BSP pushes for more currency swaps

By Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) wants to open and/or renew bilateral swap agreements (BSA) with other nations including China to support and ensure currency liquidity in the country.

MB file photo. MB file photo.

BSA or currency swap arrangement not only enhances bilateral cooperation between two countries by encouraging flow of trade and investments, it guarantees availability of currencies to settle trade.

BSP Governor Nestor A. Espenilla Jr. said forging more BSAs is a “resilience strategy” for the central bank since these are standby liquidity support in case of foreign currency emergencies. “Part of BSP resilience strategy is to have as many BSAs with willing partners,” he said.
Espenilla said the BSA with China in particular, which ended in 2010, is up for renegotiation. “That’s for discussion,” he added.

Interests to revive talks – after false starts in past years – seem to have gained more traction following economic officials’ frequent trips to China since 2017.

In one of these visits, President Rodrigo Duterte and Chinese President Xi Jinping have both expressed their willingness to revive the BSA, according to Finance Secretary Carlos G. Dominguez III.

Dominguez said that as early as January this year, Duterte has already given the BSP and Espenilla the approval to initiate technical discussion for the currency swap arrangement. He is also hoping that an agreement could be worked out before Xi’s Manila visit later this month.

The BSP will have more opportunities to discuss BSAs with other countries – including South Korea – when the Philippines hold official talks with ASEAN+3 nations next month for the $240-billion Chiang Mai Initiative Multilateralization swap facility. The country has a committed contribution of $9.1 billion in the swap facility.

The previous BSA with China, amounting to $2 billion, expired in 2010. It was the BSP’s third BSA with the People’s Bank of China. The only active BSA the BSP has right now is with Bank of Japan amounting to $12 billion.

Currency trading platforms

Pending the BSA, one of the results of Duterte’s trips to China was the creation of a peso-renminbi (RMB) trading platform this month. Fourteen banks including Bank of China in Manila agreed to set it up to lessen conversion costs between the two currencies which could be done direct without passing through the US dollar.

Espenilla said the RMB will not be the only currency that will have its trading platform. Future discussion to set up a similar arrangement to directly convert the peso for the Japanese yen, the Korean won, among other currencies, is now possible.

“Other currency pairs will certainly be possible but it has to be market driven as was the RMB. If there’s an initiative, we have the framework to rapidly respond,” said Espenilla.

BSP Deputy Governor Chuchi G. Fonacier said the BSP has laid down the framework for other currency trading platform where it is the overseer. This framework allows players to establish a market for any currency pair provided that it is compliant with foreign exchange laws.

“We adhere to certain principles that the community will observe like governance. For the oversight, we’d like for the BSP to be the ultimate overseer but there should be a self-governing body,” she said.

Fonacier said the peso-RMB trading platform which is expected to be operational this month, should establish clear rules that are non-discriminatory. “They should also have pre-set criteria for those who would like to join and to formulate a code of conduct, business rules and conventions that would govern them,” she said. Mechanisms must also ensure that market participants would know how to handle improper practice and behavior.

Bankers Association of the Philippines president, Nestor V. Tan, said it is not an easy task to set up a currency trading platform but that they are willing to work it out to reduce foreign exchange friction and conversion costs. “It’s a matter of market need,” he said.

Tan, also president of BDO Unibank, Inc., said currency trading platforms will have one governing body to oversee multiple bilateral currency arrangements and for the BSP to be oversight. “The objective is it’s going to be properly organized, transparent, efficient, and it is predictable,” he said.

Fonacier said there are no requests yet for a similar set up for other currencies but that the BSP is open for another currency pair. The peso-US dollar is also moving in that direction, she said, of having a self-governing trading community. “This will be started by the industry (and) BSP will review whether it is aligned or compliant with existing foreign exchange laws.”
Under the BSP framework, Fonacier said non-discriminatory prudential rules will cover market-determined exchange rates, pre- and post-trade transparency and efficient settlement of the peso leg central bank money.