The Bangko Sentral ng Pilipinas (BSP) transacted $955 million of foreign exchange (FX) swaps in November 2022 as it bought more US dollars to restock reserves.
The BSP has recently resumed its FX swap facility after being inactive for almost two years.
Based on central bank data, transacted forwards and futures totalled $955 million, lower than October’s $970 million. Of this amount, $810 million has residual maturity of one to three months while $145 million has a one-month maturity.
The BSP defines FX swaps as aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency including the forward leg of currency swaps.
FX swaps are also known as BSP’s unfiltered US dollar source. As one of its open market operations, it involves the actual exchange of two currencies – in principal amount — on a specific date at a rate agreed on the deal date or the first leg. It is a reverse exchange of the same two currencies at a date further in the future or the second leg at a rate different from the rate applied to the first leg, as agreed on deal date
The BSP revived the FX swaps in September last year, which was the month when the peso vis-à-vis the US dollar hit its record low of P59. In September, FX swaps amounted to $670 million.
For the entire 2021 there was zero FX swaps. The only other activity during the pandemic was in September and October 2020, and in February of the same year. Swaps usually have maturities of one month, three months and up to one year. There was no one-year maturity since 2018.
As a strategy, the BSP supplements its FX accumulation by transacting in long positions in forwards and futures but it also uses the swaps to sterilize its US dollar purchases.
By end-2022, the country’s US dollar reserves dropped to $96.15 billion from end-2021 of $108.79 billion.
The FX stock declined to its lowest level of $93 billion in September last year. But, the BSP was able to purchase US dollars in October to December and boost reserves at the $96-billion level.
BSP Governor Felipe M. Medalla said Monday, Jan. 23, while in Germany for the economic team’s European tour to meet with investors, that there is currently some relief from FX pressures following the US Federal Reserve’s jumbo rate hikes in 2022. The higher global interest rates resulted to tight money and weak currencies. The peso depreciated by 13 percent last year.
By November, with BSP’s own rate hikes of as much as 350 basis points combined, the US dollar started to weaken.
“As expectations of the Philippine central bank acting [to stem weakness in the peso] had its effect on the market, the peso actually began to appreciate,” said Medalla.
He added, “of course, the other thing we did was we sold quite a bit of dollars from our reserves. As you can see, our reserves declined by 13.7 billion dollars. It [the dollars sold] is about 12.6 percent of our reserves. The only country that has bigger in relation to reserves [sold as a percentage of their gross international reserves] were India and Thailand.”