Banks encouraged to buy forex needs from BSP facility

To ease demand pressures on the peso, banks are encouraged to avail of loans or advances from the central bank via its foreign currency rediscounting facility which has a revolving budget of $500 million.

Similar with the recently reactivated Currency Rate Protection Program (CRPP) which is a hedging facility, another idle Bangko Sentral ng Pilipinas (BSP) tool that has been untapped for the past four years is the Exporters’ Dollar and Yen Rediscount Facility (EDYRF).

BSP Deputy Governor Diwa C. Guinigundo said banks who want to purchase US dollars or Japanese yen from the BSP can do so through this facility. “It’s available for them. But, since there’s so much liquidity in the system, there’s sufficient US dollar or yen,” he said.

The EDYRF and its peso counterpart, is a rediscounting facility that functions as a standing credit but it requires collaterals. Banks can refinance the loans to their borrowers and thus increase their foreign currency position. Basically, it is a monetary tool to regulate liquidity and banks can renew access to the credit facility once a previous loan is fully paid.

Guinigundo said availment of the EDYRF can help ease pressures on the exchange rate. “Instead of buying them (US dollar) in the spot market, they are buying them from the BSP. So it doesn’t add to the magnitude of demand,” he said.

Guinigundo reiterated that demand for foreign currency has been on the rise for sometime since with an expanding economy, the private sector have resources to repay loans ahead of maturity. This has increased demand for the US dollar used for loan prepayments. Others in the corporate sector – assessing that the outlook or prospects for profits continue to be positive – have also been paying intercompany loans or their loans to their mother companies and thus contributing to the demand for the greenback.

More than 60 percent of the country’s debt, both private and public sector, are in US dollar while 13-15 percent are denominated in yen.

In 2013, the BSP made some improvements to the EDYRF by adding eligible collaterals for export-import financing, such as dollar-denominated trust receipts covering the importation of goods and materials, and term loans to finance capital expenditures or plant expansion or modernization projects.

The BSP also revised its pricing scheme to encourage banks to explore market-based sources of US dollar liquidity at the time when the peso was stable and within government exchange rate assumptions. EDYRF rates are based on the respective 90-day London Inter-Bank Offered Rate plus 200 basis points and the term premia for longer maturities.

The peso closed last week at 154.13. Year-to-date, the peso has depreciated by nine percent. It breached the 154-level in midSeptember which was a 13-year low, prompting the BSP to reactivate and to rationalize access to its inactive CRPP facility. For one thing, the facility now has a more simplified documentation requirements but will have daily reporting from banks.

Guinigundo said earlier that he expects the CRPP – which allowed banks to hedge their eligible foreign currency obligations – to prop up the peso. In other words, this should calm panicking corporate borrowers with substantial foreign exchange exposures.

In theory, the central bank never really deactivated the CRPP which was first implemented in 1997 until 2009. Guinigundo said it was inactive for a long time because the exchange rate was less volatile and the peso was stable with an upward bias.

While the EDYRF has zero availments, the peso rediscounting facility has grown to 130.62 billion as of end-September. This amount was bigger compared to same time last year of only 1603 million. It is also 110.62 billion more than the previous month’s 120 billion.