BSP may cut SDA rates anew

MANILA, Philippines - Future cuts to special deposit account (SDA) rates by the Bangko Sentral ng Pilipinas (BSP) could be as much as 150 basis points if the peso’s appreciation versus the dollar persists, an investment bank said.

The peso, which is expected to stay within the P40 level this year, is expected to find support from strong remittances and exports, particularly to Japan despite the yen’s weakness, Citi said in a report yesterday.

“We believe JPY (Japanese yen) weakness should not impede bilateral trade surplus prospects with Japan, and thus pose no obstacle to a strong (peso) outlook,” Citi said.

“If the JPY weakness will not stand in the way of a strong peso, BSP will be compelled to undertake macroprudential responses led by SDA rate cuts, likely to the range of one to two percent,” it explained.

The central bank slashed the SDA rate for the second time this year last March 16, bringing it down to 2.5 percent from three percent. The latter was a result of the first cut made last Jan. 24 from 3.5 percent.

The goal, BSP has said, was to direct funds to more productive use by deepening the capital markets or funding projects targeted at boosting economic growth. Cuts were also expected to shun inflows parking in the facility to take advantage of higher returns.

The inflows have contributed to the strength of the peso which rose 6.8 percent last year versus the US dollar.

Since the second tweak, Citi said there is evidence of a “liquidity shift” to other investment vehicles in search of higher yields. For instance, rates of 10-year benchmark Treasury bonds dipped to record-lows on the back of higher demand.

The rate of SDA— where roughly P1.9 trillion in funds are parked— is now lower than average inflation of 3.2 percent for the first two months.

In effect, Citi said this may result in “financial savings” for the BSP which is poised to register its widest loss in history. As of November, central bank losses reached P86.31 billion, just a tad away from the record P86.94 billion in 2007.

While inflows could continue to push the peso up, Citi warned of possible “capital inflow reversal” as a result of the US economy’s recovery.

It predicted the withdrawal of quantitative easing policy by year-end, which, in turn, would naturally push US interest rates up. This could make it attractive to inflows providing support to the greenback.

“In our forecasts, the peso will not be vulnerable to this USD scenario given the economy’s robust external accounts and favorable prospects,” Citi said.

“Although a peso outlook down to 39.9-40 by end-2013 doesn’t stand out— unlike last year’s peso appreciation exceeding five percent,” it added.