IMF pushes for better liquidity management, debt pricing and supply

THE BANGKO SENTRAL ng Pilipinas (BSP) can further improve liquidity management and debt pricing and supply in the country by developing more instruments and collaborating with the Treasury for its open market operations, the International Monetary Fund (IMF) said.

The IMF, in its staff report for the Philippines following its Article IV consultation, said the BSP could further refine its operational framework as it aims to reduce the reserve requirement ratio (RRR).   

In June, the BSP cut the RRR for big banks by 250 basis points (bps) to 9.5%. It also lowered the ratio for digital banks by 200 bps to 6% and by 100 bps for thrift banks, and rural and cooperative banks to 2% and 1%, respectively.

However, the adjustment in reserve requirements coincided with the expiration of a pandemic relief measure and was combined with an introduction of the 56-day securities, which mopped up any excess liquidity from the RRR cuts. 

“In the future, the BSP could manage banking system liquidity more flexibly by expanding the use of market-based operations like reverse repurchase operations (RRPs). This approach is now viable due to large-scale purchases of government bonds during the COVID-19 (coronavirus disease 2019),” the IMF said.

The IMF also noted that the BSP has shifted to a variable rate format in the auction for the overnight RRP facility in September, which introduced a formal overnight RRP rate and renamed the BSP’s key policy rate to the target RRP rate.

“As the BSP is exiting from the extraordinary liquidity support measures introduced during the pandemic and letting maturing treasury securities run-off, its communication of the desired size of its balance sheet in normal times including the use of its portfolio of treasury securities would be helpful,” it said. 

The changes to the RRP facility are part of BSP reforms that started in 2016, which was when the central bank adopted the interest rate corridor (IRC) framework to help bring short-term market rates closer to its policy rate for better monetary policy transmission.

The RRP facility is part of BSP’s monetary operations to help manage the amount of money circulating in the economy by selling government securities, which the central bank commits to buy back at a later date.   

The BSP and the Bureau of the Treasury (BTr) could also collaborate more to improve the securities market and to further develop a credible yield curve, the IMF said in its report.

“The main issue facing the short-end of the curve is a large discrepancy between yields on BSP bills and Treasury bills. This discrepancy has created challenges for the banking sector in pricing debt instruments accurately, with the Bloomberg valuation tool relying exclusively on government bond yields and banks starting to use the RRP rate explicitly for pricing working capital loans,” it said.

A smooth yield curve would help support the development of a derivatives market for hedging purposes, the IMF said.

“To harmonize the two markets, the BTr should refrain from keeping supply at the short end artificially low by transitioning to a price-taker model during bond auctions. Reducing the number of individual bond series on offer and consolidating maturities into a reduced number of benchmark bonds would help concentrate trading activity,” it said.

The BSP and the BTr could also work on streamlining approved participants in each market because the exclusion of nonbanks from the BSP bill market is a large contributing factor for the observed yield discrepancy, it added.

“Other issues in the two markets, such as the obligations and performance of primary dealers including market-making and facilitating the use of repos of government securities, should also be addressed,” the IMF said.

Meanwhile, the BSP intends to utilize its government securities holdings to support its monetary operations and enhance the transmission of monetary policy.

The central bank is also working on expanding the list of market players with access to BSP bills and has requested follow-up technical assistance from the IMF on developing a benchmark yield curve.

“The BTr has the view that the yield differential is partly due to excess structural liquidity which will decline over time,” the IMF added. — K.B. Ta-asan