Aug 022013
 

MANILA, Philippines – The central bank is monitoring where funds from special deposit accounts (SDA) are being diverted after a “massive” outflow as a result of lower returns and stricter placement rules, an official said.

“We have already seen a massive reduction on SDA balances over time,” central bank Assistant Governor Johnny Noe Ravalo told reporters on Friday.

“What does that mean? That is where the current review is being taken from a financial standpoint…It is incumbent upon us to monitor all these flows,” he added.

Idle money from the SDA— fixed-term deposits by banks and trust departments— began to drop last month after the Bangko Sentral ng Pilipinas (BSP) slashed the interest it offers by 150 basis points to two percent.

As a result, investors shifted their money to higher earning investment outlets such as government securities. As of July 12, SDA placements totaled P1.8 trillion, still down from its peak of P1.983 trillion last April 15, but higher than the P1.738 trillion two weeks before.

According to Ravalo, trust entities have complied with another BSP rule ordering them to retire 30 percent of investment management accounts (IMA)— funds held for a singular person— by the end of last month.

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A complete phase-out of IMAs by Nov. 30 was also ordered by the BSP.

BSP Deputy Governor Diwa Guinigundo, in a text message, said the reduction in SDA placements from April to June has already contributed to money supply (M3) growth, which hit a six-year high of 20.3 percent in the first semester.

For Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, bulk of banned SDA funds may “migrate” to medium-term government bonds, helping push down their yields even further.

Some may also go to bank deposits, he said, noting that if such happens, the decline in SDA placements— and rapid M3 growth— would just be a “temporary development.”

“Once the balance of the restricted funds eventually migrate to regular bank deposits, banking institutions are likely to re-invest them in SDAs and other asset types (equities, UITFs, bonds, etc.),” Neri said in a research note.

Guinigundo however has a different view. For him, money supply would continue to rise as banks lend more “to help fund economic activity.” While M3 accelerated in June, bank lending growth slowed to 12.3 percent from 13.3 percent.

“The increase in M3 derived mostly from higher savings and time deposits as a result of higher loans and investments by banks during the period,” he explained.

“Once received, proceeds are re-deposited in banks, hence both savings and time deposits have correspondingly increased,” he added.

For his part, Ravalo reiterated there is no risk of asset bubble forming in the economy despite the surge on money circulation not seen since before the 1997 Asian financial crisis.

“Liquidity is rising, not rushing,” he said.