Rediscounting/eRediscounting March 2013 Department of Loans and Credit 1 1. What is rediscounting?

Rediscounting is a privilege of a qualified bank to obtain loans or advances from the Bangko Sentral ng Pilipinas (BSP) using the eligible papers of its borrowers as collaterals. It is a standing credit facility provided by the BSP to help banks liquefy their position by refinancing the loans they extend to their clients. 2. How does the rediscounting cycle go? A bank extends loans to end-user borrowers who execute credit instruments [i.e., promissory notes (PNs), drafts or bills of exchange] in favor of the bank. The bank rediscounts the credit instruments of its end-user borrowers with the BSP by endorsing the same in favor of the BSP. The BSP, in turn, lends the bank an amount equivalent to a certain percentage of the face amount/outstanding balance of the end-user borrowers credit instrument. The bank may use the proceeds of the BSP loan for new loans to other borrowers, or to address its liquidity needs. In effect, the rediscounting cycle helps sustain the banks funds for relending to its borrowers and, at times, service withdrawals. 3. What is the role of rediscounting in our monetary system? Section 81 of Republic Act (R.A.) No. 7653, otherwise known as the New Central Bank Act, provides that the rediscounts, discounts, loans and advances, which BSP is authorized to extend to banking institutions, shall be used to influence the volume of credit consistent with its objective of maintaining price stability. During periods of inflation, the BSP shall limit the loans it extends to banks. On the other hand, the BSP makes full use of the credit operations authorized under its Charter whenever there is a need to expand money supply in our monetary system. Thus, rediscounting is one of the monetary tools of the BSP to regulate the level of liquidity in the system. 4. What are the types of rediscount facility? There are two types of rediscount facilities available to qualified banks, as follows: Peso Rediscount Facility Exporters Dollar and Yen Rediscount Facility (EDYRF) 5. What papers are presently eligible for rediscounting? The papers presently eligible for rediscounting are as follows: Commercial Credits credit instruments resulting from a) the importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; or b) the storing of non-perishable goods and products which are duly insured and deposited in authorized bonded warehouses or in other places approved by the Monetary Board (MB); with Rediscounting/eRediscounting maturities of not more than 180 days from the date of their rediscount by the BSP. Production Credits - credit instruments related to the production or processing of agricultural, animal, mineral, or industrial products with maturities of not more than 360 days from the date of their rediscount by the BSP. Other Credits special credit instruments not otherwise rediscountable under commercial and production credits, such as but not limited to microfinance, housing loans, services, agricultural loans with long gestation period, and medium and long-term loans covered by credit instruments with maturities of more than 360 days but not more than ten years from the date of their rediscount by the BSP. 6. What are the available loan facilities and acceptable collaterals under each type of credit? Commercial Credits a. Export Credit a) a packing credit to fund the working capital of exporters before the goods are shipped; facility is covered by an irrevocable letter of credit (LC) and/or confirmed purchase order (PO) and/or sales contract (SC); or b) export bill (EB) credit (post-shipment) to re-finance export shipments while awaiting final payment from the foreign drawee bank, secured by a duly notarized assignment of proceeds of export or domestic LCs, confirmed POs or SCs. b. Import Credit to fund the working capital of importers covered by usance bill of exchange (BX) secured by a Trust Receipt (TR) Agreement. c. Trading & Transport Loan to fund the working capital of domestic traders of readily saleable goods or their transportation within the Philippines secured by a duly registered mortgage on real estate property of which 70% of the

appraised value equals or exceeds the outstanding balance of the PN, or domestic BX secured by a TR Agreement, or credit guarantees/sureties issued by Industrial Guarantee and Loan Fund (IGLF), Small Business Corporation (SBC), Credit Surety Fund (CSF) and the National Government (NG). Production Credits a. Agricultural Production to finance activities of farmers for the production of food crops (rice, corn, fruits and vegetables, coffee), other crops (coconut, abaca fiber, cotton, rubber, palm oil, etc.) and fishery (fish and marine products, aquaculture). Loan is secured by a Deed of Real Estate Mortgage (REM). b. Animal Production to fund the activities of farmers for poultry and livestock development (egg production, broiler production, hog raising/weaning/fattening, cattle raising/fattening, dairy, goat raising). Loan is secured by a Deed of REM. c. Mineral Production - to fund the activities of borrowers for the production of metallic and non-metallic oremining/milling (bauxite, copper, gold bullions/bars, iron ore, lead, manganese, uranium, zinc, asbestos, coal, semi-precious stones, clay, etc.). Loan is secured by a Deed of REM. d. Agricultural Processing to fund the economic activities of borrowers involved in the manufacturing of processed food (meat, fruits and vegetables, fish and other sea foods, vegetable oils, starch from indigenous raw materials, spices and other processed foods). Loan is secured by a Deed of REM. e. Industrial Processing Indirect Exports to fund the working capital needs of local manufacturers (cottage, small and medium scale industries) that have supply arrangements with direct exporters covered by local PO/domestic LC or Deed of REM. The commodity covered by the local PO/domestic LC should be ultimately exported or applied as inputs to the production of goods to be exported. Industrial Loans to finance industries involved in the manufacturing of wood products, paper and paper products, textile and textile products, wearing apparel, footwear, leather and leather products, basic industrial chemicals, chemical fertilizers, synthetic resins, synthetic yarns and fibers, drugs and pharmaceuticals, petroleum products, rubber products, plastic products, non-metallic mineral products, construction/housing components, basic metal products, fabricated metal products, machinery and equipment, electrical and electronic products. The loan is secured by a Deed of REM. Other Credits a. Microfinance small loans granted to the basic sectors, as defined in the Social Reform and Poverty Alleviation Act of 1997, and other loans granted to the poor and low-income households for their micro enterprises and small businesses so as to enable them to raise their income levels and improve their living standards. These loans may be unsecured. b. Service Exporters to fund the working capital of service exporters who are engaged in rendering technical, professional, and other services covered by a duly notarized assignment of receivables from service contracts, the value of which equals or exceeds the outstanding balance of the PN. Service exporters refer to natural persons who are residents of the Philippines or juridical persons organized and licensed under Philippine laws engaged in rendering technical, professional, and other services abroad paid for in acceptable foreign currencies. c. Other Services to fund the working capital of local industries engaged in rendering various services such as hospitals, schools, hotels and restaurants, transportation, postal and communications, call centers, research and development, private educational services, health and social work, computers and related activities, sewage and sanitation, and recreational, cultural and sporting activities, etc. The loan is secured by a Deed of REM or credit guarantees/sureties issued by IGLF, SBC, CSF and the NG. d. Medium- and long-term loans loans covered by credit instruments with maturities of more than three hundred sixty (360) days but not more than 10 years from date of rediscount by the BSP. Eligible projects include, but are not limited to, the following: Housing loans for the construction or acquisition of a house, house and lot, townhouse or condominium by the homeowner-borrower and the construction of residential houses and condominiums by the property developer. Loans to property developer shall not include the purchase of raw land and development cost, i.e., construction of roads, drainage, park, water system and others. The loan is secured by a Deed of REM. Agricultural loans with long gestation period, secured by a Deed of REM, that become economically productive and generate revenue only after a period of three (3) years as follows: Project Gestation in number of years Abaca 4-6 Black Pepper 3-4 Cacao 4-6 Calamansi 4-6 Cashew 5 Coconut 7-8 Coffee 3-4 Durian 5-7 Jackfruit 5-7 Lanzones 6-8 Mango 5-7 Mangosteen 6-7

Pomelo 5-7 Rambutan 4-6 Rubber 6-8 Palm Oil 5-7 Pili 7 Capital assets expenditure (CAPEX) for the purchase, construction, expansion, or improvement of long term assets used in trade or business: e.g., factory, warehouse, office building, machinery and equipment, and transportation equipment. The loan is secured by a Deed of REM or credit guarantees/sureties issued by IGLF, SBC, CSF and the NG. Permanent working capital which refers to the core level in trading assets (accounts receivable and inventory) brought about by long term or rapid sales growth or increased production capacity. The loan is secured by a Deed of REM or credit guarantees/sureties issued by IGLF, SBC, CSF and the NG. Banks availing of the medium and long-term facilities shall submit quarterly report on the projects, conduct end-user verification and validate utilization of loan proceeds annually or every other year depending on the findings disclosed in the project quarterly monitoring report. 7. What loans are considered ineligible for rediscounting? Under Subsection () X269.2 of the Manual of Regulations for Banks (MORB), the following loans are exceptions from credit instruments that may be rediscounted with the BSP: Interbank loans Past due loans Unsecured loans (except in cases identified below) Personal consumption loans Loans to non-bank financial institutions Loans funded from other borrowings, e.g., government financial institutions or multilateral agencies Unsecured loans may be accepted for rediscounting provided they are: Microfinance loans; or Loans secured by a duly registered mortgage on real property of the bank, 70% of the appraised value of which equals or exceeds the outstanding balance of the unsecured PN and other collaterals acceptable to the BSP, e.g., government securities 8. Can PNs secured by Certificate of Land Ownership Award (CLOA) and Emancipation Patent (EP) be rediscounted with BSP? No. Under Memorandum No. M-2009-041 dated 4 November 2009, PNs secured by a mortgage on CLOA or EP are not among the eligible papers acceptable for rediscounting in view of the statutory prohibitions under Presidential Decree No. 27 and Republic Act No. 6657. 9. Can PNs secured by Certificate of Land Title issued by virtue of Free Patent be rediscounted with BSP? Yes, PNs secured by Certificate of Land Title issued by virtue of Free Patent, covering residential lands, can be rediscounted with BSP. However, under Memorandum No. M-2011-036 dated 5 July 2011, an Original Certificate of Title issued by virtue of Free Patent, covering agricultural lands, may only be accepted as underlying collateral for loans offered for rediscounting with the BSP after the expiry of the prescription period of five years from the date of the approval of the order to issue the patent. 10. Are there guidelines covering credit availments from the BSP? From time to time, the BSP releases credit issuances governing credit policies and procedures. The new guidelines on the BSP Rediscounting Facility are covered by Circular No. 630 dated 11 November 2008, as amended by Circular Nos. 648, 679, 684 and 776 dated 02 March 2009, 01 February 2010, 15 March 2010 and 7 December 2012, respectively. In addition, the BSP issued the following memoranda: M-2010-005 dated 15 March 2010, which provides the guidelines on the 2% creditable withholding tax on interest payments to the BSP by banks belonging to the top 20,000 corporations as authorized withholding agent by BIR and enrolled with BSP-Department of Loans and Credit (DLC); M-2010-031 dated 22 September 2010, which advises all banks participating in the eRediscounting to encode in the system the complete and correct addresses of their borrowers whose loans are being rediscounted with the BSP; M-2010-042 dated 06 December 2010, which provides the guidelines for thrift banks on the rediscounting of packing loans and export bills with the BSP; M-2011-017 dated 18 March 2011, which provides the guidelines on real estate properties covered by Section 7 of R.A. No. 26 offered as collateral for loans with the BSP; M-2011-036 dated 5 July 2011, which allows an Original Certificate of Title issued by virtue of Free Patent, covering agricultural lands, to be accepted as underlying collateral for loans offered for rediscounting with the BSP after the expiry of the prescription period of five years from the date of the approval of the order to issue the patent;

 M-2012-004 dated 16 January 2012, which allows land titles with Presidential Decree No. 1271 annotation as underlying collateral for loans offered for rediscounting with the BSP on condition that 1) the land titles submitted specifies that the Original Registration Date was on or before 31 July 1973; and 2) the land covered by titles are not within any government, public or quasipublic reservation, forest, military or otherwise, as certified by appropriate government agencies; Memorandum to all rediscounting banks dated 30 January 2012, posted in the eRediscounting website, which provides guidelines on the custodianship of credit instruments and underlying collaterals of banks authorized to hold-in-trust in favor of the BSP; Memorandum to all rediscounting banks dated 30 January 2012, posted in the eRediscounting website, which provides guidelines on the handling of rediscounted credit and collateral documents by banks under depository/ custodianship arrangement; and Memorandum to all rediscounting banks dated 18 May 2012, posted in the eRediscounting website, which provides guidelines on additional information on the appraisal report included in the documentary requirements of rediscounting banks.

11. Who are considered eligible borrowers? The universal/commercial, thrift, rural or cooperative bank determines the eligibility of its borrowers. In general, these borrowers are the following: Those with satisfactory credit standing and good business reputation; and Those who are able to meet the participating banks credit requirements. 12. Who are qualified to participate in the BSPs rediscount window? Are there eligibility requirements? All banking institutions, such as universal/commercial banks, branch of foreign banks, thrift banks, rural and cooperative banks that have existing rediscounting lines with the BSP are qualified to participate in the BSPs rediscounting window. Yes, there are eligibility requirements which are enumerated under Item Nos. 16 and 17. 13. Where can a bank file its application for rediscounting line? The application for a rediscounting line shall be filed with the DLC, BSP Manila. 14. What is the term of the approved rediscounting line? The term of the line shall be for one year unless sooner cancelled, suspended, amended or extended by the Credit Committee. The line is renewable annually upon submission of application one month before the expiry of said line. 15. What is the function of the Credit Committee? Who comprises it? The Credit Committee approves, disapproves, extends, amends, cancels, suspends and restores the rediscounting line of banks. It is composed of the Assistant Governor/Managing Director (MD) of the Monetary Operations SubSector, MD of the Regional Monetary Affairs Sub-Sector, and the Director of the DLC, BSP. 16. How much will be the rediscounting line? The rediscounting line ranges from 50% to 200% of adjusted net worth depending on the total credit score of the applicant bank. 17. What are the requirements to be met to qualify for rediscounting line? Banks shall have complied with the following requirements: Minimum capital prescribed under X106.1 and X106.2 of the MORB, as amended, based on the latest available report of the Supervisory Data Center (SDC); Capital adequacy ratio as required under Sec. X116 of the MORB, based on the latest available report of the SDC; Required reserves against deposit liabilities/deposit substitutes for two consecutive weeks based on the latest available report of the SDC; NPL ratio lower or equal to the industry average adjusted upward by two percent based on the latest available report of the SDC, or the allowable NPL ratio approved by the MB; Positive demand deposit account (DDA) balance with the BSP as of date of application; No past due obligations or collateral deficiencies on account of matured notes, unremitted collections, missing collaterals or ineligible papers with the BSP as of date of application; A CAMELS Composite Rating of 3 or higher based on the latest general examination of the appropriate Examination Department of the Supervision and Examination Sector (SES);

 The ratio of past due direct and indirect loans to directors, officers, stockholders, and their related interests (DOSRI) to the aggregate past due loans should not be more than five percent based on the latest available report of the SDC; For newly merged or consolidated banks, a temporary line not exceeding 50% of its adjusted net worth as of latest date may be granted for a period of 180 days while awaiting the required reports/data from the appropriate SES Department, renewable for another 180 days or until such time that the required reports/data are made available, whichever comes earlier, subject to the following conditions as required under Subsection X268.3 of the MORB: a. Compliance with the requirements on positive DDA balance with the BSP and no past due obligations or collateral deficiencies on account of matured notes/unremitted collections/missing collaterals or ineligible papers with the BSP, both as of date of application, and other guidelines issued by the DLC; and b. One of the merging or consolidating banks has CAMELS composite rating of at least 3 and minimum CAR of 10% based on the latest available SDC data. Banks applying for the microfinance facility shall also comply with the following requirements based on the latest available report of the SES: a. At least one year track record in microfinance; b. At least 500 active microfinance borrowers; c. A Portfolio At Risk ratio (PAR) of not more than five percent; d. The ratio of total collections (excluding prepayments) during the preceding 12-month period to total collectibles (past due microfinance loans, beginning plus matured loans/principal amortizations due for the period) should not be less than 95%; and e. Officers and staff responsible for microcredit operations shall have completed: 1) a training course on microfinance;and 2) at least one year experience in microlending activities. 18. What are the eligibility requirements at the time of availment? Banks availing of the BSP Rediscounting facility must have at the time of availment with the BSP: A positive DDA balance No past due obligations No collateral deficiencies on account of matured notes, unremitted collections, missing collaterals or ineligible papers 19. What is eRediscounting? eRediscounting is an online, internet-based rediscounting facility of the BSP available to all qualified banks nationwide. This facility allows qualified banks to conduct their rediscounting transaction in their place of business on near real-time basis. It provides an online data entry facility for rediscounting transactions and inquiries with the following capabilities: Embedded validation rules which immediately prompt on the correctness and acceptability of PNs and other collateral documents. Online submission to BSP of loan applications by applicant banks. Electronic processing by BSP providing real-time online status of loan applications. Online acceptance of payments to BSP on rediscounting loans guided by the query window for outstanding loan balances and charges. To facilitate online payments, banks will just have to identify the loan application or PN number. The system will automatically compute the amount due. Payments for a peso loan are automatically debited against the banks DDA with BSP. Provision of online information on available rediscounting line, rediscount rates, and existing and new regulations on rediscounting. 20. What are the features of the system? Online filing and processing of rediscounting loan applications and payments; Online data validation; Online access to historical rediscounting information on loans, PNs, borrowers, collaterals, payments, rediscount rates, and rediscounting lines; Online access to various rediscounting forms like PNs, User Account Registration Form, User Specimen Signature Form, User Account Change Form and Incident Report Form and Depository/Custodianship Agreement; Role-based and approval workflow from the client side; Secured data transmission and automatic generation of accounting entries at BSP; and Maintainable system formula, valuation rates, access rights, system options and coding scheme libraries. 21. How can a bank participate in the eRediscounting System? Once a bank has acquired a rediscounting line from the BSP, it must execute an eRediscounting System Participation Agreement. For a rural/cooperative bank, a Depository/Custodianship Agreement with its designated custodian bank must also be submitted. Thereafter, the DLC shall grant the bank access to the eRediscounting System via the Internet. 22. What are the minimum system requirements?

Hardware Pentium IV Workstation, at least 128 mb SDRAM, VGA Monitor Software Windows 2000, or Windows OS higher version; MS Internet Explorer Version 6.0 or higher Network With internet connection Security Token Card

23. What interest is charged by the BSP against the rediscounting loan? The interest rate charged by BSP against the rediscounting loan is called the rediscount rate. Under X269.6 of the MORB, the rediscount rates for peso, dollar and yen loans shall be as follows: Peso Rediscounts Based on the applicable BSP overnight reverse repurchase rate (RRP).Dollar/Yen Rediscounts Based on their respective London Inter-Bank Offered Rate (LIBOR) for the last working day of the immediately preceding month. 24. Is there a ceiling in the lending rates that the banks may charge on their rediscounted papers? None. The interest rates that the banks may charge on their rediscounted papers shall not be subject to any ceiling. 25. What is the term of BSP rediscounts? Under X269.5 of the MORB, the maturities of BSP rediscounts are as follows: Type of Rediscount Maturity a. Commercial Credits 1) Export Packing 2) Trading 3) Transport 4) Export Bills (EBs) i. At Sight ii. Usance EB 180 days from date of rediscount but shall not go beyond the maturity date of the credit instrument 15 days from purchase date Term of draft but not to exceed 60 days from shipment date b. Production Credits 360 days from date of rediscount but shall not go beyond the maturity date of the PN c. Other Credits Maximum maturity of 360 days. Upon maturity or full payment of the BSP loan on medium and long term loans, banks shall have the option to reapply the loans; provided, that the PNs of the enduser borrowers remain current and outstanding, and that no adverse findings resulted from the loan monitoring and verification conducted by the DLC. 26. What is the loan value of eligible papers? Under X269.4 of the MORB, the loan value of all eligible papers shall be 80% of the outstanding balance of the borrowers credit instrument but not higher than 70% of the appraised value of the underlying collateral. 27. What is the maximum amount of rediscount that can be availed of by a qualified bank with the BSP? An eligible bank may avail up to 100% of its rediscounting line, provided all rediscounting loans are fully collateralized subject to prevailing rediscounting policy. 28. How will the bank know if the loan application is approved by the BSP? The bank may view the status of its loan application online under the BSP Response module of the eRediscounting. Notice and details of the loan approval or disapproval may be viewed upon clicking the message of a specific loan bank reference. BSPs response on payment instruction submitted by the bank may likewise be viewed online. 29. How are the rediscounting loan proceeds released to the bank? The proceeds of the rediscounting availment shall be released as follows: Peso rediscounts automatically credited to the borrowing banks DDA or its depository banks DDA with the BSP on the same day for loan application submitted to the BSP before 4:00 p.m., during banking days. Dollar/Yen rediscounts released through the Treasury Department, BSP, for credit to the designated foreign correspondent bank of the borrowing bank as follows: a. Same banking day credit for dollar loan application submitted to the BSP before 11:00 a.m., during banking days; and b. Following banking day credit for yen loan application submitted to the BSP before 11:00 a.m., during banking days. 30. What are the required documentations upon receipt by the bank of BSPs advice of loan approval? Upon receipt of confirmation of loan approval, the bank shall:

 Execute the Promissory Note with Trust Receipt Agreement and Deed of Assignment (PNTRADA) in favor of the BSP, signed by the authorized officer/s of the bank. If commercial or thrift bank, hold-in-trust, segregate and keep the rediscounted credit instruments and underlying collaterals together with the PNTRADA at a secured place within its premises; if rural or cooperative bank, deposit with its respective depository/custodian bank the credit instruments and underlying collaterals and the PNTRADA not later than the next banking day from date of loan grant, receipt of which shall be acknowledged by the depository bank in the List of Rediscounted Loans. 31. How do banks pay their rediscounting loan obligations with the BSP? At any time, the borrowing bank may view its outstanding rediscounting obligations under the eRediscounting Loans Payment module wherein payments are effected as follows: Peso Rediscounts The loan value of the rediscounted credit instruments or the amortization plus interest due thereon [net of 2% creditable withholding tax (CWT) for rediscounting banks belonging to the top 20,000 corporations as identified by the BIR and enrolled with BSP-DLC] shall automatically be debited against the borrower banks DDA with the BSP at maturity/amortization due date. For microfinance loans with daily, weekly or semi-monthly amortizations, the borrower banks DDA shall be debited on the last amortization due date of said month for the total loan value of the amortizations for the month plus interest due thereon. Dollar/Yen Rediscounts Dollar and yen loans shall be repaid in the same currency under which they were released. The bank shall submit online to BSP its payment instruction a day before the maturity date of the loan corresponding to the remittance instruction to its designated correspondent bank covering the loan value plus the interest due thereon. In case of short payment, the banks DDA shall be debited for the peso equivalent of the shortage. If the loan is not settled on maturity date, the borrowing banks DDA shall be automatically debited for the peso equivalent of the matured obligation plus accrued interest due thereon, using the applicable BSP selling rate for dollar and yen at the date of debit. For prepayment of Peso/Dollar/Yen rediscounting loans, on account of collections received by the borrowing bank before the maturity date of the credit instrument, the bank shall submit to BSP within five banking days from date of receipt of collections an online payment instruction corresponding to the loan value of the principal amount collected plus interest due thereon, net of 2% CWT for payment of peso loan by banks enrolled with DLC as authorized withholding tax agent. SWIFT instruction to the correspondent bank for payment of dollar/yen rediscounting loan should coincide with the amount and value date indicated in the payment instruction submitted by the borrowing bank under the Loan Payment module. Otherwise, the borrowing banks DDA shall be debited for the corresponding peso equivalent of the shortage. For this purpose, the borrowing bank should maintain sufficient balance in its DDA to cover its maturing obligations and to fund any payment instruction submitted online. 32. How will the banks know that their rediscounting loan payments are received and taken up by the BSP? The borrowing bank may view in the eRediscounting under the BSP Responses module the application of payments for the matured loans or amortizations automatically debited for the day or prepayments submitted to the BSP before 4:00 p.m. A corresponding Authority to Withdraw Collateral is issued in the BSP Response on the following day after a credit instrument is fully paid by the borrowing bank. 33. Are the local non-working holidays excluded from the five banking days within which collection from rediscounted credit instruments should be remitted? No. Only the legal and national non-working holidays shall be excluded from the five banking days within which collection from rediscounted credit instruments should be remitted. 34. Is there a cut-off time for the submission of rediscounting loan transactions by the bank? A bank may submit to BSP its loan application and loan payments from 8:00 a.m. 4:00 p.m. during banking days, except every last Friday of the month due to BSPs observance of Earth Hour during which the cut-off time will be adjusted to 3:00 p.m. In this regard, an advisory shall be issued at the beginning of the banking day on the adjustment of the cut-off time. http://www.bsp.gov.ph/downloads/publications/faqs/rediscounting.pdf

Open Market Operations

Policy Rate Setting

The Bangko Sentral ng Pilipinas (BSP) formally adopted inflation targeting as the framework for monetary policy in January 2002. This policy move is aimed at providing the BSP with a more focused and forwardlooking approach in the pursuit of its primary mandate, which is to ensure price stability. Two intrinsic features of the approachtransparency and accountability in monetary policyis expected to enhance the credibility of the BSP in helping create a stable macroeconomic environment in which vital economic reforms to raise the growth potentials of the economy can continue. This approach involves the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. The target inflation rate is set and announced jointly by the BSP and the government through an inter-agency body. Although the responsibility of achieving the target rests primarily with the BSP, this joint announcement reflects active government participation in achieving the goal of price stability and government ownership of the inflation target. In the Philippines, the interest rates applied on the overnight RP/RRP signals the stance of BSPs monetary policy. The BSP created an Advisory Committee which deliberates, discusses and recommends to the Monetary Board the appropriate monetary policy stance that will enable the BSP to achieve the desired inflation target. The Advisory Committee meets every six weeks and in between regular meetings, whenever it is deemed necessary. Policy Instruments The BSP implements monetary policy using various instruments to influence the level of liquidity in the market and thereby steer inflation towards thetarget level. These instruments can be classified into two types:

Direct instruments enable the BSP to control directly certain items in banks balance sheets which may be in the form of financial prices or quantities. Direct instruments have a strong coercive element as in the case of reserve requirements and directed lending requirements.

Indirect instruments work through the market to influence the behavior of financial institutions, usually through the pricing of central bank facilities. Indirect instruments include adjustments in short-term policy interest rates and the conduct of open market operations (OMO).

Mechanics of OMO OMO is a monetary tool which involves the BSP publicly buying or selling government securities from banks and financial institutions in order to expand or contract the supply of money. By controlling the money supply, the BSP is able to exert some influence on the prices of goods and services and achieve its inflation objectives. When the BSP buys securities, it pays for them by directly crediting its counterpartys Demand Deposit Account that is being maintained with the BSP. Effectively, the transaction increases the buyers level of reserves and on an aggregate level, expands the systems money supply. Conversely, when the BSP sells the securities, the buyers payment (via direct debit against the buyers Demand Deposit Account with the BSP) reduces his reserve account causing money supply to contract. In conducting OMO, the BSP uses two instruments: (1) repurchase (repo)/reverse repurchase (reverse repo) agreements and (2) outright purchases and sales of securities.

Repurchase (repo) / reverse repurchase (reverse repo) agreements. The BSP purchases government securities from a bank with a commitment to sell it back at a specified future date at a predetermined rate. In effect, a repo transaction expands the level of money supply as it increases the banks level of reserves. Under a reverse repo, the BSP acts as the seller of government securities, thus, the banks payment reduces its reserve account resulting in a contraction in the systems money supply. For both repos, the BSP can only affect the level of money supply temporarily, given that the parties involved commit to reverse the transaction at an agreed future date. At present, the BSP enters into repo agreements for a minimum of one (1) day (overnight) for both repos and a maximum of 91 days and 364 days for repo and reverse repo agreements, respectively.

Outright purchases and sales of securities. An outright contract involves direct purchase/sale of government security by the BSP from/to the market for the purpose of increasing/decreasing money supply on a more permanent basis. In such a transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on the banking systems level of money supply.

The BSP may also use other monetary policy tools such as reserve requirements and rediscounting to expand or contract money supply. The BSP may also grant loans and advances to banking institutions to influence the volume of credit consistent with the objective of price stability. In addition, the BSP can employ moral suasion as a last resort when existing market mechanisms cannot adequately and promptly ensure the attainment of specific monetary objectives. Advantages of Open Market Operations However, among the tools available to the BSP, OMO offers advantages and continues to be the most practical tool for the following reasons:

First, it works within the BSPs initiative and control. Having the authority to steer market interest rates, the BSP can influence money supply by changing the monetary policy rates. Consequently, OMO gives the BSP greater flexibility in terms of the amount and timing of intervention.

Secondly, it is fast to implement and gives quick results. Any change in the policy rates is readily implemented, i.e., on the same day that the Monetary Board makes the resolution. Thus, any effect on the market is evident right after the overnight trading for the day.

Call Loans and the Interbank Call Loan Market Call money are amounts traded in the interbank call loan market that correspond to the excess or deficiency of each bank in terms of reserves. These can be overnight placements. IBCL transactions among banks are done primarily to correct reserve requirements. The reserve position of each bank or quasi-bank is calculated daily on the basis of the amount of the institutions reserves at the close of business for the day and the amount of its liability accounts against which reserves are required to be maintained. The reserve positions of banks are normally known after the check clearing results have been transmitted. As the check clearing results are known only by late afternoon, interbank call loans are currently done from 4:45 PM to 5:30 PM. The interbank market can either be securitized (collateralized) or unsecuritized (clean) lendings/borrowings, as well as repurchase agreements. Repurchase Agreements (RPs) are generally short-term sale of

government securities with an agreement to repurchase on the agreed maturity date. Repurchase agreements are extensively used as a means of short-term financing by government securities dealers and by banks. Banks establish credit lines with its counterparties for these transactions. Managing Risks in OMO Transactions A valuation scheme for securities used in repos is adopted by the BSP to help manage the credit risk inherent in OMO transactions. Eligible securities are valued based on their current market yields as well as the applicable cut based on remaining life of securities involved. To avoid exposing the BSP to undue risks arising from purchases of securities, Section 91, Article V of RA 7653 (The New Central Bank Act) sets the type of securities that can be bought or sold by the BSP for its own domestic portfolio, as follows:

Evidences of indebtedness issued directly by the Government of the Philippines or by its political subdivisions; and Evidences of indebtedness issued by government instrumentalities and fully guaranteed by the Government.

Section 92 of the same article also provides the BSP with effective instruments for OMO, that is, it may, subject to such rules and regulations as the Monetary Board may prescribe and in accordance with the principles stated in Section 90, issue, place, buy and sell freely negotiable evidences of indebtedness of the BSP, provided that such issuance shall be made only in cases of extraordinary movement in price levels. Said evidences of indebtedness may be issued directly against the international reserves of the BSP or against securities, which it has acquired under the provisions of Section 91 or may be issued without relation to specific types of assets of the BSP.

http://www.bsp.gov.ph/financial/open.asp

CHAPTER IV INSTRUMENTS OF BANGKO SENTRAL ACTION ARTICLE V - OPEN MARKET OPERATIONS FOR THE ACCOUNT OF THE BANGKO SENTRAL SECTION 90. Principles of Open Market Operations. The open market purchases and sales of securities by the Bangko Sentral shall be made exclusively in accordance with its primary objective of achieving price stability. SECTION 91. Purchases and Sales of Government Securities. In order to achieve the objectives of the national monetary policy, the Bangko Sentral may, in accordance with the principle stated in Section 90 of this Act and with such rules and regulations as may be prescribed by the Monetary Board, buy and sell in the open market for its own account: (a) evidences of indebtedness issued directly by the Government of the Philippines or by its political subdivisions; and

(b) evidences of indebtedness issued by government instrumentalities and fully guaranteed by the Government. The evidences of indebtedness acquired under the provisions of this section must be freely negotiable and regularly serviced and must be available to the general public through banking institutions and local government treasuries in denominations of a thousand pesos or more. SECTION 92. Issue and Negotiation of Bangko Sentral Obligations. In order to provide the Bangko Sentral with effective instruments for open market operations, the Bangko Sentral may, subject to such rules and regulations as the Monetary Board may prescribe and in accordance with the principles stated in Section 90 of this Act, issue, place, buy and sell freely negotiable evidences of indebtedness of the Bangko Sentral: Provided, That issuance of such certificates of indebtedness shall be made only in cases of extraordinary movement in price levels. Said evidences of indebtedness may be issued directly against the international reserve of the Bangko Sentral or against the securities which it has acquired under the provisions of Section 91 of this Act, or may be issued without relation to specific types of assets of the Bangko Sentral. The Monetary Board shall determine the interest rates, maturities and other characteristics of said obligations of the Bangko Sentral, and may, if it deems it advisable, denominate the obligations in gold or foreign currencies. Subject to the principles stated in Section 90 of this Act, the evidences of indebtedness of the Bangko Sentral to which this section refers may be acquired by the Bangko Sentral before their maturity, either through purchases in the open market or through redemptions at par and by lot if the Bangko Sentral has reserved the right to make such redemptions. The evidences of indebtedness acquired or redeemed by the Bangko Sentral shall not be included among its assets, and shall be immediately retired and cancelled. ARTICLE VI - COMPOSITION OF BANGKO SENTRAL'S PORTFOLIO SECTION 93. Review of the Bangko Sentral's Portfolio. At least once every month the Monetary Board shall review the portfolio of the Bangko Sentral in relation to its future credit policy. In reviewing the Bangko Sentral's portfolio, the Monetary Board shall especially consider whether a sufficiently large part of the portfolio consists of assets with early maturities, in order that a contraction in Bangko Sentral credit may be effected promptly whenever the national monetary policy so requires.

http://www.bsp.gov.ph/about/charter_13.asp
CORE INFLATION AND THE ESTIMATION OF CORE INFLATION 1. What is core inflation? Core inflation is a widely used measure of the underlying trend or movement in the average consumer prices. It is often used as a complementary indicator to what is known as headline or Consumer Price Index (CPI) inflation. 2. How is core inflation different from CPI or headline inflation? Headline inflation refers to the rate of change in the CPI, a measure of the average price of a standard basket of goods and services consumed by a typical family. In the Philippines, the CPI basket is composed of various consumer items as determined by the nationwide Family Income and Expenditure Survey (FIES), which is conducted every three years by the National Statistics Office (NSO). Headline inflation thus captures the changes in the cost of living based on the movements of the prices of items in the basket of commodities and services consumed by the typical Filipino household. On the other hand, core inflation measures the change in average consumer prices after excluding from the CPI certain items with volatile price movements. By stripping out the volatile components of the CPI, core inflation allows us to see the broad underlying trend in consumer prices. Core inflation is often used as an indicator of the

long-term inflation trend and as an indicator of future inflation. It is usually affected by the amount of money in the economy relative to production, or by monetary policy. 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Headline and Core Inflation (2006 = 100) (Year-on-year, in percent) 3. Why do we need to measure core inflation? In many countries, CPI inflation is often influenced by factors beyond the control of economic policy and has tended to be historically volatile. Shocks or disturbances in certain areas of the economy may cause it to temporarily move away from its long-term trend. In the Philippines, the volatility of inflation has been caused by factors such as disturbances in agricultural food supply or movements in international oil prices. As a result, the headline inflation rate may reach double-digit levels, even though the prices of other CPI components show only mild increases. Core inflation is an indicator of the underlying movement in consumer prices since it takes out the effect of temporary disturbances and shocks that cause prices to surge or decline, independent of economic and monetary policy. Measuring core inflation helps policymakers determine whether current movements in consumer prices represent short-lived disturbances or are part of a permanent trend. Such knowledge is important to the formulation of economic policy, particularly monetary policy.

4. How is core inflation measured or computed? There are several methods used to compute core inflation. The most common approach used in many countries is the exclusion method, which computes core inflation by taking out the prices of a fixed, pre-specified set of items from the CPI basket. The excluded components are considered to be either volatile or susceptible to supply disturbances and typically consist of food and energy items. This is based on the notion that the markets related to these goods are prone to supply shocks. Some economists advocate the use of statistically-based methods that remove extreme or outlier price changes (both positive and negative) from the overall inflation rate. The set of excluded items changes each month, depending on which particular items exhibit extreme price movements. The most common statistical measures of core inflation are the trimmed mean and weighted median. Both measures are derived from a highest-to-lowest (or positive to negative) ranking of individual price changes for each given month. The trimmed mean measure takes the average inflation rate after excluding a specified percentage of extreme positive and negative price changes, while the weighted median simply takes the median inflation rate which corresponds to a cumulative CPI weight of 50 percent from the highest-to-lowest ranking. It is also possible to use econometric techniques to estimate core inflation by estimating or calculating a statistical relationship between inflation and other relevant economic variables. The estimated regression model is then used to generate monthly estimates of core inflation using actual data for the other variables in the model. In the Philippines, the official core inflation measure is computed using the exclusion method. This approach was chosen for the following reasons: ease of construction; understandability by the general public; easy replication and verification by others; increased accountability and transparency of measurement; and timeliness. Answers to question nos. 9-10 provide a more detailed explanation on the choice of core inflation measures. Answer to question no. 12 provides a numerical example. CROSS-COUNTRY EXPERIENCES ON CORE INFLATION 5. Do other countries monitor core inflation? Yes, most statistical authorities in other countries publish a measure of core inflation. Among central banks, it has become a common practice to monitor core inflation, irrespective of the monetary policy framework being used. For example, non-inflation targeting central banks such as the US Federal Reserve, the Bank of Japan and the Monetary Authority of Singapore also monitor core inflation. 6. How do other countries measure core inflation? The majority of countries employs the exclusion method and defines core inflation as the overall price index net of the most volatile components, which most commonly refers to food and energy. In addition to food and energy items, other countries also excludes the effects of changes in interest rate, Canada, for example, excludes food, energy and the effects of indirect taxes, while the US only exclude food and energy. The table below summarizes

the official core inflation measures adopted by other countries as well as the other core inflation measures used internally by their central banks. Country Excluded component from Core CPI Weight in the total CPI basket United States Cereals and bakery products, meats, poultry, fish, and eggs, dairy and related products, fruits and vegetables, nonalcoholic beverages and beverage materials, other food at home, food away from home, fuel oil, motor fuel, electricity and utility (piped) gas service 26.8Canada Fruit, fruit preparations and nuts, vegetables and vegetables preparations, Mortgage Interest costs, 17.9Country Excluded component from Core CPI Weight in the total CPI basket natural gas, fuel oil and other fuels, gasoline, intercity transportation, and Tobacco products and smokers supplies as well as the effect of changes in indirect taxes United Kingdom*Retail Price Index excluding: Mortgage interest payments (RPIX) Housing Mortgage interest payments and council tax Mortgage interest payments and depreciation Seasonal food Food 3.4 23.7 7.3 8.9 1.9 11.2 Korea* Radish, young radish, Chinese cabbage, leek (welsh onion), yellow onion, spinach, bean sprouts, cabbage lettuce, carrot, cucumber, squash, eggplant, tomato, sweet potato, platycodon, mushroom, fernbrake, unripe hot pepper, parsley, perilla leaf, scallion, apple, pear, peach, grape, persimmon, chestnut, mandarine orange, melon, watermelon, strawberry, banana, dried pepper, garlic, ginger, sesame, peanut, kerosene, LPG for cooking, city gas, potable butane, ginseng, fresh flower, gasoline, light oil and LPG for car 11.7Japan* Fresh food (fresh fish and seafood, fresh vegetables, fresh fruit) 4.1Indonesia Administered prices (fuel prices, transportation tariffs, electricity, and tobacco) and volatile food (seasonings, which includes red chili peppers, tomatoes, shallots and garlic, as well as several vegetable varieties; rice) 40.0Thailand Raw food (rice and cereal products, meat, poultry and fish, vegetables and fruits) and eggs and milk products) and energy (electricity, cooking gas, 24.1Core Inflation Country Excluded component from Core CPI Weight in the total CPI basket benzene 91, benzene 95, diesel and lubricant) Australia Fresh fruit and vegetables, automotive fuel, mortgage interest charges and consumer credit charges 15.2 Singapore Rented accommodation, owner occupied accommodation, minor repairs and maintenance, purchase of vehicles, repairs and maintenance and purchase of spare parts and other running costs 31.7 *For United Kingdom, Korea, and Japan, CPI weights are expressed in thousands (parts per 1,000 for UK and Korea and 10,000 for Japan). Source: Central Bank websites and Official Statistical offices 7. How do policymakers use core inflation in other countries? Most statistical agencies in other countries use core inflation as a supplementary indicator to headline inflation and publish it alongside the headline rate. Some inflation targeting central bankssuch as the central banks from Canada, Czech Republic, Finland, Thailand and South Africause core inflation as the operating target for monetary policy. TOWARDS AN OFFICIAL DEFINITION OF CORE INFLATION IN THE PHILIPPINES 8. Is there an official definition of core inflation in the Philippines? Yes, there is an official definition of core inflation in the Philippines. The National Statistical Coordination Board (NSCB) through NSCB Resolution No. 6 Series of 2003 adopted an official definition and methodology for computing core inflation in the Philippines based on the exclusion method. Thus, while headline inflation is calculated as the year-on-year change in the overall CPI compiled by the NSO, the official core inflation measure is defined as the rate of change of headline CPI after excluding selected food and energy items. As is practiced, the core inflation is regularly reviewed with the change in the CPI base. Using the 2006-based CPI series, results show that the official core inflation measure excludes basically the same food- and energy-related items as the 2000based core inflation series, with the addition of meat. 9. How was the official definition of core inflation determined? The official definition is the result of inter-agency technical discussions among the NSO, the NSCB, the National Economic Development Authority (NEDA), the Statistical Research and Training Center (SRTC), the National Wage and Productivity Commission (NWPC), the Department of Trade and Industry (DTI), and the Bangko Sentral ng Pilipinas (BSP). 10. Why was the exclusion method chosen for the official definition? The exclusion method was chosen because: (a) it is easier to understand compared to the other methodologies; (b) it is more transparent and can be easily computed by anyone from CPI data; (c) it can be produced by the NSO at the same time as the headline inflation rate; and (d) it is in accordance with the common international practice of excluding food- and energy-related components of the CPI. Given that core inflation is a relatively new concept for the Filipino public in general, policymakers believed that the simplicity of the exclusion method can facilitate greater understanding by the public and consequently, help build credibility in the use of core inflation. 11. What specific items were excluded in order to compute for core inflation?

The items in the CPI that were excluded in the definition of core inflation components and their corresponding CPI weights (2006=100) are as follows: Rice (8.9 percent) Corn (0.7 percent) Meat, fresh, chilled or frozen (4.9 percent) Fruit, fresh (1.5 percent) Vegetables, cultivated for their roots, fresh or dried (0.6 percent) Vegetables, cultivated for their fruit, fresh or dried (1.2 percent) Natural gas, liquefied or in a gaseous state (1.5 percent) Gas oils for motor vehicles (0.7 percent) Together, the above excluded items account for 20.0 percent of the CPI. The list of excluded items shall be reviewed by the NSCB Board and the Technical Committee on Price Statistics (TCPS) whenever the CPI is rebased. 12. Is it possible to cite an example of the numerical computation of core inflation based on the official definition? For illustration purposes, the following table presents a sample computation of core inflation for December 2011. The core inflation rate for a given month (in this case December 2011) is the sum of core items inflation adjusted by the re-calibrated weights of these core items. 13. Which government agency generates the official core inflation data? The NSO generates and publishes the official rate of core inflation, alongside the headline inflation rate. 14. Will core inflation replace the current CPI or headline inflation published by the NSO? No. Core inflation is not intended as a replacement for headline inflation, but as a complementary indicator of the general movement in prices of goods and services. CONSUMER PRICE INDEX, PHILIPPINES (2006=100)December 2011 in percent Inflation Rate Weights 1 Weights in Core CPI Dec 2010 Dec 2011 Core Inflation(1) (2) (3) (4)=(2)(3) (5)=(4) / 80.0 (6) (7) (8)=((6/7)1)*100 ALL ITEMS 4.2 100.0 20.0 80.0 100.0 119.4 124.4 4.2 I. A. Food and NonAlcoholic Beverages 4.1 39.0 17.9 a 21.1 a 26.4 129.9 135.8 4.5 B. Alcoholic Beverages and Tobacco 6.0 2.0 0.0 2.0 2.5 117.7 124.8 6.0 C. Clothing and Footwear 3.7 3.0 0.0 3.0 3.8 115.8 120.1 3.7 D. Housing, Water, Electricity, Gas and Other Fuels 4.9 22.5 1.5 b 21.0 b 26.3 115.0 120.6 4.9 E. 2.5 3.2 0.0 3.2 4.0 114.9 117.8 2.5 F. Health 3.0 3.0 0.0 3.0 3.8 122.0 125.6 3.0 G. Transport 6.2 7.8 0.7 c 7.1 c 8.9 116.8 122.9 5.2 H. Communication 0.4 2.3 0.0 2.3 2.9 92.6 92.2 0.4 I. Recreation and Culture 1.8 1.9 0.0 1.9 2.4 105.6 107.5 1.8 J. Education 4.7 3.4 0.0 3.4 4.3 126.8 132.8 4.7 K. Restaurants and Miscellaneous Goods and Services 3.2 12.0 0.0 12.0 15.0 116.8 120.5 3.2 n.b. Figures may not addup due to rounding off 1 The CPI weights are derived from each components' percentage share to the total personal consumption expenditure of typicalfamily, based on data from the NSO's FIES. (See Question No. 2) a Noncore items are rice, corn, meat, fruits and vegetables b Excluding natural gas, liquefied or in a gaseous state c Excluding gas oils for motor vehicles CORE COMMODITYHEADLINE Weights of Non-Core Items CPI Weights Excluding Non-Core Items Furnishings, Household Equipment and Routine Maintenance of the House 15. Where does core inflation fit into the BSPs inflation targeting framework? Under the BSPs inflation targeting framework, the annual inflation target is still defined in terms of the headline inflation rate. The BSP uses the official measure of core inflation as a complementary indicator of consumer price movements. Thus, it would serve as an additional input to monetary policy analysis. 16. As a consideration in adjusting the minimum wages in the country, should Regional Wage Boards use core inflation rather than headline inflation? No. Core inflation should not be used as basis for adjusting wages in the country. Since the intention is to factor into the wage-setting decisions the overall increase in the cost of living and losses in purchasing power, the Regional Wage Boards should still use headline inflation. Wage adjustments must consider the price changes in all the items in the CPI basket, including rice, corn and fuel-related items which are excluded in the computation of core inflation.

http://www.bsp.gov.ph/downloads/publications/faqs/inflation.pdf