P1T set to be withdrawn from SDA

Some P1 trillion worth of funds which are kept by the nation’s lenders with the Bangko Sentral ng Pilipinas (BSP) are set to be flushed out in accordance with the latest central bank mandate to rid the special deposit account (SDA) facility of retail placements.

At least 30 percent of the amount, or some P300 billion, will be plowed back to the financial system by next month.

The redeployment is part of the BSP’s drive to rid its SDA window of retail accounts that on aggregate made monetary-policy crafting much more complicated than usual.

It also forms part of the central bank’s desire to optimize the country’s low credit-to-GDP (gross domestic product) ratio of less than 50 percent at the moment, when elsewhere around the world the ratio is often 100 percent of GDP or higher.

The low credit-to-GDP ratio is indicative of an economy that still has much room to grow in terms of deploying the banks’ total outstanding gross loans that amounted to only P3.49 trillion at end-April this year.

Under an existing mandate, the banks were to withdraw their investment management accounts [IMAs] in full by November this year, which means all P1 trillion worth of funds should have been pulled out of the SDA window by November.

IMAs represent essentially retail deposits pooled by the banks that they then deploy as SDA accounts with the central bank, generating guaranteed earnings that BSP Governor Amando M. Tetangco Jr. wants cut.

But unless this much money is redeployed in a productive manner, inflation, thus far averaging below target at 2.6 percent in the first five months, is seen kicking up abruptly.

Still, Jose Arnulfo “Wick” Veloso, chief executive officer at the Manila unit of the British-owned lender HSBC, ruled out any drastic rise in inflation even with the mandated withdrawal of large amounts of SDA deposits.

He said the banks would redeploy the funds in the form of lending to the government sector, for instance.

“The funds will promptly be redeployed in the form of purchases in government securities or the commercial-paper sales of some of the country’s large corporations. They could also end up as deposits in the various banks,” Veloso said.

He ruled out a kick-up in inflation, noting hast the national government still operates on a budgetary shortfall this year and would need to borrow the resources to fund its activities.

Veloso pointed out that the IMAs are essentially 30-day money that the banks only successfully pooled for deployment at the SDA window.

Now that the mandate is out for the banks to bring the funds elsewhere, bank loans are seen to accelerate, even as some of the money will fund the purchase of government IOUs, commercial paper issuances from the top-performing corporations and greater lending activities from the banks.

Deputy BSP Governor Nestor A. Espenilla Jr., in a text message, also gave assurance that the planned withdrawals would not likely kick up inflation.

“That’s in the ballpark. We expect the bulk of that to be re-invested in other relatively liquid and safe investments like money-market type unit investment trust funds (UITFs) and bank deposits, consistent with the profile of its investors,” Espenilla said of the estimated P1 trillion worth of funds affected by the BSP mandate.

Like Veloso, Espenilla also gave assurances against any unwarranted rise in the inflation rate. “This is not expected to lead to a spending frenzy. This is not expected to generate inflationary pressures.”

The redeployment of SDA funds of some P1 trillion was five times larger than that estimated by economist and academician Vic Abola, who regularly conducts consulting activities for the First Metro Investment Corp, the investment banking arm of the Metropolitan Bank and Trust Co.

According to Abola’s estimates, the series of BSP decisions to reduce the rate at which SDA placements were rewarded would cause the redeployment of only P200 billion worth of funds from the special facility.

“No more than P200 billion,” Abola said on the matter of withdrawn funds from the SDA facility for the rest of the year. –Jun Vallecera, Businessmirror