BSP pins hopes on $ hedging facility to cushion peso fall

The central bank hopes to cushion the steady decline of the peso—which neared a 13-year low on Friday—with the reintroduction of a hedging facility, which it hopes will stop large corporations from rushing to buy dollars today for requirements that won’t fall due until several months from now.

Speaking to reporters, Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said the so-called Currency Risk Protection Program (CRPP) would ease the worries of companies, especially those that need dollars to pay for foreign loans.

“Normally, when you have some volatility in the foreign exchange market, the corporates would be nervous,” the central bank deputy chief said, explaining the recent run on the peso that depressed its value to as low as 53.975 to a dollar last Friday.

He explained that it was this sudden rush for dollars that added more pressure on the peso.

“But if you have this CRPP, your corporates will have the reassurance that they will be protected regardless of the fluctuations in the foreign exchange market,” Guinigundo said.

Last Friday, BSP Governor Nestor Espenilla Jr. announced the reactivation of a dollar hedging mechanism introduced during the 1997 East Asian financial crisis—and used heavily during the financial markets turmoil in the lead up to former President Estrada’s resignation in 2001 —in a bid to cushion the peso’s precipitous drop.

The CRPP will be made available to eligible corporations with foreign exchange obligations based on more liberalized rules. With this scheme, regulators hope that large companies with future dollar needs would not rush to buy them early, thus aggravating the peso’s weakness.

The CRPP is a nondeliverable forward hedging facility aimed at alleviating demand pressures in the foreign exchange spot market from borrowers seeking to hedge their future foreign exchange exposures.

Under the facility, parties agree that, on maturity of the forward contract, only the net difference between the contracted forward rate and the spot rate will be settled in pesos. The BSP will make the CRPP available to eligible borrowers through the commercial banks.

Guinigundo explained that the CRPP was just one of the measures the central bank has in its arsenal to cushion the decline of the peso as well as to blunt speculative attacks against the currency by local financial market participants.

He explained that the peso was also being weakened by negative perception from external elements like the economic problems in the fellow emerging market economies of Turkey and Argentina, and the trade tensions between the US and China.