The country’s gross international reserves (GIR) dropped to $96.01 billion as of end-December 2022, down by 12 percent from end-2021’s $108.79 billion due to US dollar selling.
Despite the almost $13 billion decline in reserves, the central bank considers the foreign exchange (FX) stock as more than enough buffer.
Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said that by International Monetary Fund (IMF) standards, the country’s reserves are adequate and even on the “high” side.
The end-December GIR is higher than BSP’s revised projection of $93 billion for 2022. The GIR level is also higher than the end-November of $95.12 billion since the BSP has started to purchase FX again.
“By IMF metrics -- the IMF Assessing Reserve Adequacy (ARA) - our reserves are assessed as ‘high’,” said Medalla during his Jan. 3 address to BSP officials and staff of what is in store for 2023 as far as BSP operations are concerned.
“We do think that given all the things that are often happening, there is no reason to be complacent, to let our reserves go down too sharply,” he added.
Medalla said in terms of reserve management, they plan to be a signatory to the United Nation Principles for Responsible Investment in keeping with its Sustainable Central Banking strategy.
“We also are looking at developing a Responsible Investment Charter, which will guide the integration of sustainability tests with financial assessments,” said Medalla.
The BSP already invests $550 million in the Green Bond Fund of the Bank for International Settlements (BIS) as part of its sustainability agenda. The green bond investment, which is in the GIR, can be increased to as much as $1 billion by this year until 2024.
The latest GIR level of $96.01 billion is a “more than adequate external liquidity buffer” equivalent to 7.3 months’ worth of imports of goods and payments of services and primary income, said the BSP. It is also about 5.9 times the country’s short-term external debt based on original maturity and 3.9 times based on residual maturity.
The rule of thumb is that a GIR is adequate if it can finance at least three-months’ worth of a nation’s imports of goods and payments of services and primary income. For this year, the BSP expects the GIR to improve to $100 billion.
The GIR is composed of foreign investments, gold, FX, reserve position in the IMF, and the IMF’s special drawing rights.
At the end of 2022, the BSP’s foreign investments amounted to $81.32 billion, about $10.30 billion or 11.24 percent lower from same period in 2021 of $91.62 billion.
With BSP’s intervention in the spot market, its FX holdings dropped to $912 million end-2022, which was $2.18 billion or 70.54 percent lower from from $3.1 billion in 2021.
Gold reserves was also lower at $9.28 billion versus $9.33 billion in the previous year.
Meantime, reserve position in the IMF and SDRs stood at $789 million and $3.70 billion, respectively, compared to the previous year’s $801 million and $3.94 billion.
The BSP had originally estimated a GIR of $105 billion for 2022 before the peso depreciation, the higher-than-expected local inflation and large US interest rate hikes last year.
The peso depreciated to P59 vis-à-vis the US dollar on Sept. 29, 2022. This is currently the weakest level for the peso since breaking the previous low of P56.45 which was in 2004. As of Friday, Jan. 6, the FX rate was at P55.64.
The FX reserves fell to a low of $93 billion in end-September 2022 with BSP’s active participation in the exchange rate market to prevent the peso from breaking past P60 versus the strong US dollar last year.
Medalla has said that the BSP is focused on ensuring a stable FX market and that it has an “unwavering commitment to use the tools at its disposal to stabilize the exchange rate” including its first defense which is the GIR.
As a matter of policy, the BSP’s participation in the FX market is limited to tempering sharp fluctuations in the exchange rate. The BSP also does not target nor avoid any level of the peso and does not alter currency trends, it said.
Medalla said to boost GIR, the BSP “may tap other sources of dollars.”
The GIR is supported by FX inflows from remittances, earnings from the business process outsourcing sector, and foreign direct investments. Tourism revenues, once recovered, are also a steady source of US dollars for the Philippines.