Download Domestic Liquidity

Challenges Facing the BSP in
Conducting Monetary Operations
under Excess Liquidity
Diwa C. Guinigundo
Deputy Governor
Monetary Stability Sector
Bangko Sentral ng Pilipinas
Outline of Presentation
Excess liquidity and foreign exchange inflows
II. Challenges to monetary policy
III. Policy responses
IV. Future policy directions
I.
I. Excess Liquidity and
Foreign Exchange Inflows
Domestic liquidity growth strong, interest rates declining
9
Domestic Liquidity
(Annual growth rate in percent)
30
LIQUIDITY GROWTH
(RHS)
8
7
91 DAY TBILL (LHS)
25
20
6
15
5
10
4
3
5
2
0
J M M J S N J M M J S N J M M J S N J M M J
‘05
‘06
‘04
‘07
Credit growth is moderate
Loans Outstanding: Other Depository Corporations (ODCs)
(Annual growth rate in percent)
8
6
4
2
0
J
M M J
S N
J
M M
J
S N
J
M M
J
S
N
J
M M J
-2
-4
2004
2005
2006
2007
Domestic liquidity growth driven by growth 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)
-280
2410
3769
6659*
BoP(US$Mil)
*Jan-Sept 2007
Some issues on foreign exchange flows:
Are the flows witnessed in recent years sustainable?
Are the flows reversible?
Are they volatile?
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)
6
Balance of Payments and Reserve
Accumulation
in percent of GDP (1999-1st Semester 2007)
Current Account Balance (LHS)
Capital Account Balance (LHS)
4
Gross International Reserves (RHS)
2
0
-2
-4
1999
2000
2001
2002
2003
2004
2005
2006 Jan-Jun
2007
45
40
35
30
25
20
15
10
5
0
For the Philippines, net increases in the current
account balance is largely due to remittances
Philippines: Components of $3.0 bn and $1.1 bn Increase in the Current
Account in 2006 and Jan-Jun of 2007($ bn)
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: 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%
Implications of higher current account balances
than net capital inflows:
Less vulnerable to shocks and “sudden stops”
Persistent currency appreciation pressures, resulting
in large reserve accumulation
Downside risks:
Strong liquidity and credit growth
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
The BSP’s Policy Mix
 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
Exchange rate policy has been flexible
58
Peso per US Dollar Rate
56
54
52
50
Aug ‘07
46.965
48
End-Sep ‘07
46
45.063
44
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S ON D J F MAM J J A S
2004
2005
Monthly Averages
2006
End-of-Period
2007
GIR has been increasing
35,000
Gross International Reserves of BSP
end-of-period
(in million US dollars)
End-Sep ‘07
$30.9 billion
30,000
25,000
Gross International
Reserves of BSP
20,000
15,000
J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S
2004
2005
2006
2007
Foreign exchange liberalization : 1st wave
 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
Prepayment of Debt
Total Prepayments
(in million US dollars)
Total Prepayments (January-June 2007)
2,625.50
Loans Owed to Residents
1,687.30
Public
Private
Loans Owed to Non-Residents
Public
Private
1,078.50
608.80
938.20
329.40
608.80
Medium and Long-Term Foreign/Foreign Currency Denominated Loans
Fine-tuning of monetary policy instruments
Allowing trust entities to deposit funds with
the BSP special deposit account facility
Encouraging public and private pension
funds and other government-owned and –
controlled corporations to deposit funds
with the BSP
Allowing special deposit account placements
as alternative compliance with the liquidity
floor requirements for government deposits
500,000
Special Deposit Account (SDA)
(in million pesos)
As of 22
Oct ’07
471, 943
450,000
400,000
350,000
May ‘07
300,000
222, 892
250,000
SDA Levels
200,000
150,000
100,000
50,000
0
J
F
M
A
M
J
J
2006
A
S
O
N
D
J
F
M
A
M
J
2007
J
A
S
As
of 22
Oct
Reverse Repurchase (RRP)
RRPs
(in million pesos)
400,000
(Apr’07)
341, 137
350,000
300,000
(May’07)
240, 074
250,000
22 Oct‘07
199,895
RRP Levels
200,000
150,000
100,000
50,000
0
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
as
of
22
Oct
30
Domestic Liquidity
(Annual growth rate in percent)
(Feb-Mar’06)
7.6
25
20
(Apr’07)
26.1
(Dec’06)
22.7
INFLATION (right scale)
(Aug’05)
17.0
15
Aug ’07
14.9
10
LIQUIDITY (left scale)
5
0
Aug ’07
2.4
J F MAM J J A SOND J FMAM J J A SOND J F MAM J J A SOND J FMAM J J A
2004
2005
2006
2007
10
9
8
7
6
5
4
3
2
1
0
IV. Future Policy Direction
Long-term approaches:
Facilitate productive use of inflows
Encourage private sector capital outflows
Insure against sudden reversals in flows
Improve BSP's ability to offset the effects of
inflows
Facilitate productive use of inflows
Encourage investments by Overseas Filipinos
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.
What the BSP has done:
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
Encourage private sector capital outflows
Foreign exchange liberalization
Facilitate overseas portfolio investments by
domestic investors
What the BSP has done:
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
Improve BSP's ability to offset the effects of
inflows
Pursue BSP’s remaining P40B capitalization
Pursue amendments to BSP Charter, to allow
BSP to issue its own instruments
Ensure against reversals in portfolio flows
Sound macroeconomic policy
Provide high-quality, timely information to
market participants
Risk management through financial reform,
strengthened supervision and regulation
Pursue multilateral/regional insurance
arrangements against sudden stops
What the BSP has done:
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)
Thank you.