The Philippine central bank has cleaned out its coffers over the past year, spending billions of pesos to shield its currency and economy from the impact of large inflows of foreign money.
Now, as the cash flows to fund market intervention dry up, the Bangko Sentral ng Pilipinas (BSP) knows it is facing tough -- and limited -- choices.
Stepping aside and letting the peso appreciate is the easiest option, even if highly undesirable at a time when major economies such as Japan and Britain have the economic advantage of easy policies and weak currencies.
"The BSP has experienced losses from the combination of reserve build-up in the face of capital inflows, strong currency appreciation, sterilisation to manage domestic liquidity, and low reinvestment returns on dollar assets relative to cost of sterilisation," Governor Amando Tetangco told Reuters this week.
Over the past year, BSP data shows it has spent 6 billion pesos to 10 billion pesos ($148-$246 million) each month, and slashing that expense is the most pressing need.
Part of the outflows were paper losses from revaluing its $84 billion currency reserves portfolio of dollars, euros and pounds. The rest was the cost of managing money supply as investors are drawn by strong growth, moderate inflation and a stock market that has risen 3-1/2 times in value in four years.
BSP data shows its net worth included a surplus of 115 billion pesos in January 2012. That had shrunk to 37.9 billion by November, or less than $1 billion, and may now have disappeared.
Its holdings of FX reserves have climbed $2 billion since October, while balances in Special Deposit Accounts (SDA), which it uses to mop up cash from the banking system, hit a record 1.86 trillion pesos in mid-February.
"Their sterilisation costs are mounting and conventional policy options are depleted," said Sanjay Mathur, economist with the Royal Bank of Scotland. "And the scale of the balance-of-payments surplus is fairly large in relation to the BSP's capital."
RBS, however, still expects the authorities to try to rein in the peso, Mathur said.
The BSP's balance sheet has historically been constrained. Of the 50 billion pesos pledged when it was created in 1993, only 10 billion was initially delivered.
A further 10 billion was infused in 2011 and another 20 billion in December 2012, made possible by the government's improved fiscal position under President Benigno Aquino. That capital is not used for the BSP's day-to-day operations.
The BSP had built up operational surpluses in 2005 and 2006, when the peso was volatile and interest expenses were lower. But currency operations have been a net drain since 2010, when it was buying foreign currency entering the economy to keep the peso from appreciating too fast.
With both time and cash running out, analysts feel the BSP ought to cut the rates on the SDA deposits, possibly as soon as Thursday when it has a regular policy review meeting.
"We will refine the SDA facility as appropriate to enhance its effectiveness as a tool for mopping up excess liquidity and not as an investment vehicle for portfolio flows," Tetangco said.
Special Deposit Account
Interest payments on Special Deposit Accounts have been the biggest drain on the BSP's finances. These accounts now pay 3 percent on deposits, which range from 7 days to 31 days and have run up to a record 1.86 trillion pesos.
By shepherding inflows into these accounts, the BSP can stop them from entering the broader economy and fuelling asset-price bubbles. But this process of sterilisation burns cash, as the BSP earns barely any yield on its dollar and euro assets.
In contrast, the SDA is an attractive option for foreigners who also derive additional returns from a rising peso. The peso rose nearly 7 percent against the dollar in 2012.
Cutting rates on the SDA would seem a simple fix, but it is easier said than done as the BSP's toolkit is sparse.
The bulk of the money coming in is remittances from Philippine workers abroad -- which reached nearly $6 billion in the December quarter -- and revenues for Philippine-based outsourcing firms, the sort of flows that can't easily be regulated by capital controls.
The BSP has run out of government bonds to sell to the markets, and it is not permitted to issue its own bonds, as counterparts in India and South Korea can -- something Tetangco said he was talking to the government about.
The BSP has made losses for the past three years, including a loss of 86 billion pesos in 2012. Tetangco, Euromoney magazine's Central Bank Governor of the Year for Asia-Pacific, said central banks were not profit-driven.
"Central banks make money when times are bad for the economy. They tend to lose money when times are good. Nevertheless, the BSP remains mindful of the impact of our actions on our financial position," he said.
The Philippine authorities certainly aren't the only ones struggling with the heavy costs of intervention.
It's a problem Asia's high-yielding economies will have to live with for a while, so long as yields on their dollar, euro and yen reserves earn far less than what central banks have to pay on domestic deposits and bonds.
That may force the BSP's hand on the peso. The problem of mounting sterilization costs could influence the BSP's decision-making, said Credit Suisse strategist Ashish Agrawal.
"It is possible that the BSP uses a combination of FX appreciation, SDA rate cut and/or reserve requirement increases to get more policy endorsement on addressing this issue," he said.