BSP sees no danger in forex buildup


The Bangko Sentral ng Pilipinas sees no danger in allowing the country to further build up its foreign exchange reserves, now at a record $84 billion.

For the BSP, the accumulation of gross international reserves (GIR) is simply a consequence of its effort to stabilize the country’s financial system. Should destabilizing factors become significant, the monetary authority said it would engage in heavier dollar-buying right away.

“We [the BSP] need to maintain stability in the system, and so we need to absorb some [foreign exchange] inflows. We think we have enough reserves, but the maintenance of monetary stability is an important objective for us, and so we will continue to pursue that objective,” BSP Governor Amando Tetangco Jr. told members of the Rotary Club of Manila on Thursday.

The central bank earlier reported that the country’s GIR already reached $84.1 billion in November, the highest on record. The amount would be enough to cover the country’s import requirements for over a year. It is also nearly seven times the combined short-term debt, denominated in foreign currencies, of private and government entities in the Philippines.

Based on old standards, GIR worth about four months of a country’s import requirements was considered comfortable. A significantly higher amount could be costly.

But Tetangco said that the old standards were relevant before the Asian financial crisis. Since then, he said, economies in Southeast Asia have decided it would be more prudent to accumulate substantial amounts of foreign currencies to serve as buffer in the event of a crisis.

Tetangco explained that determining the ideal amount of reserves would depend on the crisis that happens to threaten an economy.

Last year, the BSP engaged in heavy dollar buying to help temper the appreciation of the peso. Monetary officials admitted that, if not for the central bank’s intervention, the local currency would have appreciated by a much faster pace.

The peso closed at 41.05 against the US dollar on the last trading day of 2012. It rose by 6.8 percent against the greenback in 2012, becoming the second-fastest appreciating currency in Asia, and the fourth-fastest among all actively traded currencies in the world.

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  • Hayek_sa_Maynila

    The rise in PHL GIR is  phenomenal… but still far from excessive. 

    BSP’s GIR is only around 30% of PHL nominal GDP. Singapore’s GIR is 160% of its sizeable GDP. 

    The value of financial stability far outweighs the cost of insuring against it. 

    SDAs do not have to be costly if the rate the BSP offers for it continues to drop. 

    Also, why does the BSP have to stick to old norms of macro management by carrying out Quantitative Tightening when the world is clearly in aggressive Quantitative Easing mode. 

    BSP will just shoot itself in the foot and drag the whole PHL economy with it if it tries to tighten liquidity at a time when Global central banks are just printing money left and right. QT at a time of QE is like asking for more rope…rope for the PHL economy and the BSP’s own hanging.

    …bottom line, we must abandon orthodox prescriptions in this “new normal” global economy we are operating in. $100Bn GIR by the end of 2013 should be fine, if it is what’s necessary to keep the USD/PHP from appreciating by more than 5% again in 2013 after nearly a 7.0% appreciation in 2012.

    • Maxene

      Stop comparing Philippines to Singapore because they have different historical and economic developments. Would you compare the US to Singapore? It’s a fallacious comparison!

      In addition, did you read the article? The BSP clearly said it already abandons “old standards/ orthodox prescriptions” because they were made before the Asian Financial Crisis. Now, the BSP sees nothing wrong with accumulating more reserves thats why it keeps buying dollars in order to temper the quick rise of the Peso. 

      You said, “BSP will just shoot itself in the foot and drag the whole PHL economy with it if it tries to tighten liquidity at a time when Global central banks are just printing money left and right.” – the thing is, Philippine banks are well liquified so there’s no need for the BSP to print more money. 

      When the US Federal Reserve started quantitative easing, much of that money go to emerging markets like the Philippines that have good macroeconomic fundamentals. Thus, while the Philippines is flooded with these money called “inflows” it eventually causes the Peso to appreciate. Who said the BSP wants to tighten liquidity? The BSP wants to tighten these inflows because they cause speculative appreciation of the Peso (disadvantageous to exporters). :)

      • Hayek_sa_Maynila

        What’s wrong with comparing if its used in the proper context. Singapore is a perfect example because it shows that a country which is so rich (income per capita of USD42,000) and has such sizeable GIR is willing to allow less currency appreciation than a $2,500 income-per-capita economy like the PHL. It drives the point stronger than if I compare the PHL with Indo which has only recently overtaken us (btw Rupiah actually fell by around 6.0% against USD in 2012)

        Build up of GIR is only partly the initiative of the BSP. We had huge current account deficits in the 1990s and there was not as much opportunity to build up GIR back then. Its the Overseas Filipinos which are actually allowing the BSP to build up its GIR now. Unfortunately they are being punished by the strong peso instead of being rewarded for helping us get our credit rating upgrades. Give credit to where majority of credit is due. Besides BSP learned when it allowed PHP to strengthen from 49 to 41 from 2006 to 2007 that it is foolish not to build up GIR when PHP strengthens bec it just brought the market back to 49 by 2008.

        I never knew PHL banks had LPG (sabi mo liquefied e), haha =) Seriously, what liquidity are you talking about? M3 has only grown 7.0% or so. The nominal growth of the economy in 2012 is about 10%, clearly much faster than M3 growth. PHL banks are, therefore, starved of PHP liquidity. Most of the PHP liquidity is with the BSP in the form of SDAs which is now near Php2.0Trillion. This is going to cost them around P60.Bn to service in 2013 if it keeps policy rate at 3.5%.To answer your question “Who want’s to tighten liquidity?” the answer is it is the BSP who continues to tighen liquidity. If it wants liquidity to expand faster it should not sterilize the money created by intervening in the spot USDD/PHP market. Lets abandon the old inflation targeting framework! Say good bye to orthodox prescriptions. Even Washington these days is having a change of heart. One DG in the BSP is even more hard liner than the IMF. Sabi na nga ni Lagarde OK ang capital contorls, if necessary, pinagpipilitan pa ng isang DG dyan na huwag. Depressing =(

        PHL corporates are starting to aggressively borrow from abroad again bec of strong PHP outlook and wide interest differential, a very dangerous combination/combustible policy mix that can very quickly turn the PHL to the same leveraged economy it was in 1997. You have the likes of SMIC, etc. issuing USD bonds despite being a non-USD earning company.

    • Baket?

      There you go again Friedrich. Your reasoning is sound and good but Tetangco is merely toeing the political line. A strong peso looks good and sounds good for whoever is in the palace even if it does not necessarily add value to to our economy. When those guys in US Fed and ECB finally raise their interest rates and hot money flows out of PH for greater returns back home, it will be fun to watch how Tetangco saves the day. Even WB’s Justin Yifu Lin is warning Asia about the same thing but because his country is at war with us, he can´t be trusted. You can rest assured Tetangco has us covered. Let’s encourage the corporate sector to aggressively take out foreign currency-denominated loans and float bonds. Let’s not worry too much about any black swan. Besides, if something goes wrong it won´t be the first time. Been there, done that. For now, suspend your disbelief. Under Tetangco’s watch, things will go swimmingly well. Sink or swim, Tetangco will always be around to throw us a lifeline if not a lifesaver. Tetangco is the man.

      • Hayek_sa_Maynila

        You got me wrong again. My comments are mostly supportive of the BSP’s actions, specifically to build up GIR. In fact, Gov Tetangco and Dr. Medalla of the MB have been willing to try new things to temper the PHP’s rise. To me, having $100Bn at the end of 2013 will have more benefits that costs.

        A lot of people are criticizing BSP for this as it they claim that GIR build up is the biggest source of loss of the BSP and that the costly issuance of SDAs to sterilize the expansionary effect of intervening in the spot USD/PIHP market is a natural consequence of GIR build up. 

        The biggest source of loss to the BSP in sterilizing its purchases of GIR is really the build up of SDAs. Paying 3.5% for around PhP1.8Trillion worth of SDA will cost BSP more than PhP60.0Bn  worth of losses this year.

        Currency reval has much less impact on their P&L. In fact, if BSP had allowed PHP to weaken during the global “risk off” episodes in Nov 2011 and May 2012, (i.e. if they had let the market  seek a higher rate and not sold USD in the market at that time) BSP’s FX losses would have been much smaller.

        Having a war chest of GIR will actually come in handy should the US and ECB start raising rates, although I doubt this is going to happen soon.

        I don’t agree with your point that corporates should issue fx bonds/loans. This is dangerous specially in companies that do not earn in USD. This will subject us to the same vulnerabilites as 1997 and it can happen very quickly bec of the sheer volume of liquidity in the global financial system today. Lower local interest rates shoudl encourage more PHP borrowings and issuance of more PHP bonds – no currency risk, external leverage involved.

        Bottom line here are my recommendations:

        1) minimize sterilized intervention by cutting SDA issuances or lowering policy rate further to narrow interest differential and therefore discourage dangerous unhedged USD borrowing which led to 1997 crisis. This will also reduce the interest expenses of the BSP significantly while discouraging portfolio flows. (but still encouraging FDI). Orthodox policy frameworks like inflation targeting will have to be abandoned in this new normal environment. Keeping local interest rates higher than US and EU will not stop local from borrowing abroad. This will even be more inflationary. 

        2) if BSP is willing, introduce even more aggressive macro prudential measures/financial repression/capital controls to temper PHP rise without compromising inflation targeting

        3) buy more USD/build up GIR but diversify in gold, CHF, EUR, other AAA EU sovereign bonds just like many Asian sovereign wealth funds do.

        Let all help each other sustain our newfound growth momentum

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