'Hot money' outflow hits $312 M in September - BSP

MANILA, Philippines – The Bangko Sentral ng Pilipinas reported a net foreign portfolio outflow of $312.2 million in September after net inflows in the previous two months as risk-averse investors dumped local assets.

Foreign portfolio inflows in the first nine months of the year dropped to a net $521.7 million against $3.4-billion net inflow in the same period of 2007.

“This was due primarily to the meltdown in the US financial markets, the effects of which have spilled over to other countries, and subsequent fears that a recession in major economies is imminent,” BSP governor Amando Tetangco said in a statement.

In September alone, portfolio outflows totaled $829.5 million, with withdrawals from bank deposits accounting for 43 percent. Withdrawals from equity investments made up 29 percent and government securities, 28 percent.

Equity investments accounted for 67 percent of September inflows of $517.3 million. Investment in government securities accounted for 33 percent.

The central bank expects net foreign portfolio investments of $700 million in the whole of 2008, way below net inflows of $3.5 billion last year.

As this developed, the BSP last night approved a new dollar facility that Philippine banks could use should the liquidity problem spill over to the country.

Tetangco told reporters that the Monetary Board approved the dollar-denominated repurchase facility which banks could use when they need dollars to service the requirements of their clients.

Tetangco insisted there was no serious tightness in dollar supply or liquidity in general, but he said monetary officials wanted to provide a standby facility to ease apprehensions.

“These measures would be in place as long as necessary,” Tetangco said. “Although we still have to see whether banks would even need it at all.”

The MB approved the request of the banking industry for a dollar-denominated repurchase facility that would allow them to borrow dollars from the BSP.

According to Tetangco, these short-term dollar loans would be primarily for liquidity assistance only and would be fully collateralized with dollar-denominated government bonds of the Republic of the Philippines, known as dollar ROPs.

Tetangco said this facility should ease apprehensions that banks would not have access to foreign exchange if they need it.

Under normal circumstances, banks just buy dollars either from the currency market or directly from the BSP. But if they had no readily available cash, the dollar repurchase facility would allow them to borrow dollars from the BSP, using dollar ROPs as the underlying collateral.

According to Tetangco, the MB also approved the decision of the BSP to allow banks to tap its existing peso-denominated repo facility with dollar ROPs as underlying collateral.

Under existing rules, the BSP’s regular repo facilities require peso-denominated government securities as collateral, but Tetangco said banks could now use dollar ROPs to get short-term peso loans.

However, these short-term loans from the BSP would be more expensive because the MB also approved revisions in the valuation of these collateral securities.

Tetangco explained that the “enhanced valuation,” in effect, would apply a haircut on the value of the instruments to make them more market risk-sensitive.

Tetangco said the same valuation would apply to both the dollar and peso repo loans, which would factor in increasing market risk for longer-tenor instruments.

“In effect, the longer the tenor of the loan, the longer the tenor of the underlying ROP collateral and the bigger the haircut,” said BSP deputy governor Nestor Espenilla. “We are essentially factoring in the uncertainty in the market over a longer period of time. If the loans are short, overnight loans, then that would not be an issue.”

The BSP has been insisting that, while there is some tightness in dollar liquidity, the situation is not even close to the crunch being experienced by the US and other markets.

“But it is good to have something ready if the need should arise,” he said. “I’ll have to see if the banks actually need it in the first place.”

Tetangco also reminded banks that the BSP has a standing facility for dollar deposits which allow banks to make dollar placements if they keep their foreign exchange instead of dipping them in the volatile offshore markets.

“That dollar deposit facility is there, we’ve had it all this time,” he said. “Just to remind everyone it’s there too.”

But according to Tetangco, the BSP is already seeing some easing in the swap market and should banks need the liquidity, the facility is there to provide help.

As major central banks around the world released dollars into their systems to ease shortages, the BSP said early on that there was “some tightness” in the Philippine market but no dollar shortage.

Before the US Congress started discussing its bail-out package, the foreign exchange and the swap markets were experiencing tight dollar supply but not to the extent seen in other markets.

But Tetangco said this was understandable, as both domestic banks and branches of foreign banks – likely under instructions from their head offices – re-evaluate their credit standards.

Tetangco said banks were watching their dollar positions, considering that the root of the financial market turmoil was the United States. He said this was causing some tightness in supply.

Tetangco declined to say how much liquidity the BSP has so far injected into the system but he said the central bank “continues to be in both the spot and swap FX markets, as part of our normal operations to help smooth volatilities in the exchange rate.”