SDA cut to tame capital inflows

MANILA, Philippines - The latest cut on special deposit account rates (SDA) is targeted at taming capital inflows that continued to push the peso up and hence, another round of easing could not be discounted, analysts said.

The Bangko Sentral ng Pilipinas (BSP), in its second policy meeting last Thursday, slashed anew by 50 basis points to 2.5 percent the interest it charges on SDA- fixed-term deposits of banks and trust departments with tenors of one week, two weeks and one month.

The move followed a similar action in January when SDA rates were cut to three percent from 3.5 percent.

“We think the primary motivation for the last two SDA rate cuts...is still to help temper peso appreciation,” Bank of the Philippine Islands lead economist Emilio Neri Jr. said in a research note.

DBS Ltd. economist Eugene Leow, in a separate report, said tweaking the SDA has served as a “macroprudential measure” for the BSP to shun speculative inflows despite the facility’s ban on foreign investments.

Inflows have swamped the Philippines due to its strong macrofundamentals, helping the financial markets reach new highs. The peso, for instance, touched a new five-year high versus the dollar at 40.55 on Thursday before closing weaker at 40.63.

A strong peso, while makes imports cheaper, also trims the value of dollarearnings of business process outsourcing companies and remittances from overseas Filipinos. It also makes export products more expensive and uncompetitive abroad.

With the SDA rate cut, portfolio inflows to bond and equity markets could slow down and thus “help temper peso appreciation pressures,” Neri said.

Jojo Gonzales, economist at the Bank of America-Merrill Lynch, said the rate reduction could “add liquidity” to the financial system which could benefit growth in the process.

 â€œThe latest SDA rate cut may only add liquidity to a financial system already flushed with liquidity. This will continue to support bond and equity markets in the near term,” Gonzales explained.

With inflation manageable, HSBC economist Trinh Nguyen said the central bank could afford to loosen its hold on money supply- something that has contributed to its record losses of P86.31 billion as of November.

“The cut is rather large and comes earlier than we had thought, possibly reflecting the BSP’s determination to save money on sterilization costs as well as the central bank’s confidence about limited inflation pressures,” she explained.

Meanwhile, Gonzales and Leow have warned against too much easing that could provoke imbalances and bubbles in the long run.

“Excess liquidity in the system can be a threat to financial stability when the cycle turns and inflows turn to outflows,” Leow said.