043007: BSP debt paper mulled

By Jun Vallecera

Reporter

THE Bangko Sentral ng Pilipinas plans the issuance of a new monetary tool, a debt paper that will help it deal more effectively with excess money supply without exposing itself to potentially costly interest expense, but such would require amending the central bank charter. BSP Governor Amando M. Tetangco Jr. knows that the plan enticing the state-owned pension funds with market-determined interest rates could prove costly and would in fact diminish their ability to produce a surplus at the end of the year. Still, the BSP is determined to entice the pension funds before the already-surging domestic liquidity growth translates to high inflation down the line. What he has in mind, he said on Sunday, is the ability to issue a debt paper that the BSP charter, or Republic Act 7653, currently prohibits him from selling. “We will include it in the proposed amendments to RA 7653. If approved, it will provide the BSP with an important additional instrument to address potential money supply expansion which may be in excess of what is needed to maintain low inflation and promote sustainable economic growth,” Tetangco said. He reiterated that domestic liquidity growth, or M3, is not yet a threat to inflation but acknowledged that it could not be allowed to continue expanding as it has. Normally seen expanding at around 13 percent, M3 growth accelerated by 21.4 percent in December last year, picked up speed averaging 22.8 percent in January, and was tracked at 22.4 percent in February. His colleagues at the policy-setting monetary board have come up with antiliquidity measures described by some as “baby steps” rather than decisive strides against the gathering inflationary momentum. The measures include asking the Government Service Insurance System and the Social Security System to participate in a special facility that offers a still-undetermined interest rate of return “set by market.” But what is clear is that the facility, even if successful in controlling surging domestic liquidity, will cost the BSP plenty. Singapore, Malaysia, Thailand and Taiwan, among others, have issued similar instruments for liquidity  management purposes and each paid a price tending to diminish its respective central bank’s capacity to report profits or surplus at the end of the year. Deputy BSP Governor Diwa Guinigundo, stung by the “baby steps” comment, told reporters the amount to be siphoned off should the GSIS and the SSS bring their money to them “should be enough to bring down the liquidity growth to below 20 percent.” This is important because liquidity growth sustained over a 12-month stretch was potentially deadly to the economy. Guinigundo disputed the “baby step” tag, saying analysts were only saying that because they only considered its impact on reserve money, not on domestic liquidity which is a broader measure of money. Computed with the money multiplier, not just reserve money, the analysts would have reconsidered the magnitude of the impact of the measure, Guinigundo said.

 

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