Bunye: The BSP’s Bottom Line

Sunday, January 22, 2012

THE business pages of last week’s newspapers carried articles about the Bangko Sentral ng Pilipinas (BSP) posting a net loss of P23.62 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.

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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 the 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 less pesos for every dollar that bread earners sent from abroad. Our exports, on the other hand, 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.

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 per cent 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 US 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.”

Note: You may email us at totingbunye2000@gmail.com. Past articles may be viewed at http://speakingout.ph/speakingout.php.