BSP’s defense of weak peso in Sept. causes largest surge in dollar outflows since 2014

With the central bank forced to cushion the fall of the peso, the Philippines experienced a surge in dollar outflows last month that aggravated the already yawning trade gap caused by the country’s large imports and weak exports, authorities said on Friday.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said that the overall balance of payments position posted a deficit of $2.7 billion in September 2018, marking a reversal of the $24 million surplus recorded in the same month last year.

These outflows “stemmed mainly from foreign exchange operations of the BSP and payments made by the national government for its foreign exchange obligations,” the BSP said, the former referring to the monetary authority’s selling of dollars on the open market to meet the foreign currency demand from investors or end users.

The large drain of dollars in September was the highest level for the balance of payments deficit in four years after the economy ended 2014 with a $2.8-billion foreign currency flow gap.

“These were partially offset, however, by the net foreign currency deposits of the national government,” the central bank added.

Their balance of payments represents the net value of all foreign currency that leaves the local economy, like for the repatriation of investments, payments for foreign goods or services, and those entering the system, representing inward investments or export earnings.

As a result of last month’s performance, the gap between the amount of dollars spent and earned by the local economy over the first nine months of this year ballooned to $5.1 billion. This level is 240 percent higher than the central bank’s stated goal of ending the year with a balance of payments deficit of only $1.5 billion, although the final figure could still change in coming months depending on dollar inflows and outflows.

“The higher deficit may be attributed partly to the widening merchandise trade deficit (based on the Philippine Statistics Authority’s preliminary data) for the first eight months of the year,” the BSP said.

“This, in turn, was brought about mainly by the sustained rise in imports of raw materials and intermediate goods as well as capital goods to support domestic economic expansion.”

The reported balance of payments deficit is consistent with the final gross international reserve level of $74.94 billion as of end-September 2018.

“At this level, the [dollar reserves] represents a more than ample liquidity buffer and is equivalent to 6.8 months’ worth of imports of goods and payments of services and primary income,” the BSP said, explaining that this amount is also equivalent to 5.9 times the country’s short-term external debt based on original maturity and 4.2 times based on residual maturity.

Last month, the peso weakened to levels not seen in almost 13 years, hitting P54.23 at one point as fears of higher inflation forced investors to seek safe haven in foreign currencies. The peso has, however, since strengthened to P53.70 as of Friday, after the central bank capped off last month its most aggressive streak of interest rate hikes since 2000 in a bid to rein in the spike in consumer prices this year. /jpv

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