The Bangko Sentral ng Pilipinas (BSP) is planning to expand its liquidity-absorbing facilities such as the weekly auction of BSP securities to enhance its function of mopping up excess liquidity from banks and non-banks.
The BSP discussed its plans with the International Monetary Fund (IMF) in a recent official visit as part of the latter’s surveillance work on the Philippines.
The Philippines is an IMF member but the BSP in its own right is also an IMF direct participant as creditor-member since 2010.
In the next months, the BSP will be exploring broadening access to its monetary instruments including expanding the eligible counterparties; assessing the eligibility of BSP bills as collateral; and enhancing the flexibility in auctions to optimize absorption.
These are all aimed at improving and strengthening monetary policy transmission.
The BSP’s open market operations (OMO) include BSP securities, the term deposit facility, the overnight reverse repurchase facility and overnight deposit facility. The BSP defines OMO as the buying and selling of government securities; lending and borrowing against underlying assets as collateral; acceptance of fixed-term deposits; and foreign exchange swaps. The BSP absorbs liquidity through OMO to influence the “underlying demand and supply conditions for central bank money.” At the end of the third quarter 2024, the BSP has siphoned off P2.1 trillion of excess liquidity.
Last year, the BSP with the banking industry, established a benchmark yield curve, enhanced the peso interest rate swaps (Peso IRS) market, and a repo market for government securities.
The IMF said reactivating the IRS market and creating a benchmark yield curve “are important steps to further develop the Philippines’ fixed income and money markets and improve monetary policy transmission.”
The Peso IRS market which is based on the reverse repurchase (RRP) will help businesses and banks hedge local interest rate risk. The IMF has noted the fragmentation of the yield curve at the short end since the yields on government securities are below the BSP bills.
The improvement in the repo market for government securities will also help monetary transmission. Presently, the BSP is shifting from “tagging” government securities to banks to full delivery of these securities, said the IMF, adding that this will expand the market by enabling banks to trade these securities.
With the help of the BSP, the Bankers Association of the Philippines (BAP) opened the Peso IRS market last Nov. 18, with 16 BAP-member banks as market makers plus five more banks as regular participants.
The IRS market is using the Philippine Overnight Reference Rate or ORR. The rate is based on the BSP’s variable overnight repurchase rate. The ORR was developed by the BAP on which the swaps will be anchored at the short end.
Besides improving access to BSP’s monetary instruments and optimizing its liquidity absorption, the central bank will also adopt the Global Master Repurchase Agreement (GMRA) contracts to enable banks to transact more repo deals.
The GMRA is one of five initiatives the BSP and other government agencies are engaging in to improve capital market liquidity. GMRA contracts enables the delivery of Treasury bonds to banks when they enter into repo deals.
The central bank said this will expand the government securities repo market, which is mostly interbank transactions, since banks will have access to BSP’s Treasuries for repo and additional profit.
The BSP is also engaged with credit rating agencies and financial market index providers to make local assets more accessible to both foreign and domestic investors.Philippine US dollar bonds are rated “BBB+” by S&P Global; “Baa2” by Moody’s; and “BBB” by Fitch Ratings.