There is life after SDA-A A +A
Sunday, May 19, 2013
I WAS confronted recently by a good friend following the latest reduction of the Special Deposit Account (SDA) rate to 2 per cent across all tenors.
“At the rate the Monetary Board is slashing the SDA rate, there will be nothing left for us retirees,” he groaned.
I could only sympathize with him, and other fixed income earners, as I explained to him the true purpose of the SDA.
-That the SDA is not primarily an investment vehicle, as many have come to believe.
-And that in fact, the SDA is a monetary tool principally used by the Bangko Sentral to manage excess peso liquidity.
In line with the Bangko Sentral’s mandate of maintaining price stability, the BSP has engaged in open market operations. The BSP buys or sells government securities, as circumstances dictated, to maintain liquidity at target levels.
(If the BSP buys securities, peso liquidity would go up. If the BSP sells securities, peso liquidity would go down.)
This was well and good until the BSP ran out of government securities to buy or to sell. Note that the limited availability of government securities - in the amount required for its open market operation - is one of the reasons cited by the BSP for the need to amend the BSP charter. The BSP is seeking legal authority for it to be able to issue its own debt securities and bonds.
Pending such legislation, a substitute mechanism had to be devised by the BSP which would have the effect of removing excess pesos from the system. This was the Special Deposit Account or SDA.
Shortly after the introduction of the SDA, banks went to town, marketing the SDA as a “risk free” investment outlet with comparatively high yields.
Naturally, a lot of money, local and foreign, went to SDAs. The SDA became specially attractive to foreign money seeking higher and safe yields in this part of the world.
From a year-ago level of under P1 Trillion, Special Deposit Accounts, now lodged with the Bangko Sentral, have ballooned to P1.9 Trillion!
This is costing the Bangko Sentral a lot – and I really mean a lot! So the Monetary Board thought it was time to rationalize the Special Deposit Account.
The Monetary Board initially responded by barring the entry of foreign money into SDAs. The Monetary Board also started gradually reducing the SDA rate 50 basis points at a time. Of late, the Monetary Board also instructed Trust entities to ensure that only funds from trust accounts are placed in the SDA. This move will effectively block off so-called Investment Management Accounts or IMAs from the SDA.
With these moves, hopefully the SDA will eventually go down to a more manageable level.
Now going back to my retiree friend. His main concern was beating inflation. Correctly, he has been advised that his retirement fund should earn more than the inflation rate.
So if the inflation rate, for example is 3 pct, his money should earn more than 3 per cent for him to stay ahead. Therefore, the SDA is not the way to achieve his objective.
Fortunately, there are now bank products which just might answer his needs. He may inquire from his friendly bank investment counselor about Unified Investment Trust Fund or Mutual Funds. Among the array of these financial products, I am almost sure there will be a product or two which will suit the size of his resources as well as his risk appetite.
Definitely, there is life after SDA.
Note: My book “Central Banking for Every Juan and Maria” is now available in major outlets of Fully Booked, Power Books, National Book Store and The University of the Philippines Press.