The Bangko Sentral ng Pilipinas on Wednesday defended itself against criticism that the country’s rising foreign exchange reserves have hit excessive and imprudent levels, saying the accumulation of dollars has actually aided the economy in withstanding external shocks.
The BSP said the buying of dollars, which leads to the buildup of the reserves, is needed from time to time to keep the country from the destabilizing effects of surges in foreign portfolio investments and other unfavorable developments in the global economy.
Significant inflows of foreign capital may cause sharp and sudden appreciation of the peso—which can be disruptive to businesses and the economy—without its participation in the market, the BSP said.
“In the wake of heavy capital inflows, the BSP has accumulated additional reserves, recognizing that financial volatility can be seriously disruptive and that a high level of reserves can be a good cushion,” BSP Deputy Governor Diwa Guinigundo told the Inquirer.
The rise in foreign portfolio investments to emerging markets like the Philippines is attributed to the economic problems of the US and eurozone economies.
The BSP also said significant dollar reserves give it flexibility to buy pesos and prevent a steep depreciation of the local currency in case of capital flight. Withdrawal of foreign investments is a probability, especially in times of a volatile global economy.
Guinigundo said the significant amount of foreign exchange reserves help reduce the country’s vulnerability to external shocks. Consequently, he said, the country is able to gradually gain the confidence of more investors.
“Without this [high level of reserves], we might lose external competitiveness and undermine the real sector,” he said.
The country’s foreign exchange reserves currently stand at about $80 billion, a historic high. The amount is enough to cover for almost one year of import requirements and is six times more than the country’s debt to foreign creditors.
Guinigundo’s comments were made when he was asked to respond to the opinion of some economists that the foreign exchange reserves of the Philippines are already excessive and that accumulation of dollars over the last few years had been a costly activity for the BSP.
Johanna Chua, chief economist for Asia-Pacific at Citi, said in a press briefing on Tuesday that the foreign exchange reserves of the Philippines is the second-highest in the region in terms of proportion to certain foreign liabilities of the country.
She said the BSP can afford to go slow on dollar accumulation, saying the country already has more than enough foreign exchange buffer.
Chua said dollar accumulation is costly because this entails infusion of additional peso liquidity into the economy. Portions of the additional liquidity are placed by banks as deposits to the BSP, which pay interests on the deposits.