bn Increase in Trade Balance: $0.4 bn
Increase in Services Balance: $0.7 bn Decrease in Services Balance: $0.2 bn
Increase in Balance on Income and Transfers (including remittances): $1.5 bn
Increase in Balance on Income and Transfers (including remittances): $0.9 bn
Increase in Current Account Balance in 2006: $3.0 bn
Increase in Current Account Balance in Jan-Jun 2007: $1.1 bn
Philippines: Components of $3.0 bn and $1.1 bn Increase in the Current Account in 2006 and Jan-Jun of 2007($ bn)
Philippines: Main sources of FX inflows appear to be relatively stable
Relative Magnitude and Volatility of Selected FX Inflows (2000 – 2006)
Sources of FX Inflows % of GDP C.V.2/
Overseas Filipinos Remittances1/ 9.7 11.9
Exports of Goods and Services 48.0 6.3
Foreign Direct Investments Inflows 1.5 63.9
Foreign Portfolio Investment Inflows 1.7 97 Note: 1/ Coursed thru the banking system (Table 11 of SPEI)2/ Coefficient of Variation = (Standard Deviation / Mean ) x 100%
Less vulnerable to shocks and “sudden stops”Persistent currency appreciation pressures, resulting in large reserve accumulation
Implications of higher current account balances than net capital inflows:
Strong liquidity and credit growth
Downside risks:
II. Challenges in the Conduct of Monetary Policy
Conduct of monetary policy is more challenging
Capital inflows have increased pressures on currencies to appreciate
Surging capital inflows have enhanced liquidity growth, inflation pressures
Policy complications posed by capital inflows
Higher interest rates could address liquidity concerns but could induce more capital inflows
Lower interest rates may be consistent with a benign inflation outlook but could spur domestic liquidity growth
III. Policy Response
Market-determined exchange rate policy Building up reserves to temper foreign
exchange market volatility Foreign exchange liberalization measures Prepaying a substantial amount of debt Fine-tuning of monetary operations
The BSP’s Policy Mix
Peso per US Dollar Rate
44
46
48
50
52
54
56
58
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
Monthly Averages End-of-Period
Exchange rate policy has been flexibleExchange rate policy has been flexible
End-Sep ‘0745.063
Aug ‘0746.965
GIR has been increasingGIR has been increasing
15,000
20,000
25,000
30,000
35,000
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
Gross International Reserves of BSP end-of-period (in million US dollars) End-Sep ‘07
$30.9 billion
Gross International Reserves of BSP
Increase in OTC purchases by residents without documentation
Increase in allowable outward investments by residents without BSP approval and registration
Imposed symmetric limit of 20% of unimpaired capital with an absolute limit of US$50 million on overbought and oversold positions of banks
Foreign exchange liberalization : 1st wave
Total Prepayments (J anuary-J une 2007) 2,625.50
Loans Owed to Residents 1,687.30Public 1,078.50
Private 608.80
Loans Owed to Non-Residents 938.20Public 329.40
Private 608.80
Medium and Long-Term Foreign/ Foreign Currency Denominated Loans
Total Prepayments (in million US dollars)
Prepayment of Debt
Allowing trust entities to deposit funds with the BSP special deposit account facilityEncouraging public and private pension funds and other government-owned and –controlled corporations to deposit funds with the BSPAllowing special deposit account placements as alternative compliance with the liquidity floor requirements for government deposits
Fine-tuning of monetary policy instruments
Special Deposit Account (SDA) (in million pesos)
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
J F M A M J J A S O N D J F M A M J J A S Asof 22Oct
2006 2007
SDA Levels
May ‘07222, 892
As of 22 Oct ’07
471, 943
RRPs
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
J F M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A S O
2004 2005 2006 2007 asof22
Oct
RRP Levels
22 Oct‘07199,895
Reverse Repurchase (RRP) (in million pesos)
(Apr’07)341, 137
(May’07)240, 074
Domestic Liquidity (Annual growth rate in percent)
0
5
10
15
20
25
30
J F MA M J J A S O N D J F M A M J J A S O N D J F MA M J J A S O N D J F MA M J J A
2004 2005 2006 2007
0
1
2
3
4
5
6
7
8
9
10
INFLATION (right scale)
LIQUIDITY (left scale)
(Aug’05)17.0
(Dec’06)22.7
(Apr’07)26.1
(Feb-Mar’06)7.6
Aug ’0714.9
Aug ’072.4
IV. Future Policy DirectionIV. Future Policy Direction
Facilitate productive use of inflowsEncourage private sector capital outflowsInsure against sudden reversals in flowsImprove BSP's ability to offset the effects of inflows
Long-term approaches:
Encourage investments by Overseas Filipinos
Facilitate productive use of inflows
Overseas Filipinos (OFs) include:
= Permanent Migrants + Overseas Filipino Workers
(= temporary + irregular)
Note: In 2006, the stock of OFs is estimated to be around 8.2 million (10% of the total population), of which 4.7 million are OFWs.
On encouraging investments by OFs(First wave: facilitating remittance flows)
Promoted transparency and competition by issuing Circular no. 534 (remittance charges disclosure).Improving payment and settlement systems by approving setting up of local bank’s remittance centers & branches abroad, authorized rural banks to accept FCDs, approved interconnection of three (3) ATM networks, and approved use of new technologies as mode of remittance (e.g. internet and SMS)Promoted financial literacy campaigns among OFs/families
What the BSP has done:
Foreign exchange liberalization Facilitate overseas portfolio investments by domestic investors
Encourage private sector capital outflows
On encouraging private sector capital outflows through further FX liberalization:
Phase 1: BSP Circular 561 (symmetrical limit of 20% of unimpaired capital [OS/OB positions] + increased outward investment by Philippine residents to $12B/year); BSP Circular 565 (allowed thrift banks to invest in FCD debt instruments)
Phase 2: Simplifying documentary requirements for trade and non-trade; promoting cross-border transport of the peso; and facilitating derivative trading
What the BSP has done:
Pursue BSP’s remaining P40B capitalizationPursue amendments to BSP Charter, to allow BSP to issue its own instruments
Improve BSP's ability to offset the effects of inflows
Sound macroeconomic policyProvide high-quality, timely information to market participantsRisk management through financial reform, strengthened supervision and regulationPursue multilateral/regional insurance arrangements against sudden stops
Ensure against reversals in portfolio flows
On insuring against reversals in portfolio flows
Pursuing multilateral/regional insurance arrangements against sudden stops
Philippine involvement in ASEAN+3 Regional Financial Cooperation (e.g. Chiang Mai initiative, Bilateral swap agreements, Asian Bond Markets Initiative, Economic Reviews and Policy Dialogue)
Adopting risk management through financial reform, strengthened supervision and regulation
MB Resolution No. 1516 (approved the BSP’s implementation plans for Basel II)
What the BSP has done:
Thank you.Thank you.