Finance Secretary Carlos Dominguez III said Wednesday a more targeted and market-oriented approach to managing liquidity will ensure an efficient and stable financial system, especially at this time when the coronavirus pandemic has unleashed a possibly deep global downturn that will adversely affect the country’s economic growth.

Dominguez said the plan by the Bangko Sentral ng Pilipinas (BSP) to issue in the months ahead its own debt securities will add a “new and powerful instrument” to its policy toolbox for monetary management and enable it to respond more effectively in mopping up any excess liquidity in the country’s financial system.

“With all the uncertainty about the progress of this contagion, we need to continuously sharpen our fiscal and monetary tools. This will allow us some degree of certainty in this very uncertain world. The new monetary instrument in the BSP policy toolbox assumes greater significance in this light,” Dominguez said at the signing of the Memorandum of Agreement (MOA) between the BSP and Bureau of the Treasury (BTr) on the issuance of the central bank’s debt securities.

“By being able to issue debt securities, the BSP is empowered with a more targeted approach to achieving desired monetary policy outcomes. Should there be excess structural liquidity in the financial system, the BSP will be able to respond more effectively,” he added.

The BSP is planning to formally launch the issuance of its securities within the third quarter of this year, provided that all requirements that would support the negotiability features of the debt papers are in place.

Dominguez said the MOA inked by the BSP with the BTr will ensure proper coordination between the two institutions in issuing their respective debt instruments.

“This is important for achieving a finely tuned liquidity process,” the Finance chief said.

Dominguez said that although the country’s financial system is fundamentally strong, it cannot remain immune to the challenges of the global health and economic crisis spawned by the coronavirus disease 2019 (COVID-19) pandemic, which is why the BSP is beefing up its arsenal of monetary operations by introducing its own debt securities in the market.

These securities will be in addition to the term deposit facility (TDF) that is already in use by the BSP, and will complement the bond issuances regularly undertaken by the BTr, Dominguez said.

He said that “with the country’s fiscal and monetary institutions on solid footing,” the government is confident that the pain brought by the coronavirus crisis will be short and the economy’s recovery will be strong.

“By moving together in the right direction, we can beat this pandemic and come out more resilient than ever,” Dominguez said.

BSP-issued debt securities are market-based instruments used by central banks to manage liquidity in the financial system.

These securities serve as substitutes for reserve requirements or the use of government securities (GS) in open market operations (OMOs) for managing liquidity.

Section 92 of The New Central Bank Act, which was amended last year, allows the BSP to issue its own debt securities as part of its monetary instruments to manage liquidity in the financial system, particularly in the face of a large structural liquidity surplus arising from the reduction in the reserve requirement ratios of banks.

Issuing debt securities now form part of the BSP’s regular monetary operations, unlike before when it was only allowed to issue these debt papers in cases of extraordinary movements in price levels.

The BSP shifted to the interest rate corridor (IRC) system for conducting its monetary operations in June 2016 by introducing a new instrument–the TDF–that was intended to serve as the BSP’s key instrument in absorbing liquidity.

Before the shift to the IRC system and the amendment of its Charter, the BSP relied heavily on the Special Deposit Account (SDA) facility for absorbing the bulk of structural liquidity in the financial system.

BSP securities are more likely to be used to deal with structural excess liquidity over the long term and tend to have longer maturities than other OMO liquidity-draining instruments.

-oOo-