Hands off BSP reserves

We may yet see the day when we will need sufficient reserves in the BSP and regret tying up or losing what we had in this Maharlika Wealth Fund. It could be soon, given the volatility of the international economic and financial environment.

BSP Governor Philip Medalla said it quite well before he was bullied into endorsing the MWF which, as now constituted, puts BSP reserves and capital at risk.

“If they say we’ll take the central bank’s (US) dollar, then what will we use if the reserves are reduced because they have been taken to the sovereign wealth fund? We’ll have less ammunition the next time there is an international volatility that is related to the peso and the dollar.”

Philip speaks out of experience because he has just fought a valiant defense of the peso to prevent it from quickly falling to the 60 level against the US dollar. Ben Diokno, who insists half of the $90 billion we now have is enough, is playing with fire.

We all saw how BSP loses money when the peso appreciates and makes money when the peso depreciates.  In order to fund the MWF from BSP profits, you have to allow the peso to depreciate.  If you believe these geniuses, buy dollars once the MWF gets operational.

So, they will seed the MWF from the revaluation gains of the BSP’s dollar position (from converting to pesos, not based on underlying wealth) from the peso depreciation. This way of seeding the MWF for nation building is pure nonsense.

The GIR figure is also mostly based on the valuation of BSP’s dollar and other foreign assets holdings. That goes up and down with the market and all we are seeing are accounting entries when they mark to market. BSP must actually sell those assets to realize tangible cash to defend the peso or invest in Maharlika.

The thing is, we never know when we will need all that ammunition, so we must always keep our powder dry. There was a time in the recent past when BSP incurred over P80 billion in losses in one year for a good cause – keeping the peso competitive. Do we want income objectives of the BSP and MWF to instead drive monetary policy?

I was covering the Senate when the late senator Raul Roco sponsored the bill creating the BSP. In the debates, the independence of the BSP from politics was paramount.

We have enough experience with the old central bank to make us true believers in a BSP as an independent monetary authority, with the all-important responsibility of ensuring price and financial stability.

Philip is a very competent economist who lives by the numbers he sees. I can see him giving up his job on an issue he feels strongly about. But he also realizes it is a patriotic duty to stay around and protect the BSP as best as he can. He can do more inside than outside.

Former senior deputy BSP governor Diwa Guinigundo agrees with Philip. Diwa, with his 40 years of experience in central banking, said: “When we are faced with a global financial crisis, no GIR level is good enough.”

True. Remember what happened to the Thai baht during the Asian financial crisis.

Then too, the BSP is undercapitalized for the responsibility it has in stabilizing the Philippine economy.

“When we need to do open market operations to stabilize inflation, the financial system has grown many times more than the original P50 billion capitalization of BSP—it may not be enough. We just have to look back at our history…”

Diwa is not hot about the proposal to contribute the BSP dividends to the proposed MWF. “Ang liwanag ng batas: dividends shall be declared by BSP, remitted to the national government, which in turn is returned to BSP itself as additional capital to complete its capitalization.”

Indeed, the original proposal was to give the BSP a capitalization of around P300 billion to P400 billion given the manifold increase of both the GDP and the financial system. Hindi natupad.

Diwa recalls: “Under the BSP charter, whatever BSP declares as a dividend should remain with BSP as an equity infusion of the national government to achieve the P200 billion capitalization of the BSP for the objective of strengthening BSP independence and monetary/financial stability.”

Rep. Stella Quimbo and Rep. Sandro Marcos talk of exponential earnings growth. Never did they consider the possibility that all that money could be lost. Again, higher returns require higher risks.

Losses may happen not necessarily from corruption or even from wrong investment decisions. A serious international downturn that suddenly happens is all it takes. The 2008 financial crisis comes to mind. It came swiftly and brutally erased wealth in the blink of an eye.

Of course, given the track record of our government in handling funds, what guarantee do we have that whatever “safeguards,” “transparency,” and “accountability” they put in the law will result in good governance and keep public money invested in Maharlika secured?

My economist Viber friends are very concerned about BSP independence. Said one of them:

“To the extent that this bill brings about fiscal dominance that impinges on the ability of the BSP to do its job as monetary and financial regulator, yes, it is a problem. Walang mangyayaring matino pag na politicize na ang monetary policy and banking supervision.”

Said another: “My gut sense is that the BSP must first top up its capital before it can start distributing dividends to the national government. And according to BSP financial statements, they aren’t yet at P200 billion, so theoretically, no profits/dividends are distributable yet.

“BSP made an ‘advance’ during the pandemic. So, maybe the bill will either do away with the required P200 billion or the proponents know the top up completion is happening or inevitable, and they want the rest.

“Central banks should by nature be biased towards more conservative investment outlets. By law and the painful lesson of history during the martial law regime, the BSP is prohibited from engaging in development financing.

“We also have the international rating agencies and the impact on our borrowing costs to consider.”

Keep BSP independent.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco