Quantcast
Latest Stories

$86B in forex reserves seen excessive, costly, beyond optimal

By

The country’s nearly $86-billion foreign exchange reserves, which are projected to rise further due to robust inflow of remittances and portfolio investments, were deemed  excessive, costly and beyond optimal.

This is the opinion of Philippine Institute for Development Studies (PIDS), which said in one of its latest research notes that the economy might be missing out on prudent investment opportunities as it kept more than enough foreign exchange liquidity.

PIDS also said the Bangko Sentral ng Pilipinas (BSP), which manages the gross international reserves (GIR), was incurring huge interest expenses as it continued to build the reserves.

It explained that the central bank’s dollar buying activities—which boosts the GIR—resulted in the infusion of peso liquidity into the economy. Financial institutions that earn from selling dollars to the central bank, in turn, park a significant portion of the proceeds in special deposit accounts (SDA) with the BSP.

The BSP accommodates funds in its SDA facility and pays interests on these to avoid excess liquidity in the economy as this can fuel higher demand and rise in inflation.

SDA funds were estimated at P1.8 trillion and the central bank pays an annual interest rate of 3 percent on it.

PIDS cited three general means to measure whether foreign exchange reserves were either within or beyond optimum levels.

“Based on these three criteria, the foreign exchange reserves of the Philippines have been determined to be higher than the optimal level,” PIDS said in the commentary titled “Rapid Accumulation of Foreign Exchange Reserves: Boon or Bane.”

The first is the ratio of the reserves to the country’s outstanding, short-term foreign currency-denominated debts. According to PIDS, an ideal ratio is 1:1. In the case of the Philippines, its foreign-exchange reserves are about 6 times its short-term external debt.

Second is the ratio of the reserves to total liquidity in the economy measured in terms of M2 (M2 includes currencies in circulation and bank deposits). PIDS said an optimal level of reserves is one that is equivalent to between 5 and 20 percent of M2. However, the country’s foreign-exchange reserves are even slightly higher than M2.

Third is the number of months of import cover. PIDS said a comfortable GIR should cover imports requirements for three to four months. The Philippines’ current foreign exchange reserves, however, can cover one year worth of imports.

“Hence, the BSP should explore measures on how to minimize the costs associated with holding foreign exchange reserves,” PIDS said.

PIDS urged the central bank to study the proposal of pulling some money from the GIR to form a sovereign wealth fund, which will be used for various developmental investments.

“The more elaborate proposal for managing foreign exchange reserves is to establish a sovereign wealth fund such that the strategic focus of using surplus reserves will shift from passive liquidity management to active profit-seeking investment,” PIDS said.


Follow Us


Follow us on Facebook Follow on Twitter Follow on Twitter


Recent Stories:

Complete stories on our Digital Edition newsstand for tablets, netbooks and mobile phones; 14-issue free trial. About to step out? Get breaking alerts on your mobile.phone. Text ON INQ BREAKING to 4467, for Globe, Smart and Sun subscribers in the Philippines.

Tags: Bangko Sentral ng Pilipinas , forex reserves , Philippine Institute for Development Studies (PIDS) , Philippines

  • http://www.facebook.com/people/Betz-Chui/100002310507085 Betz Chui

    The government should invest this money on income / job  generating projects. Kong hindi nila kaya – be investors on existing small industries in rural areas so they can expand and generate more employment, profit, and income. Pagawa ng train system around Mindanao…



Copyright © 2014, .
To subscribe to the Philippine Daily Inquirer newspaper in the Philippines, call +63 2 896-6000 for Metro Manila and Metro Cebu or email your subscription request here.
Factual errors? Contact the Philippine Daily Inquirer's day desk. Believe this article violates journalistic ethics? Contact the Inquirer's Reader's Advocate. Or write The Readers' Advocate:
c/o Philippine Daily Inquirer Chino Roces Avenue corner Yague and Mascardo Streets, Makati City, Metro Manila, Philippines Or fax nos. +63 2 8974793 to 94
Advertisement
Advertisement

News

  • Two Popes who would be saints
  • Anti-gay demo in Ethiopia cancelled
  • Obama launches measures to support solar energy in US
  • Nebraska toddler gets stuck inside claw machine
  • Philippine eagle rescued by Army turned over to DENR
  • Sports

  • Duke freshman declares for NBA draft
  • Vietnam says it will not host Asian Games
  • Nadal passes clay landmark with 300th victory
  • Wawrinka waltzes through with Monte Carlo walkover
  • Power Pinays smash India in Asian Women’s Club volleyball opener
  • Lifestyle

  • Ford Mustang turns 50 atop Empire State Building
  • Pro visual artists, lensmen to judge Pagcor’s photo contest
  • ‘Labahita a la bacalao’
  • This is not just a farm
  • Clams and garlic, softshell crab risotto–not your usual seafood fare for Holy Week
  • Entertainment

  • Cannes film festival launches race for 2014 Palme d’Or
  • Jones, Godard, Cronenberg in competition at Cannes
  • Will Arnett files for divorce from Amy Poehler
  • American rapper cuts own penis, jumps off building
  • Jay Z to bring Made in America music fest to LA
  • Business

  • Total says makes ‘very promising’ oil find off Ivory Coast
  • ‘Chinese Twitter’ firm Weibo to go public in US
  • World stocks subdued, Nikkei flat on profit taking
  • Asia stocks fail to match Wall Street gains
  • Fired Yahoo exec gets $58M for 15 months of work
  • Technology

  • Netizens seethe over Aquino’s ‘sacrifice’ message
  • Filipinos #PrayForSouthKorea
  • Taylor Swift tries video blogging, crashes into fan’s bridal shower
  • DOF: Tagaytay, QC best at handling funds
  • Smart phone apps and sites perfect for the Holy Week
  • Opinion

  • Editorial cartoon, April 17, 2014
  • A humbler Church
  • Deepest darkness
  • ‘Agnihotra’ for Earth’s health
  • It’s the Holy Week, time to think of others
  • Global Nation

  • Last call for nominations to ’14 Presidential Awards
  • San Francisco business coalition slams proposed tax on sugary drinks
  • A ‘time-travel’ production of ‘Les Miserable’ at Stanford
  • Filipina Maryknoll sister honored for years of service
  • Malaysia quarantines 64 villagers over MERS virus
  • Marketplace