The Bangko Sentral ng Pilipinas (BSP) has enough US dollar liquidity to stabilize and ease exchange rate pressures and has no intention to use their currency swap arrangements on both regional and bilateral level.
“(There’s) no need,” BSP Governor Felipe M. Medalla told Manila Bulletin. He said the country’s reserves at $94 billion as of end-October is “still quite adequate”.
The BSP’s first line of defense, or its gross international reserves (GIR), has a constant source of US dollar flows from overseas Filipinos’ remittances, business process outsourcing sector, and foreign direct investments. As the world recovers post-pandemic, other foreign exchange or FX sources such as tourism and exports will further boost GIR.
Banks’ foreign currency deposit units (FCDUs) are another source of buffer fund, on top of the GIR. FCDU assets which amounted to $46.6 billion as of end-June this year, are considered US dollar reserves.
The BSP is a participant to regional financing arrangements such as the $240-billion Chiang Mai Initiative Multilateralization (CMIM) where the Philippines can borrow up to $22.76 billion from the facility.
The Philippines, likewise, has a $2 billion standby liquidity support from the ASEAN Swap Arrangement (ASA) as foreign exchange liquidity assistance. The country can tap up to $600 million from ASA. The BSP’s ASA commitment is $300 million.
Another standby buffer is the bilateral swap arrangement (BSA) with Bank of Japan which has been in place since 2014. The swap deal includes a crisis prevention scheme to address potential liquidity needs. It enables the Philippines to swap its local currency against Japanese yen, or $12 billion equivalent for the Philippines and $500 million for Japan.
The country’s GIR dropped to $93 billion in September or $4.44 billion lower from August, due to its intervention in the foreign exchange market to smoothen peso-US dollar volatility. The peso depreciated to its record lowest of P59 in September and October.
After selling US dollars in support of the peso, the exchange rate did not breach past P59. As of Nov. 11, it was back at the P57-level. The GIR has already lost $13.61 billion from $107.69 billion at the start of 2022.
The BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity which it withdraws from the country’s reserves.
“The BSP observes a flexible exchange rate policy, as such we don’t target a specific exchange, nor set a specific line in the sand. Nevertheless, we recognize that significant and persistent depreciation of the peso can dislodge inflation expectations. We therefore intervene in the market as needed,” said Medalla late Friday, Nov. 11, in a virtual keynote address to members of the Economic Journalists Association of the Philippines (EJAP) which was holding its 31st Business Journalism Awards.
Medalla said the Philippines has ample GIR that has allowed them to sell dollars and help smoothen foreign exchange market volatility.
“The BSP uses three tools to cushion the economy (against disruptions) -- interest rate adjustments, flexible exchange rate, and foreign exchange market participation. We use a combination of these tools in a well-calibrated manner, to keep the impact of external shocks manageable,” Medalla told EJAP.
Medalla, who was a Monetary Board member for 11 years before being appointed as BSP’s sixth governor last June, said the Philippines is facing “more challenges than ever on the economic front.”
“I’ve said before that this may be the most difficult time since I joined the Monetary Board more than a decade ago,” he said. These “very difficult challenges” include the “very aggressive response” to the US Federal Reserve’s interest rate hikes, the Ukraine-Russia war and its impact on oil and non-oil commodity prices which has “pushed inflation to the center of mainstream consciousness”.
“While these challenges are indeed tough, the Philippines will pull through. We have done so in the past crisis and we will do it again,” Medalla said.
The BSP chief on Friday also reiterated that on Nov. 17, as Monetary Board chair, he will be voting to raise the policy rate by 75 basis points (bps) to match the US Fed’s earlier policy action. This will increase the reverse repurchase overnight rate to five percent.
“The reason we do this is to increase the likelihood that headline inflation will be within target (two-four percent) by the second half of next year. And, hopefully, the rest of 2024,” he said. The BSP’s latest inflation forecast for 2022 is 5.6 percent, 4.1 percent for 2023 and three percent for 2024. For the first 10 months, the average inflation stood at 5.7 percent after the government released the latest inflation number of 7.7 percent for October, up from 6.9 percent in September, and the highest rate for the year so far.
Medalla said the BSP rate hikes “will also prevent a significant narrowing of the interest rate differential between the US and the Philippines.”
He added that maintaining a comfortable interest rate differential will “lend support to the peso.”