BSP digs deeper into toolbox, sets own securities issuance

MANILA, Philippines  — The Bangko Sentral ng Pilipinas (BSP) is digging deeper into its toolbox by issuing its own debt securities this quarter to manage liquidity amid deep global downturn due to the coronavirus disease 2019 or COVID 19 pandemic that could adversely affect the country’s economic growth.

BSP Governor Benjamin Diokno said during the signing of a memorandum of agreement (MOA) between the central bank and the Bureau of the Treasury (BTr) that the restoration of its authority to issue its own freely negotiable securities under Republic Act 11211 provides the central bank an additional market-friendly instrument in its policy toolkit.

“Moreover, following our extraordinary liquidity measures to mitigate the impact of the COVID-19 crisis, the BSP will need greater flexibility through the use of its various instruments to manage the sizeable liquidity released in the financial system in the months ahead,” Diokno said.

The COVID-19 measures adopted by the BSP, including the cumulative 175-basis point rate cuts, the lowering of the reserve requirement ratio for big banks by 200 basis points, the P300-billion repurchase agreement with the Treasury and the purchase of government securities, have unleashed P1.6 trillion into the financial system

With the agreement, the central bank’s Monetary Operations System and the Treasury’s National Registry of Scripless Securities were linked, creating the main infrastructure that would allow the issuance and make the features of the BSP securities negotiable and attractive to the market.

“The BSP is looking forward to its first issuance of the BSP securities this quarter,” Diokno said.

The BSP chief said the central bank would offer BSP bills and BSP bonds depending on market and liquidity conditions. The central bank would initially offer BSP bills in view of the prevailing market preference for short-term tenors.

“In line with the practices of central banks that offer securities as part of their liquidity management operations, the BSP will consider market preferences and prevailing liquidity conditions in deciding the maturities of BSP securities to offer at the same time the BSP will ensure that the tenors of BSP securities will not overlap with the tenors of government securities issued by the Bureau of the Treasury,” Diokno added.

Diokno said there is still a need to ensure that trading of BSP securities in the secondary market could be facilitated while the central bank is conducting an end-to-end systems testing to ensure that the entire process from auction to trading in the secondary market works smoothly.

“With a fully functioning system in place, the BSP will embark on coordination with its eligible counterparties for market sounding activities,” the BSP chief said.

Maria Ramona Santiago, senior assistant governor at the BSP, said the BSP securities would be the considered the central bank’s main liquidity tool for mopping up structural liquidity.

For his part, Finance Secretary Carlos Dominguez III said a more targeted and market-oriented approach to managing liquidity would ensure an efficient and stable financial system.

Dominguez, a member of the central bank’s Monetary Board, said the plan to issue its own debt securities would add a “new and powerful instrument” to its policy toolbox for monetary management and enable it to respond more effectively in mopping up any excess liquidity in the country’s financial system.

“With all the uncertainty about the progress of this contagion, we need to continuously sharpen our fiscal and monetary tools. This will allow us some degree of certainty in this very uncertain world. The new monetary instrument in the BSP policy toolbox assumes greater significance in this light,” Dominguez said.

Although the country’s financial system is fundamentally strong, Dominguez said it could not remain immune to the challenges of the global health and economic crisis spawned by the COVID-19 pandemic.

The BSP shifted to the interest rate corridor (IRC) system for conducting its monetary operations in June 2016 paving the way for the launch of the term deposit facility serving as its key instrument in absorbing liquidity.

BSP-issued debt securities are market-based instruments used by central banks to manage liquidity in the financial system. These securities serve as substitutes for reserve requirements or the use of government securities in open market operations for managing liquidity.

Before the shift to the IRC system and the amendment of its Charter, the BSP relied heavily on the special deposit account (SDA) facility for absorbing the bulk of structural liquidity in the financial system.