The Bangko Sentral ng Pilipinas has vowed to help prevent a sharp volatility in the peso-dollar exchange rate that may arise from the uncertainty brought about by the recent downgrading of the United States’ credit rating.
The BSP is expected to intervene more in the foreign exchange markets by increased buying or selling of dollars to ensure that there would be no sudden and sharp movements in the exchange rate.
“The BSP will take action in the foreign exchange markets to stem excessive volatility in the exchange rate,” BSP Governor Amando Tetangco Jr. told reporters Monday on the sidelines of the Senate hearing on the proposed 2012 national budget.
Asked by legislators on what the impact of the US credit-rating downgrade would be on the Philippines, Tetangco said there could be two potential effects.
In the immediate term, without intervention by the central bank, the peso may depreciate as foreign portfolio investors withdraw and liquefy their assets, even those invested in emerging markets like the Philippines, as the uncertainty increases their risk aversion.
However, Tetangco said, the peso might shoot up once investors regained their footing and realized that investment instruments from emerging markets, like the Philippines, were some of the best investment options given their favorable economic projections.
A potential sharp volatility in the exchange rate resulting from market reactions to the US credit rating downgrade is expected to prompt the BSP to participate more actively in the foreign exchange market.
Tetangco stressed that helping avoid sharp and sudden movement in the peso-dollar exchange rate, which is currently at 42 to 43 to a dollar, was one of BSP’s mandate.
Since the start of the year, the peso has appreciated by about 4 percent. The pace of the peso’s appreciation is still deemed benign by the BSP, noting that other Asian currencies have been more volatile by rising at a much faster pace, with some rising even beyond 10 percent.
Any sharp and sudden currency movement is disruptive to operations of businesses.
In the meantime, Tetangco said the downgrade of the US credit rating was a call to all central banks around the world to review a proposal to consider accepting other currencies as part of their foreign exchange reserves.
At present, the US dollar is the official currency composing the foreign exchange reserves of most countries, including the Philippines.
Tetangco said changing the “reserve currency” might not happen immediately given that the US dollar and US treasuries, where foreign exchange reserves of the Philippines and many other countries were invested in, were still the most liquid. However, he said it might be wise to consider other options over a long-term horizon.
“A more long-term review of other possible reserve currencies may be warranted,” Tetangco said. The BSP chief suggested coordinated talks among countries to have a common means to address the current uncertainty in the global market.
Tetangco said the United States and several industrialized countries in Europe should come up with concrete measures to deal with their fiscal problems, which were causing disruptions in the global economy.
“Coordination of responses, especially from advanced economies, should lead to concrete actions to get their fiscal houses in order. Coordinated action in this respect is at the core of a credible solution to our global problems,” Tetangco said.