Peso strength helped arrest BSP’s dollar reserve slide

Positive market sentiment toward the peso helped the central bank rebuild its war chest of US dollars in 2018 after being on a steady downtrend for most of last year, according to the latest data on the country’s gross international reserves.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said its total holdings of foreign exchange as of December stood at $78.4 billion, after declining to $74.7 billion in October—its lowest level since the $75.3 billion at the end of 2011.

The strong currency in recent months was due partly to the abatement of dollar outflows from the local financial markets in response to the improvement in yields of peso-denominated securities. This reversal of sentiment toward domestic assets was caused by the cumulative 175-basis point increase in the key interest rates that the central bank implemented last year in an effort to bring inflation under control.

This recovery in dollar reserves in November and December, however, still left the BSP $3.1-billion poorer compared to the end-2017 level of $81.5 billion, representing an annual decline of 3.8 percent in the dollar stash that is used for the transactions of the Philippine economy with the rest of the world.

According to BSP Officer-in-Charge Diwa Guinigundo, the end-2018 level improved on a month-on-month basis “due mainly to inflows arising from the central bank’s foreign exchange operations, net foreign currency deposits by the national government and revaluation gains from BSP’s gold holdings resulting from the increase in the price of gold in the international market.”

“However, the increase in reserves was partially tempered by payments made by the government for servicing its foreign exchange obligations,”
he said.

More importantly, however, the end-December 2018 level of foreign reserves continued to serve as an ample external liquidity buffer and was equivalent to 6.9 months’ worth of imports of goods and payments of services and primary income, he said.

It was also equivalent to 5.8 times the country’s short-term external debt based on original maturity and 4 times based on residual maturity. Short-term debt based on residual maturity refers to outstanding external debt with original maturity of a year or less, plus principal payments on medium- and long-term loans of the public and private sectors falling due within the next 12 months.

Net international reserves—which refer to the difference between the BSP’s gross dollar reserves and total short-term liabilities—likewise increased by $2.78 billion to $78.44 billion as of end-December 2018 from the end-November 2018 level of $75.66 billion.