The Bangko Sentral ng Pilipinas holds a significantly higher level of dollar reserves than it needs, giving regulators a large buffer with which to absorb the impact of an expected outflow of capital that will result from rising US interest rates.
Thus said BSP Governor Nestor Espenilla as he pointed out that the central bank also has other tools at its disposal to mitigate the effects of any repatriation of funds by foreign investors who may be attracted to higher yields from US dollar-denominated securities.
“Remember that, before the [global financial crisis], our reserves were only at $40 billion,” he said. “Today, we have double that amount.”
This massive inflow of capital in the aftermath of the 2008 worldwide financial meltdown resulted in the US Federal Reserve cutting its interest rates to historic lows in order to jumpstart the weak economy with cheap credit. Some of those funds found their way to emerging markets like the Philippines as investors sought higher returns.
“As the US economy recovers, the Fed is beginning its [monetary] tightening cycle, and that will result in some funds [currently in the Philippine economy] moving back abroad,” he added, explaining that the buffer afforded by the central bank’s dollar reserves as well as the “significant” leeway the central bank has to exercise its various monetary policy tools like its key overnight rates and banks’ statutory reserve requirements were sufficient to insulate the local financial system.
Over the weekend, the BSP said that the country’s gross international reserves (GIR) rose to $81.5 billion as of end-December 2017—higher than the $80.3 billion level recorded in the previous month.
This was due mainly to inflows arising from the BSP’s foreign exchange operations, net foreign currency deposits by the national government, revaluation adjustments on the BSP’s gold holdings resulting from the increase in the price of gold in the international market, and income from the BSP’s investments abroad.
These were partially offset by payments made by the government and the BSP for their maturing foreign exchange obligations.
“The end-December 2017 GIR level remains adequate as it can cover 8.3 months’ worth of imports of goods and payments of services and primary income,” the central bank said in a statement. “It is also equivalent to 5.8 times the country’s short-term external debt based on original maturity and 4.2 times based on residual maturity.”
Net international reserves, which refer to the difference between the BSP’s GIR and total short-term liabilities, increased by $1.1 billion to $81.4 billion as of end-December 2017, compared to the end-November 2017 level of $80.3 billion.