IMF: Healthy forex reserves to secure PH from threats

The Philippines’ growing foreign exchange reserves will keep the country safe from shocks brought on by problems now gripping the global economy, the International Monetary Fund said.

The IMF said that the Philippines’ gross international reserves (GIR), which stood at a record of $77.77 billion by the end of February, would be sufficient to allow monetary officials of the country to respond to sharp capital outflows—a risk emerging economies now face due to global economic uncertainties.

“Should volatile [capital] outflows occur, there is scope to use reserves to smoothen the effects of such outflows,” the multilateral institution said in its latest paper on the Philippine economy.

Prone

In times of uncertainties, foreign investors tend to withdraw their funds from emerging markets, like the Philippines, preferring to hold on to their cash or put their money in what they consider to be less risky assets.

As a result, emerging market currencies, such as the peso, is prone to sharp depreciation.

But in the case of the Philippines, the IMF said, the Bangko Sentral ng Pilipinas has enough resources to intervene in the foreign exchange market, particularly by using its dollar reserves to control the peso, preventing any sharp and sudden depreciation of the local currency.

The foreign exchange reserves are deemed sufficient enough to enable the central bank to undertake market interventions without risking the country’s ability to cover its debt and import requirements.

Central bank officials observe a policy that allows the peso’s value to be determined by the market. And from time to time, the regulator undertakes market intervention to avoid any sharp and sudden movements—whether appreciation or depreciation—of the peso.

Prudent

Such movements of the exchange rate tend to disrupt the economy, the BSP explained.

The International Monetary Fund considers the BSP’s exchange rate policy to be prudent.

“The [IMF] staff supports the [BSP] authorities’ stated policy of limiting foreign exchange market intervention to smoothing operations and allowing the exchange rate to adjust to market pressures,” the IMF said in its paper.

The multilateral institution said the Philippines’ foreign exchange reserves are in a more comfortable level compared with some of its neighbors.

The foreign exchange reserves of the Philippines may be smaller in absolute terms compared with Indonesia’s estimated $110 billion and Malaysia’s $130 billion. But it is bigger in terms of worth of import and debt cover, according to the IMF.

Bigger

This is because the import requirements and the foreign currency-denominated debts of most neighboring countries are bigger.

The Philippines’ foreign exchange reserves as of end-February were enough to cover 11.5 months of imports. It was also worth 6.5 times the country’s foreign currency-denominated debts maturing within the short term.