BSP eases exchange rate pressures

Published March 14, 2022, 2:52 PM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) may have sold over $2.5 billion of foreign exchange in the spot market to ease exchange rate pressures amid the Russia-Ukraine war.

The peso broke P52 vis-à-vis the US dollar last March 7 and dropped to a 30-month low as the war is increasing currency volatility across the globe. On Monday, March 14, the peso depreciated to a low of P52.49 after opening at P52.32. The peso closed at P52.47 versus P52.29 last Friday.

Based on BSP data, the central bank has been taking actions since January to relieve foreign exchange rate pressures.

BSP Governor Benjamin E. Diokno has stressed earlier that they will stick to a flexible exchange rate arrangement which is “an automatic stabilizer in the face of external shocks.”

Diokno said a market-determined exchange rate has the benefit of reducing the negative impact of external shocks as a floating exchange rate can appreciate or depreciate immediately to stabilize the country’s balance of payments.

When the BSP intervenes in the peso-US dollar spot market, it releases foreign currency to relieve the pressure off the peso.

This kind of intervention is a way of effectively tightening monetary policy by mopping up the peso equivalent of the US dollar it is releasing.

For example, by selling over $2.5 billion in the spot market, the BSP actually siphoned off some P130 billion, an additional mopping up operation to complement the BSP’s other open market operations such as its reverse repurchase or RRP facility and the weekly auctions of term deposit and securities facilities.

The Russia-Ukraine war which began on Feb. 24, affects the Philippines through higher oil, energy and wheat prices.

Diokno said last week that the war’s impact on the exchange rate should be muted. The peso is expected to continue to trade sideways, he noted, with a “slight depreciation pressure” and mirroring other currencies in the region which also depreciated against the US dollar.

Diokno also stressed that the Philippines has more than adequate level of foreign exchange reserves “to temper any volatility in the exchange rate market.”

The BSP expects the peso to be strong since it is fully supported by a healthy gross international reserves or GIR. As of end-February, GIR stood at $107.98 billion.

Over the near term, the BSP expects the peso to continue to reflect the demand and supply conditions in the local foreign exchange market, driven largely by the changing global conditions such as the Russia-Ukraine war, and the eventual normalization of the US monetary policy.

For now, the government as advised by the BSP, is maintaining a peso-US dollar rate assumption of P48 to P53 until 2024.