BSP to gov't: Borrow in pesos

By Prinz P. Magtulis, The Philippine Star

Posted at Aug 25 2012 02:22 AM | Updated as of Aug 27 2012 04:01 PM

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has advised the government to source its remaining funding needs for the year locally – a move seen to benefit both parties in the process.

“The BSP feels that it is more advisable, at this point, to source the pesos from the local market and make use of those peso proceeds to buy dollar from the Bangko Sentral,” BSP Deputy Governor Diwa Guinigundo told reporters yesterday.

For its part, “the Bangko Sentral has time and again indicated its readiness to sell the dollars to the national government,” he said on the sidelines of the “Philippines Services Sector” seminar sponsored by the BSP and the Asian Development Bank in Manila.

Government officials could not be reached for comment.

With barely a quarter left in the year, the Aquino administration is yet to decide on how it will source the balance of $750 million in commercial foreign borrowings programmed for the year meant to finance the projected budget gap of P279.1 billion.

Guinigundo, however, suggested the government could look at the domestic market where liquidity of roughly P4.8 trillion as of June could adequately meet its funding requirements.

Also, by borrowing “existing” local funds, the deputy governor said “we are not only able to minimize the exposure of the national government to foreign exchange risk, but we are also able to mop up liquidity.”

BSP has been siphoning off excess domestic liquidity from the financial system on fears this could push inflation up. Thus, government sourcing its funding needs locally, in effect, could make the central bank’s job easier.

In contrast, Guinigundo said government borrowing abroad will not only be inflationary, but will also contribute to the peso’s appreciation, which has concerned exporters who have complained of lesser earnings.

With a strong currency, dollar earnings are trimmed in value once they are repatriated to the country and converted in pesos.

“Once they (government) borrow abroad, they will exchange that for pesos with us so we get the dollars.

Reserves will then rise up again. Now, we will give them peso, in effect, those pesos which are kept in the central bank to prevent inflationary pressures, they will be released in the financial system,” he explained in Filipino.

The country’s gross international reserves hit a new record-high of $79.3 billion as of July – way above the $77.5-$78 billion forecast for the year – as BSP bought more dollars to tame peso’s strength. The local currency has risen by 5.1 percent from January to July, BSP data showed.

Under the 2012 state financing program, 75 percent of funding needs equivalent to P529.493 billion will be sourced locally, while the remaining 25 percent or P174.767 billion will come from abroad.