SDA funds shifting to bank deposits

MANILA, Philippines - Trust entities have began winding down prohibited funds in special deposit accounts (SDA), with most of the funds expected to transfer to bank deposits and government securities, a senior central bank official said.

“We have seen a reduction in trusts, while we’re seeing an increase in bank placements,” central bank deputy governor Nestor Espenilla Jr. told reporters Friday night.

The Bangko Sentral ng Pilipinas (BSP) has ordered trust entities to wind down 30 percent of agency accounts and investment management accounts (IMA) in the SDA by July 31, before a complete phase-out by Nov. 30.

IMAs are singular accounts entrusted by a specific individual to the trust entity for investments. BSP has said SDA is meant to be a tool to control domestic liquidity and not as investment vehicle.

Since its inception in 1998, SDA deposits have risen to as high as P1.983 trillion in April 15, owing to its relatively higher return versus other safe investment vehicle such as Treasury bonds and bills.

Now, Espenilla said the central bank expects the P1.738 trillion still with the SDA as of June 28 to decrease further, after SDA rates were slashed to two percent from 3.5 percent, and following the prohibition of certain placements.

The moves were meant to push out trillions of liquidity into the financial system so that they would finance economic activity and boost growth or deepen the capital markets.

“We expect a possible shift to time deposits, UITFs (unit investment trust funds) and even into government securities,” Espenilla pointed out.

“Basically, what is happening now is along the lines of what we’ve expected,” he added.

Sought for comment, Lorenzo Tan, president of the Bankers Association of the Philippines, said the recent downtrend in SDA deposits has allowed bank deposits to gain from the BSP order.

“Not all people need market based products such as UITFs so they won’t all probably go there. So time deposits will be an option,” Tan said on the sidelines of the BSP’s 20th anniversary dinner.

Meanwhile, ING senior economist Joey Cuyegkeng said he also expects the equities market to benefit from the funds that would leave the SDA facility. About P400 billion are expected to leave by the end of this month.

By November, another P1 trillion would fly from the SDA, flooding the economy with money, whose supply is expected to grow by “20 percent or more’ over the next 12 months.

Domestic liquidity grew by a six-year high of 16.3 percent in May, according to latest BSP data.

“(This) may bring about higher inflation expectations for late 2014 and for 2015,” Cuyegkeng said in a statement.

In his latest “Views and Cues” weekly financial markets report, Cuyegkeng said, while freeing up the SDA funds would give markets a boost, it also has a downside: “the (fund) migration would likely raise domestic liquidity growth to around 20 percent or more within the next 12 months, which may bring about higher inflation expectations for late 2014 and for 2015.”

“However, inflation this year and for most of 2014 would likely be in line with BSP inflation forecasts, he said.

While higher liquidity normally weakens the local currency against the US dollar, Cuyegkeng pointed out that the impact is still “uncertain” as the freed-up SDA funds could also spur overall economic growth that could attract investors and strengthen the peso.

In the near term, “higher liquidity is likely to keep interest rates at modest levels. Higher inflation and interest rates in 2015 are risks,” the ING economist added.

He added that the local bond and equity markets would also benefit from the SDA phase-out, a much-needed boost for these markets which have lately been on a roller-coaster ride due to mixed reactions on the US Federal Reserve’s economic stimulus plan.