Does DOF talk to BSP?

Those who read my column and follow me on Twitter and Facebook know that I had been supportive of that controversial “loan” of a billion dollars to the IMF’S Europe Rescue Fund. I think we ought to do it and it is no big deal. Our $76-billion Gross International Reserves or GIR is not made poorer by it.

The GIR works as some kind of a “piggy bank” for the country where we deposit dollar earnings from exports/ OFW remittances, dollar proceeds of Global bond issues. We withdraw from it payments for imports and foreign loans. A healthy GIR enables us to trade in the international market for goods and services. An empty GIR or “piggy bank” like what happened to us in 1983 can be rather inconvenient. We were forced to pay for essential imports like oil on a cash-before-delivery basis.

To make sure our GIR is safe and liquid, we have largely been limited to obtaining US Treasuries and similar top rated sovereigns and the usual gold and other precious metals and bank deposits in freely convertible currencies, usually US dollars, Euro and Japanese yen, because our trade mostly use these currencies. Subscribing to the IMF Europe Rescue Fund fits these criteria.

While I have no problem with the decision of the BSP to subscribe to the IMF Europe Rescue Fund, I am not sure about how two agencies of government manage our foreign exchange transactions. I get the impression that the DOF and the BSP are not talking to each other. Both are determined to exercise their supremacy over their areas: the fiscal side for DOF and the monetary side for the BSP and disregard the impact of one on the other.

Good practice mandates a separate handling of the fiscal and monetary sides to minimize the danger of politicians using monetary policy for short term political advantage. That’s how it is with us. But our laws allow for enough coordination, which is why the Secretary of Finance sits in the Monetary Board. Their offices are also just a building away from each other.

I have a problem trying to explain why the DOF is borrowing dollars at an interest rate much higher than what the BSP can lend those dollar proceeds for. The National Treasurer is paying fivepercent interest on dollar global bonds whose dollar proceeds the BSP must buy to keep the peso from getting too strong. From the global bond dollars the BSP buys and puts in our GIR, the BSP buys US Treasuries and now the IMF rescue fund at very low interest, less than a percent these days.

Worse, in buying the dollar proceeds of DOF Global Bond issues, the BSP unleashes a torrent of pesos it must mop up through SDRS and pay about four percent to sterilize. Why can’t the National Treasurer just issue peso bonds, pay about two percent and serve the same purpose of mopping excess peso liquidity in the system?

I also find it strange that the National Treasurer had recently been rejecting bids for local TBills that are already so low as to be below inflation rate. Other than missing an opportunity to further lower government’s borrowing costs and mop up excess liquidity, the rejections don’t seem to be a good thing particularly for capital market development. This practice is starting to look like official market manipulation by the DOF but for what justifiable purpose?

Don’t the BSP and the National Treasurer talk and try to coordinate things? Much as I hate politicians interfering in these matters, congressional oversight may just produce the transparency required.

In fairness to BSP Gov. Say Tetangco, I remember him calling for a change in the DOF’s borrowing mix toward more domestic bonds. Gov. Say knows, as the National Treasurer and the Secretary of Finance must know that this makes a lot of sense, particularly in this current environment of strong forex inflows and ample domestic liquidity.

The National Treasurer can use the peso proceeds from the local bond issue to buy the forex from the BSP to service their foreign obligations. The National Treasurer should limit their offshore borrowings to official loans and perhaps, an issue to provide a benchmark. Mopping up excess peso liquidity and reduce forex inflows with minimal damage to the BSP’s income statement should be a joint responsibility of the BSP and the DOF.

The BSP incurred a net loss of P33.69 billion last year after a loss of P59.04 billion in 2010 largely on account of its operations to manage the peso exchange rate. The BSP had a net income of P2.77 billion before accounting for its losses from its efforts to “stabilize” the peso’s foreign exchange rate. If the BSP and DOF worked together, perhaps the losses of the BSP could have been less, if any.

The BSP’s net loss from such forex operations amounted to P36.22 billion in 2011, which was as high as P90 billion in 2010. The surge in foreign portfolio investments recently has caused heavy appreciation pressures on the peso. The huge inflow of the “hot money” is typical of emerging markets in recent times as portfolio fund managers look for alternatives to the troubled markets in the developed economies.

The BSP and the National Treasurer should always see things in the light of the national interest.

Bad blood

The Ayalas and the Sys of SM used to be such close friends and allies. The old man Henry Sy even used to have an office at the Makati Stock Exchange building and I am told that he used to have regular meetings with Ayala executives as they coordinate their moves.

Things however, soured completely in recent months. The fight over that mall site in Bacolod was supposedly the culmination of a long simmering rivalry. The normally soft spoken JAZA was reported to have raised his voice at Tessie Coson over it. Now it is war!

That’s probably why the Sys are building a giant mall close to the Ayala’s Market Market in Bonifacio on land the Ayalas donated to Taguig for a community center. That SM mall will suck a lot of air from the Ayalas in that area. SM has a stronger pull for the crowd that now shops at Market Market. Or maybe, Market Market will have to scale up its target market to a higher socio economic demographic in response.

I imagine this rivalry is also why it is difficult to complete the LRT/MRT loop. The big fight is about the common station between SM North EDSA and the Ayala’s Trinoma. Hope they shake hands long enough to get things going to serve the public.

The big news is about how the Ayalas turned out to be the white knights that helped the Ortigas family fend off a $1 billion takeover bid from the SM group. The move to sell was initiated by Hong Kong Shanghai Banking Corp (HSBC) reportedly on behalf of the Quezon family. HSBC is said to be managing the Quezon family’s 34-percent stake in the property firm with a market value of P11 billion. One side of the Ortigas family was amenable to the SM buyout but another side wasn’t.

So now it seems the Kastilas are uniting versus the Chinoys. The Ortigases aren’t as savvy as the Ayalas in developing their prime properties. Look how messed up Greenhills is compared to the Ayala Makati developments. The Ortigas property developments can greatly benefit from the Ayala touch.

The initial official story from the Ortigas group is that they are using internal funds plus bank lines. The bank loans most likely came from BPI of the Ayalas. In a disclosure to the Philippine Stock Exchange on Friday, Ayala Land said it had obtained authority from its board to negotiate and enter into a strategic alliance with the group led by Ignacio Ortigas. ALI said it had allocated an initial amount of P15 billion for this partnership, coincidentally close to the P11-billion market value of the HSBC shares.

For the past three weeks, the grapevine was quite sure the Ayalas were helping out one branch of the Ortigases consolidate the family’s holdings so that they could exercise their right of first refusal over the HSBC-Quezon shares. There aren’t too many conglomerates here that can produce P11 billion at the drop of the hat.

There were also pretty loud murmurs after the launch of the Ayala’s P30-billion Bonifacio High Street development that an even bigger announcement is forthcoming. It seems that Tony Aquino of Ayala Land, who was plucked out of retirement, will have to work well into his ’70s at the rate things are moving.

Skeletons

Some people have skeletons in their closet. Many of our politicians have a whole graveyard, yet we keep voting for them!

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco