MANILA, Philippines–The expansion of the Philippines’ new bilateral currency swap deal with Japan would stabilize financial markets and contribute to protecting both economies during times of distress.
In a statement on Tuesday, the Bangko Sentral ng Pilipinas (BSP) announced the expansion of the Philippines’ currency swap agreement with Japan, under which both nations committed to provide foreign currencies to each other in times of need.
The deal was signed between the BSP and the Bank of Japan.
“Authorities in Japan and the Philippines hope that the strengthened bilateral financial cooperation will contribute to the stability of financial markets,” the BSP said in a statement.
Likewise, the deal would also “further develop growing economic and trade ties between the two countries.”
This comes at the heels of the recent approval to double the size of the Chiang Mai Initiative Multilateralization (CMIM)—a similar deal that involves all 10 member countries of the Association of Southeast Asian Nations (Asean), and their three richer neighbors China, Japan, and South Korea.
Under currency swap deals, participating countries agree to sell foreign currencies to each other. This is needed to avert or address a so-called Balance of Payments (BOP) crisis, which is the depletion of an economy’s supply of foreign exchange liquidity that a country needs to do business with the rest of the world.
Without such agreements, countries are often forced to either dip into their foreign exchange reserves or buy dollars from international markets, which leads to the depreciation of their local currencies.
Weaker currencies mean more expensive imports. Paying for foreign obligations also becomes more expensive.
The new deal with Japan doubles the size of a previous currency swap agreement to $12 billion, in favor of the Philippines. Japan can swap up to 500 million US dollars with the Philippines.
Aside from the crisis resolution facility, this arrangement also introduces a new feature in the form of a crisis prevention scheme to address potential liquidity needs.
BSP Deputy Governor Diwa C. Guinigundo said this new provision would help avert potential crises.
“If you expect a reversal of capital flows and experience a severe pressure on BOP, you can apply for this,” Guinigundo said.