Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno on Tuesday reiterated that despite recent pressure on the peso, the foreign exchange market will remain stable.
Diokno said the BSP’s policy of a flexible exchange rate “helps protect the peso against speculative attacks.”
“The market-determined exchange rate is our first line of defense against external shocks,” he said during a virtual fireside chat with clients of Japan-based financial services firm, Nomura Holdings.
On Tuesday, the peso opened steady at P49.95 vis-à-vis the US dollar but hit a high of P50 from Monday’s P49.97. It closed stronger at P49.91, based on Bankers Association of the Philippines exchange rate summary
The recent peso depreciation is mainly due to the dollar strength as investors were on a risk-off sentiment with COVID-19 Delta variant new cases and US Federal Reserve’s (US Fed) impending policy normalization.
Diokno is still saying that the peso, which dropped by 3.5 percent against the dollar since the start of the year, is “relatively stable.”
He pointed out that the “manageable weakening” of the peso is similar to the behavior of other emerging market currencies because “demand for the dollar rises amid the anticipated policy normalization by the US Fed.”
Diokno stressed that the Philippines continue to enjoy healthy external accounts with buffers that are sufficient to manage impact of shocks, including market reaction over pending move of the US central bank to normalize its monetary policy.
“Our external liquidity buffers continue to be more than adequate,” he told Nomura. “Our hefty GIR (gross international reserves), steady inflows from remittances and BPOs (business process outsourcing), and recovery of exports and FDIs (foreign direct investments) will support the peso.”
As of end-August, the GIR stood at $108.05 billion, which was higher than the country’s outstanding external debt of $97 billion (as of end-March 2021). The GIR increased in August because of a new $3.99 billion reserves in Special Drawing Rights (SDR) in the International Monetary Fund. The SDR reserves are available for the BSP and the government utilization when needed, including financing COVID-19 response.
Last week, Diokno said the peso will not break P53 despite the US Fed’s hawkish assertions. He’s even hinted that before that happens, the BSP will “use its wide range of monetary policy tools to deal with any short-term volatility, including foreign exchange market participation”.
The BSP has an open-market foreign exchange policy. It will intervene only to smoothen out extreme volatility or when speculators are attacking the local currency to weaken it.
The BSP does not make forecasts for the exchange rate, but for the purpose of setting the National Government budget, BSP has a peso-dollar rate assumption of P48 to P53 until 2024.
The last time the peso depreciated past the P53 level and almost reached P54 was in 2018. It recovered to the P50-level in 2019 and to a strong position of P48 by end-2020. This year, the first time the peso breached P50 was in July.