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The
BSP's Bottom Line
By
Ignacio R. Bunye
January 23, 2012
The
business pages of last week’s
newspapers carried articles about
the Bangko Sentral ng Pilipinas (BSP)
posting a net loss of R23.62 billion
in the first three quarters of 2011.
The
net loss was attributed by BSP officials
to significant dollar purchases by
the central monetary authority in
a bid to prevent the peso from suddenly
and sharply appreciating vis-a-vis
the US dollar.
Is this
good or bad?
First,
one has to understand that central
banks look at the bottom line differently
from commercial banks. While commercial
banks would look at profitability
as a prime indicator of performance,
BSP views profitability as merely
secondary.
The
primary mandate of BSP is to maintain
price stability, i.e., to keep inflation
low and stable. Profit only becomes
relevant for purposes of determining
the amount of dividends that the BSP
would have to remit to the national
government.
As Axel
Webber, former president of the Bundesbank
once said in an interview with Reuters
News: “The Bundesbank profit
is a residual issue for me and my
colleagues… I don’t enter
into any strategic considerations
about Bundesbank profits, neither
in the morning, afternoon, or evening.”
That
said, let me explain how the losses
came about.
When
you have a MASSIVE influx of dollars
into the country, the tendency would
be to drive up the value of the peso.
The dollars come in the form of remittances
from our three million Overseas Filipinos
as well as from foreign portfolio
investments or the so-called “hot
money.”
What
would have happened if the Bangko
Sentral did nothing? The peso would
have strengthened far beyond what
our Overseas Filipinos and our exporters
could bear. Families of our OFWs would
have received significantly fewer
pesos for every dollar that bread
earners sent from abroad. Our exports
would be less price competitive and
our exporters would eventually lose
their markets.
To avert
this, the Bangko Sentral buys the
dollars (to prevent the peso from
strengthening abruptly). But in the
process, the Bangko Sentral releases
pesos to the system. This is also
not good because too much pesos would
drive up local prices, resulting in
the peso’s own weakness.
The
Bangko Sentral then performs the second
leg of its stabilizing action. The
BSP siphons off the excess pesos from
the market. This is done in two ways:
One.
The BSP sells government securities.
Two. The BSP offers Special Deposit
Accounts (SDAs). The BSP incurs tremendous
interest expense by offering SDAs.
Just imagine paying 4.5 percent per
annum on P1.6 TRILLION!
What
happens to the dollars that the BSP
purchased? They eventually form part
of the Gross International Reserves
which, over the last five years, have
grown by leaps and bounds. (OVER U.S.
Dollars 75 BILLION as of Dec. 2011)
But
herein lies the paradox. When the
dollar component of the Gross International
Reserves is revalued, the BSP loses
if the peso appreciates. (Conversely,
the BSP gains if the peso depreciates.)
At the
end of the day, we have to bear in
mind that the BSP’s 2011 net
loss AROSE out of its NECESSARY efforts
to smooth out the exchange rate fluctuations,
even if such efforts proved costly.
Again,
I must point out that the BSP was
not created for profit. While other
types of banks are ultimately concerned
about their profits, the BSP has its
own bottom line, as emphasized in
the BSP vision: “To deliver a
high quality of life for all Filipinos.”
You
may e-mail us at totingbunye2000@gmail.com.
Past
articles may be viewed at http://speakingout.ph/speakingout.php.
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