PH dollar reserves fall below $100 B

Published August 7, 2022, 8:10 PM

by Lee C. Chipongian

Philippines’ foreign currency reserves dropped to year-year low of $98.83 billion as of end-July this year as the central bank was selling US dollars to temper the exchange rate volatility.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said they have their eye on the exchange rate and have sold US dollars to smoothen out volatility pressures. But, he said they have enough gross international reserves (GIR) ammunition for its spot market intervention when needed.

BSP Governor Felipe M. Medalla

Excluding Europe and Japan, Medalla said the Philippines was second to Korea in terms of which country has the worse depreciating currency in the region, and tied with Korea in terms of policy rate increase. The peso has depreciated by 8.28 percent versus Korean won’s 9.19 percent.

Meanwhile, the Philippines is second to Thailand in terms of selling reserves to prop up the currency. “Fortunately our reserves are still quite comfortable in spite of this,” said Medalla last Friday in a forum. The country’s GIR declined by 7.30 percent compared to Thailand’s 9.64 percent due in part to US dollar selling.

Medalla said the BSP expects the peso “to be middle of the pack”. The Development Budget Coordination Committee’s (DBCC) peso-US dollar exchange rate assumption is P51 to P55 for 2023 until 2028. The peso at P55 has already broken past the P51 to P53 DBCC assumption for this year.

Medalla declined to put a number of where he thinks the peso should be since the BSP does not target a specific exchange rate. “Sometimes you think it’s a weak peso, but in reality it’s a strong dollar. And right now, quite a bit of the change in currencies are driven by movements of the dollar,” he said instead.

The peso breached P56 vis-à-vis the US dollar in early July. The currency, one of the worst performers in the region in recent months after the Korean won, lost grounds four times in June and July and rapidly depreciated from P52 to P56. At the close Friday, Aug. 5, the peso was at P55.2 versus P55.6 the day before.

The BSP has raised the policy rate by a total 50 basis points (bps) in May and June but it did not tame the peso. Medalla said the more aggressive, off-cycle 75 bps rate hike last July 14 has done its job of keeping the peso below P56 and it will also help in preventing a disanchoring of inflation expectations. He hinted that with inflation hitting 6.4 percent in July, higher than June’s 6.1 percent, there is a greater possibility of a 50 bps rate hike this month to ensure the peso will stabilize soon. Since May, the Monetary Board has lifted the key borrowing rate by 125 bps from two percent to 3.25 percent. The next policy meeting is on Aug. 18.

“Our policy stance, judging by the stabilization of the exchange rate that happened after our 75 bps policy hike, seems to be working,” said the BSP chief.

Medalla said the exchange rate will continue to be flexible and market-determined. For now, the BSP monitors the depreciation pressures such as the aggressive monetary policy tightening by the US Federal Reserve and increased market risk aversion with the still ongoing Ukraine war with Russia. Another factor weakening the peso is the widening trade gap amid improving domestic demand and uptick in global oil prices.

Meanwhile, the GIR was last reported in the $98 billion level in 2020. It first climbed the $100 billion level in September 2020, reaching a peak of $110.12 billion in December of the same year. The peso was strong at the time and the BSP accumulates US dollars when the currency is appreciating. The GIR is the country’s reserve assets composed of gold holdings, foreign investments, foreign exchange, reserve position in the International Monetary Fund (IMF) and special drawing rights (SDR).

The end-July GIR of $98.83 billion is $8.32 billion lower compared to same period last year of $107.15 billion. It is also down by $2 billion from end-June, and by $8.86 billion since January this year when the GIR stood at $107.69 billion.

The BSP in a statement said the latest GIR level still represents “a more than adequate external liquidity buffer.” It is equivalent to 8.3 months’ worth of imports of goods and payments of services and primary income and about 6.9 times the country’s short-term external debt based on original maturity as well as 4.5 times based on residual maturity.

“The month-on-month decrease in the GIR level reflected mainly the National Government’s foreign currency withdrawals from its deposits with the BSP to settle its foreign currency debt obligations and pay for its various expenditures, and downward adjustment in the value of the BSP’s gold holdings due to the decrease in the price of gold in the international market,” said the BSP.

As of end-July, BSP’s gold reserves declined to $8.76 billion from $9.15 billion same time in 2021, while foreign investments totaled $82.54 billion, also lower from last year’s $92.65 billion. Its foreign exchange or FX also fell to $3 billion from $3.33 billion same time in 2021.

The IMF reserves in SDR remains at $3.78 billion as of end-July. It was in August of last year when the BSP received fresh SDR liquidity from the IMF amounting to $2.78 billion.

The BSP recently downgraded its GIR forecast to $105 billion from its earlier estimate of $108 billion. At the current level though, the GIR is lower than the country’s outstanding external debt debt of $107.3 billion as of end-March.

The emerging 2022 GIR reflects the latest trends as well as the expected rationalization of the government’s foreign borrowings amid fiscal consolidation efforts, said the BSP. It has not however factored in the depreciation of the peso in June and July.