Central bank seeks ways to unlock ‘unofficial’ forex stock
Peso hits new 10-mo low 45.87 to $1
By Doris Dumlao
Philippine Daily Inquirer
First Posted 00:41:00 07/09/2008
Filed Under: Foreign Exchange Markets, Central Banks
The central bank, Bangko Sentral ng Pilipinas (BSP), is seeking ways to unlock its foreign exchange stock outside the official reserves without adding too much pressure on the peso, which closed at a new 10-month low of 45.87 to the dollar Tuesday on lingering concerns over high fuel costs.
The peso lost another 0.15 to close near the day’s low of 45.88 to the dollar versus Friday’s finish of 45.72.
Aside from jitters over rising oil prices, currency traders said the central bank was inadvertently contributing to the peso’s depreciation in recent months by unwinding foreign exchange swaps, which lock up US dollars not yet booked in the gross international reserves (GIR).
They said the BSP was trying to address the situation and was seeking banks’ cooperation in ensuring a more orderly way of unwinding these forex swaps.
The banks that entered into foreign exchange swaps with the BSP had already used the dollar proceeds of the deal to purchase foreign currency assets, including the Philippines government’s global bonds, currency dealers said.
“But now that the BSP is unwinding the swaps, the banks that have already invested the dollars they got elsewhere are now forced to buy dollars from the spot foreign exchange market to give back to the BSP, thus contributing to the peso depreciation,” a treasury official said.
The official said some of the banks did not want to unload their Philippine government bonds because they had obtained bond warrants for these that would protect them against debt default.
Aside from adding pressure on the peso, banking sources said the swaps were infusing additional liquidity into the financial system at this time that the central bank was waging a tough battle against rising inflation.
The BSP aggressively used these swaps as a way of mopping up excess money supply in the system, which was brought about by strong remittances from overseas Filipinos and inflows of foreign portfolio investments in the past.
The forex swaps hold the US dollars bought by the BSP from the open market and swapped for pesos over the last two years when the local currency was rallying against the dollar. These are the US dollars that the BSP owns now but will be given back to the sellers after a specified period. They are not booked as part of the GIR.
The amount of the BSP’s outstanding swaps or the “unofficial” foreign exchange stock is another indicator of how much more its GIR could rise if the central bank were to scrap such contracts.
Currency traders said the central bank had been unwinding such forex swaps in recent months and flushed the US dollars to temper the peso’s sharp depreciation.
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