The Bangko Sentral ng Pilipinas’ (BSP) foreign exchange (FX) swap transactions amounted to $3.89 billion as of the latest data in May this year, down from $4 billion in April.
BSP data showed that swaps remain in long positions. The BSP conducts FX swaps to sterilize its reserves accumulation. Holding long positions is a signal that the BSP is buying more US dollars.
In the same period last year, in May 2022 there was zero FX swaps from the BSP with a healthy buffer stock of $103.65 billion at the time.
In May this year, $1.85 billion of FX swaps had up to one month maturities compared to the previous month’s $2.12 billion.
The central bank also transacted $2.04 billion of swaps with up to three months’ maturities, higher than April’s $1.88 billion.
FX swap is defined as a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward) and may use foreign exchange derivatives.
While the BSP uses its swaps as a market tool to build up reserves, it is also utilized as spot market exchange rate intervention.
A central bank source has said that the BSP conducts FX swaps when they need to intervene in the exchange market beyond outright sale of FX.
The BSP has to manage FX liquidity to influence the exchange rate market. Also, 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 peso has been relatively stable at the P54-55 level vis-à-vis the US dollar for several months.
Meanwhile, the BSP’s latest gross international reserves (GIR) position was lower at $99.4 billion as of end-June from $100.6 billion in end-May as the government paid some of its maturing foreign currency obligations.
This is the second time that GIR dropped below $100 billion for this year. The last time was in February at $98.22 billion. The highest GIR level so far for this year was $101.76 billion in April.
The BSP said the latest GIR level is still “more than adequate external liquidity buffer.” It is equivalent to 7.4 months’ worth of the country’s imports of goods and payments of services and primary income. It is also about 5.7 times of the short-term external debt based on original maturity and 4.1 times based on residual maturity.
The GIR is considered adequate if it can finance at least three-months’ worth of the country’s imports of goods and payments of services and primary income.
The central bank’s reserve assets consist of foreign investments, gold, foreign exchange, reserve position in the International Monetary Fund, and special drawing rights.
The BSP has been replenishing the GIR which fell to $96.15 billion in 2022 from $108.79 billion in 2021.
Since October last year, after the central bank sold US dollars to prop up the peso in July to September 2022, the BSP has been accumulating FX as reserves.
Despite that the BSP has been buying foreign currency to boost the GIR, they still expect a modest US dollar stock of $100 billion by end-2023.
The BSP said the “emerging financial market vulnerabilities combined with the after-effects of monetary policy adjustments in advanced economies, such as the US, cast a shadow on the country’s external sector prospects for the year.”