Monetary Board OKs move to temper risky capital inflows

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has limited banks' access to currency contracts in a bid to temper “speculative” capital inflows flooding the economy and causing the peso’s appreciation and regulators’ fear of asset bubble formation.

BSP’s policy-making Monetary Board approved a cap on non-deliverable forwards (NDF) for both local and foreign banks based in the country and for transactions here and abroad, BSP Governor Amando Tetangco, Jr. told reporters on Wednesday.

Local banks would only be allowed to carry NDF of up to 20 percent of their capital, while for their foreign counterparts, the limit was set at 100 percent of their capital. An “internal” market cap was also introduced.

NDFs are short-term currency contracts used by investors to hedge against losses. It includes buying up a contract and agreeing on a particular contracted exchange rate. By settlement date, the contract holder should be paid the difference between the agreed rate and the prevailing market exchange rate.

Pre-termination of contracts would also no longer be allowed, Tetangco said, while the 15 percent capital charge, changed from 10 percent in January, would also be retained.

Lenders will be given until March to adapt to the new measures.

“This limit is going to provide a cap that is based on a clear policy anchor instead of what was earlier agreed upon by individual banks, which is basically based on their NDF exposures at the time the agreement NDF was reached,” Tetangco said.

Entities were allowed to participate in the NDF market in order “to meet legitimate foreign exchange requirements,” Tetangco noted, something that is no longer happening now following the result of a BSP study.

The BSP chief noted NDFs have gone “from a legitimate hedging tool to a tool for speculation” that peso will appreciate further in the future. A strong peso trims the value of dollar export earnings and remittances.

It was also pioneered during a time when the Philippines needed dollars to bolster its reserves, Tetangco added. This, he said, is also no longer present as reserves have ballooned to a record-high of $84.1 billion as of November.

Capital inflows have flooded the local economy causing authorities to worry of their impact on over-all financial stability. This marks the latest BSP move to temper capital inflows this year, preceded by tighter watch on real estate lending and ban on foreign funds on special deposit accounts.

Tetangco said the latest measure will be up for review “after six months.”