BSP Eyes Issuance of Bonds for Monetary Stabilization

By Lee C. Chipongian, Manila Bulletin

The amended Bangko Sentral ng Pilipinas (BSP) Charter has restored the central bank’s authority to float its own debt instruments which may be called “Monetary Stabilization Bonds.”

BSP Deputy Governor Diwa C. Guinigundo said these bonds, when issued, will address structural excess liquidity and unlike its open market operations (OMO) such as the auction-based term deposit facility (TDF) or the special deposit accounts (SDA) which the TDF replaced, the BSP bonds will be negotiable and marketable. As such, its impact on the capital and credit market will be significant as it will “set the stage for a deeper and more developed domestic capital market.”

“(The) availability of BSP debt instruments could be a critical element,” said Guinigundo, who is currently in Japan for a lecture on global financial conditions. “In a properly sequenced and timed fashion, the BSP’s monetary operation can be more effective and will be made less dependent on such blunt instrument of monetary policy like the RRR (reserve requirement ratio).”

The market highly anticipates the BSP will cut RRR, or the percentage of bank deposits and deposit substitute liabilities that banks maintain or deposited with the central bank and currently still high at 18 percent, this year by another 200 basis points (bps) at least, same as in 2018, to free up liquidity in the system.

Guinigundo said it is not a simple matter to reduce RRR to “help establish some level playing field between banks and non banks and in the process address the issue of abetting shadow banking.”

“There should be appropriate infrastructures to help bring it about. That is another significance of the new BSP charter amendments. There should be a good period of transition to help bring this about, something that should be consistent with both price and monetary conditions,” he said.

With its restored ability to issue its own bonds, Guinigundo said the BSP “can move more quickly” when using its OMO facility which is more market based, to manage domestic liquidity and sustain price stability. “(The) BSP’s debt instruments will be focused on monetary stabilization, they will collateralize BSP borrowings through the RRP (overnight reverse repurchase), the regular open market facility.” He added that the BSP monetary stabilization bonds – “if we could call them that, will not only be market-based, they will also be negotiable and marketable.”

Republic Act No. 11211, or “An Act Amending Republic Act No. 7653, Otherwise Known as the ‘New Central Bank Act’, and for Other Purposes”, signed into law by President Duterte last February 15, virtually restored what was an available monetary tool under the original charter of the BSP, noted Guinigundo.

“This is now possible without the need for the BSP to declare an extra-ordinary situation that could warrant the issuance of its debt securities, something that RA 7653 required as a very difficult condition for the use of its own debt instrument,” he said.

Guinigundo said that in the past, the BSP was severely constrained by RA 7653 which prohibited it from issuing its own debt securities. The 1993 law replaced RA 265 which was the Central Bank Act of 1948.

Under the 1987 Constitution, central banking in the Philippines was revised.“Congress then disapproved what happened when the old central bank used the Central Bank Certificates of Indebtedness or CBCIs or JOBO Bills to mop up excess liquidity in the 1980s by increasing the rates to up to 40 percent. At that time, inflation rates were averaging upwards of 30 percent. There was hardly any choice at the time for monetary policy except for severe tightening that eventually contributed to the national output declining for a number of years,” Guinigundo explained.

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