BSP: No speculative play on the peso yet

Published July 3, 2022, 9:10 PM

by Lee C. Chipongian

The central bank said the peso is not under any speculative attack or huge selling of the peso, which depreciated further to a 17-year low of P55.09 vis-à-vis the US dollar on Friday, the first day of July.

“We don’t think there is a speculative attack on the peso, but corporates that have maturing forex (foreign exchange) obligations are buying ahead of their needs,” Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla told Manila Bulletin.

Medalla also added that importers who have excess pesos or can borrow are likely to buy earlier than normal the dollars that they need for their imports.

Speculative attacks on currencies occur when there is excessive, large volume of foreign exchange selling in the hope that the central bank will run out of reserves and thus a currency crisis ensue, and speculators with a foreign currency hoard will be able to dictate market price.

Bank teller counting P1,000 bills/Bloomberg photo

While the exchange rate is market-determined, the BSP has the ammunition to intervene and to participate via other monetary measures to prevent major exchange rate volatility.

The central bank currently implements a Currency Rate Protection Program (CRPP) which the BSP reactivated in 2018 when the peso was depreciating due to inflation worries. The CRPP facility is a non-deliverable US dollar-peso forward contract between the BSP and big banks to “help relieve the pressure on the foreign exchange market created by corporate clients wanting to front load their future foreign currency requirements.”

The country’s exchange rate policy supports a freely floating exchange rate system where the BSP leaves it to market forces to dictate the exchange rate level. The BSP will only enter the spot market to ensure “order and temper destabilizing swings” in the peso-US dollar rate.

At $104 billion adequate reserves, the BSP is fairly confident it can maintain stability and convertibility of the peso against all other currencies.

If needed, the BSP will release dollar liquidity and it will ensure there are legitimate demands for foreign currency and that these are provided for. As such, “smoothening out the exchange rate volatility is critical in performing our primary mandate of price stability since fluctuations in the exchange rate tend to feed directly into domestic prices of imported goods and services, and indirectly, through the prices of goods and services that use imported inputs,” said the BSP.

The BSP has never tolerated speculative behaviors and stands ready to use its reserves to protect the local currency against massive selling of traders wanting to cash-in on a depreciating peso.

The BSP mantra is that the peso will “take care of itself.”

Medalla told reporters last Wednesday that they are only interested in the peso rate if it is affecting inflation already. He has said that “if the exchange rate move too much, clearly it will affect inflation. But I will not say what is too much.” The inflation is currently above-target and is expected to increase to 5.7 percent to 6.5 percent for June from 5.4 percent in May.

While the BSP is not monitoring any speculative play on the peso, the new BSP chief said they are mindful of the problem and its impact on the exchange rate, which is the large revision in the current account deficit because of the larger import requirements for a recovering economy such as the Philippines.

The BSP expects a bigger balance of payments (BOP) deficit of $6.3 billion for this year from its previous estimate of $4.3 billion amid external challenges which continue to build up. The BSP has revised its BOP deficit projection on the back of an expected higher current account shortfall of $19.1 billion this year, up from its earlier projection of $16.3 billion.