Money Market in the Philippines (PDF)

# Introduction to the Money Market in Philippines In the sixties, the Philippine economy exhibited considerable growth where production expanded at a steady pace and the investment climate was regarded as generally favorable. Based on these sound economic considerations came the birth of the money...

# Introduction to the Money Market in Philippines In the sixties, the Philippine economy exhibited considerable growth where production expanded at a steady pace and the investment climate was regarded as generally favorable. Based on these sound economic considerations came the birth of the money market in the Philippines. More investment alternatives were offered to the public with the introduction of various money market instruments. # History of Money Markets in the Phillipines - The Money Market grew largely because of the Investment Houses in the 1960s, before which it was largely under-developed. - Prior to this it was unregulated and the interest rates were determined by the Usury Laws. - The large investors could avoid the interest and this led to the concentration of these instruments in the hands of the large investors - An investment house driven money market grew by 34% in between 1966 - 1973 - After the Central Bank started regulating the system, balance was restored into the system and the MM instruments were deemed deposit substitutes. - Thus only after years of its disorganised functioning did the Money Market in the Phillipines get regulated. # The Market Structure of the Phillipines - Although it is the world's 12th most populous country, the Philippines savings rate of 19% to 23% of GDP is the lowest in the region. - Around three quarters of the country's population do not yet have a savings account. - The Philippine fund industry is also the second smallest in the region. # Foreign Investment - The Philippines is open to foreign portfolio capital investment. - Foreigners may purchase publicly or privately issued domestic securities, invest in money market instruments, and open peso-denominated savings and time deposits # Major Money Market Instruments in Phillipines ## Inter Bank Call Loan - The Inter Bank Call Loan market is a system that permits banks with excess reserves over the required position for the day to lend out the same excess to reserve deficient banks. - **Issuer:** BSP - **Term:** One day although at times the term exceeds more than one day - **Other Requirements:** Borrowing IBCL transactions with the BSP require the borrowing party to earmark securities as collateral in the ROSS account with the Bureau of Treasury. Alternately, lending with the BSP requires the BSP to earmark securities with an equivalent face value of the amount borrowed. IBCL transactions between banks and quasi-banks are on a clean basis. ## Reverse Repurchase Agreement - A Reverse Repurchase Agreement (RRP) is defined where the BSP sells securities to a bank or financial institution that has quasi-banking licenses, with a commitment to buy this back on a specified date and specified rate. - The RRP serves as a monetary tool of the BSP to control money supply using open market operations. - **Issuer:** BSP - **Term:** Subject to the discretion of the BSP oftentimes overnight, 14, and 30 days - **Other Requirements:** Through the BSP RRP as its definition connotes in substance a borrowing transaction collateralized by a security. The securities that serve as collateral are usually in the form of Treasury Bills Special Series or Fixed Rate treasury notes. RRP transactions would require the BSP to earmark securities with an equivalent face value to the amount borrowed, regardless of the tenor of the instrument collateralized ## Treasury Bills - Treasury Bills (Tbills) are direct and unconditional obligations of the national government. - They are issued by the Bureau of Treasury (BTr). - They carry a maturity of one year or less and can be traded in the secondary market before maturity. - Treasury Bills are considered one of the primest investment instruments in the market. - They are safe, liquid and offer attractive returns to investors. - **Issuer:** National government - **Term:** 91, 182, 364 days ## Fixed Rate Treasury Notes - Retail Treasury Bonds (RTBs) are direct and unconditional obligations of the national government which primarily caters to the retail market or the end-users. - They are issued by the Bureau of Treasury (BTr). - They are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity. - Retail Treasury Bonds are safe, liquid and offer attractive returns to investors. - **Issuer:** National government - **Term:** 3 and 5 years ## Dollar Linked Peso Notes - Dollar Linked Peso Notes (DLPNs) are direct and unconditional obligations of the national government and are issued by the Bureau of Treasury (BTr). - They are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity. - The notes track the movement of the Philippine Peso and US Dollar exchange rate. - Payments of interest and principal are linked to the movement of the exchange rate and computed based on the foreign exchange factor. - **Issuer:** National government - **Term:** 2 and 3 years