The Bangko Sentral ng Pilipinas (BSP) has unleashed another $1.221 billion of foreign exchange (FX) liquidity in October via the FX swaps.
This brings the total to $2.684 billion of FX released by the BSP in September and October using the forward leg of currency swaps, based on BSP data.
For the month of October, the BSP long positions in forwards and futures amounted to $1.719 billion, of which $1.269 billion had residual maturity of up to one month. About $450 million of the total swaps had three months up to a year of maturity.
The transacted swaps in October were lower compared to September of $2.94 billion.
FX swaps are part of the BSP’s open market monetary operations. Swaps involve 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, and 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, according to the BSP.
Meanwhile, the BSP resorts to FX swaps when the implied peso rate in the swap market is lower than the reverse repurchase or RRP overnight rate which means it is cheaper.
The central bank uses its swap positions to unwind or release foreign currency into the system as a defensive mechanism against speculative flows or as tool to intervene in the exchange market.
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.
The peso has been on a steady appreciating trend at the mid P55 level. The peso in September and October has been dealing with the effects of a strong US dollar as US yields also remain high, but analysts observed the BSP’s support of the peso in the third quarter and in the early fourth quarter.
The BSP has a flexible and free-floating exchange rate policy, which means it is market-determined. However, it is prepared to participate in the exchange rate market to ensure orderly market conditions and to reduce excessive short term volatility.
As of end-October this year, the country’s gross international reserves (GIR) totaled $101.035 billion, up by $2.919 billion from end-September’s $98.116 billion.
The net international reserves (NIR) which refers to the difference between the BSP’s reserve assets or the GIR and reserve liabilities, on the other hand, also increased by $2.223 billion to $100.301 billion.
In October, the BSP had short-term loans amounting to $734 million.
Based on available data, the BSP has not increased its GIR-related liabilities in the last 10 years. The data only goes back to 2013.
It was also in 2013 when the BSP first participated in the International Monetary Fund (IMF) fund sourcing as a creditor-member. The BSP in its own right is a member of the IMF.
Reserve liabilities as those reported under GIR statistics are short-term foreign debt and credit and loans from the IMF, or from the Bank for International Settlements (BIS). These could either be gold-backed loans or securities-backed loans.
As described by the BSP, NIR includes gold monetization and revaluation of reserve assets and reserve-related liabilities that are not part of the country’s balance of payments. It is also the difference between the GIR and short-term liabilities and the Use of Fund Credits which are “the sum of outstanding drawings from the IMF under various policies and facilities, other than drawings under the reserve tranche.”
The BSP as creditor-member of the IMF has a total commitment of $2.26 billion as of end-2022 in various IMF facilities as standby resources, up from $1.8 billion in 2021.
This includes a bilateral borrowing agreement (BBA) worth $575 million which the BSP said will likely be renewed by the end of 2023. The BBA is the central bank’s commitment to provide resources to the IMF to finance arrangements for countries with balance of payments difficulties.
Besides the BBA, the BSP has maintained other arrangements with the IMF including the $784.9 million Financial Transactions Plan and the New Arrangements to Borrow amounting to $907 million.
The BSP became an IMF creditor-member in 2010 after pre-paying its last IMF loans in 2006.