The Bangko Sentral ng Pilipinas (BSP) is maintaining "very liquid" foreign exchange (FX) reserves, its war chest against external shocks such as geopolitical tensions closer to home and the challenging global environment in general. “We need reserves that are liquid and offers the highest principal protection. That’s how conservative (the BSP is),” BSP Governor Felipe M. Medalla told Manila Bulletin. Liquid reserves indicate foreign currency assets that are invested and deposited abroad and on home ground are easily converted into cash when needed. Medalla said these days, the central bank which is already conservative in the first place, is even more prudent in managing the country’s gross international reserves (GIR), currently at $98.2 billion as of end-February. What worries the BSP, besides another spike in fuel costs, are geopolitical tensions such as the external shock brought about by the Ukraine war with Russia that started in February 2022. This unprovoked conflict between the two countries resulted in an upsurge in  prices of both oil and non-oil commodities and led to elevated global inflation and rising interest rates to control price pressures. “You learn from our history that what we’re watching out for doesn’t come and something else comes up. I think the solution and the real correct response is to be vigilant and not to be complacent,” said Medalla on external shocks. Without naming any country or countries involved in diplomatic rows, Medalla said if a major geopolitical shock were to happen in the region, it is best that the Philippines will have the necessary buffers to cushion its impact on inflation, the exchange rate and the economy. “Such implications (are) on imports, trade, and also possible financial (impact). So, if there is a (geopolitical) shock that is very close to the Philippines, we’re not sure what will happen,” he said. “Fortunately, that’s the reason why we have high reserves,” the BSP chief added. “When something like that happens, then we do not have sudden stop that is so damaging to the economy,” he said. The Philippines has been in constant talks with China to establish better bilateral relations, especially after the 2016 Hague arbitration decision that upheld the rights of the Philippines over its maritime area in the West Philippine Sea (WPS).  China, however, does not recognize the arbitral tribunal ruling. There are other maritime territorial disputes in the WPS, involving countries such as Japan versus China, and Vietnam’s own contention with China. There are also disputed claims and tense relations between China and Taiwan. Meanwhile, the BSP’s policy-making arm, the Monetary Board, approved on March 16 revised external accounts projections for 2023 and 2024 where it kept a moderate GIR forecast of $100 billion for this year and $102 billion in 2024. The BSP unloaded about $15 billion of its reserves last year to defend the depreciating peso vis-à-vis the strong US dollar on account of rising US Federal Reserve rates. From $109 billion reserves end-2021, the GIR fell to its lowest level of $93 billion in 2022. Last year, the BSP also withdrew $3.4 billion of its total currency and deposits in foreign institutions, resulting to a 38.7 percent decrease in deposited US dollar reserves. With a relatively less volatile exchange rate of P54 to P55 at present, Medalla said they can wholly focus on bringing down the inflation back to within the target range of two percent to four percent by end-2023. Inflation is at 8.6 percent as of February. Medalla is fairly confident that with the BSP’s aggressive monetary stance, which raised the benchmark borrowing rate by a cumulative 425 basis points (bps) since May 2022 up until last Thursday, March 23, the BSP can tame inflation enough that it will fall below four percent in October or November this year. As for the peso-US dollar spot market, the BSP stands ready to intervene anytime and to tap into its reserves to smoothen exchange rate volatilities. The country’s GIR is composed of foreign investments, gold reserves, and other foreign assets. The GIR was below $100 billion for six months last year but BSP’s US dollar buying which started in October 2022 increased it back to $100.66 billion in January this year.  Aside from foreign investments and gold reserves, BSP’s reserve assets also consist of foreign exchange, reserve position in the International Monetary Fund and special drawing rights.