The Philippines’ ability to purchase imported goods and pay its dollar-denominated debts may be adversely affected should the US government fail to extend its debt ceiling on time and default on its obligations.
According to the Bangko Sentral ng Pilipinas, most of the Philippines’ foreign exchange reserves, which are currently at a historic high of about $69 billion, are invested in US Treasuries.
Because of this, the Philippines could be hit hard should the US government default on its obligations, BSP Deputy Governor Diwa Guinigundo said in a forum on Tuesday.
The Philippines, like most emerging markets in Asia, has a significant exposure to the US government, Guinigundo explained.
Bulk of the Philippines’ gross international reserves (GIR) has been invested in US treasuries, Guinigundo added.
The US Congress has until August 2 to agree to extend the US government’s debt ceiling. If the US legislature fails to do so, the US government would be prevented from borrowing more funds to pay some of its maturing obligations.
The executive branch of the US government is urging Congress to finally agree to raise the debt ceiling. But some legislators oppose the idea.
The international community is closely watching developments on Capitol Hill, given the adverse repercussions of a US default.
Nonetheless, Guinigundo has expressed confidence that the US government will raise its debt ceiling before the August 2 deadline, believing that a US administration defaulting on its obligation is beyond imagination.
“I have some confidence that there is still sanity left among US Congressional leaders and that they will raise the debt ceiling on time,” Guinigundo said.
The BSP earlier reported that, as of end-June, the country’s GIR reached a record $68.997 billion. The amount, according to the central bank, is enough to cover 10.4 months’ worth of the country’s imports and is 5.9 times the country’s foreign currency-denominated debt maturing within a year.
The Philippines’ GIR is considered to be healthy, based on international standards. The Philippines has a comfortable amount of foreign exchange reserves, which can cover at least four months’ worth of imports.
The country’s growing GIR, beefed up by remittances and foreign investments in business process outsourcing and portfolio instruments, is one of its strengths, the central bank said.
Because of its comfortable level of reserves, supported by other factors, the country was able to gain the favor of credit rating firms, the BSP said.
Moody’s Investors Service and Fitch Ratings both lifted the Philippines’ credit rating by a notch last month.
Moody’s now rates the Philippines at two notches below investment grade, while Fitch rates the country at a notch below investment grade.