BSP intervention fails to slow down peso – IMF

The International Monetary Fund (IMF) said the intervention of the Bangko Sentral ng Pilipinas (BSP) in the currency market has done little to slow down the peso and would have little effect on future appreciation.

According to the IMF, there were structural factors that affect the appreciation of the peso against the dollar and this would obscure the effect of any intervention in the foreign exchange rate.

The BSP’s forex operations have so far cost it over P50 billion as monetary officials struggled to smoothen the volatility in the exchange rate amid intense political pressure to actually keep the peso from further appreciation.

Despite its limited effect, however, the IMF said the continued intervention of monetary authorities in the Philippines as well as other countries in the region, suggested that they still believed their strategy to be working.

In the Regional Economic Report (REO) released over the weekend, the IMF said that it looked at the so-called “sterilized” intervention of the central bank in the currency market and whether this has been effective in swaying the level, change or volatility of the exchange rate.

“The question arises because it is hard to rationalize the rapid build up of reserves in (Emerging Asia) as solely aimed at ensuring sufficient reserves,” the IMF said.

According to the fund, some of the reserve accumulation had been precautionary in nature and in some countries in the region, intervention reflected the operation of a fixed exchange-rate regime.

But for countries like the Philippines where monetary authorities operate flexible regimes, reserve accumulation could still reflect a desire to influence the level of the exchange rate.

Thus far, however, the IMF said it found limited evidence of systematic links between sterilized intervention and exchange rates.

The IMF said this might be surprising, especially considering that the large size of interventions relative to currency market turnover in emerging markets would suggest that intervention could have a sizable effect on exchange rates.

In the Philippines, specifically, the IMF said the absolute monthly intervention of the BSP averaged 38 percent of total market turnover compared with 11 percent of daily foreign exchange market turnover in India, 50 percent in Indonesia, five percent in Korea and 22 percent in Thailand.

According to the IMF, intervention in the region has often followed a “leaning against the wind” pattern where countries have often stepped up foreign exchange purchases during periods of protracted appreciation.

The IMF said there was “some modest evidence” that intervention dampened volatility, which was consistent with the stated objectives of the BSP.

However, the IMF said there were factors that could weaken the effectiveness of intervention, particularly persistent structural factors that might be driving the appreciation of the currency, obscuring any effect of intervention beyond a short period.

Second, the IMF said that to the extent that sterilized intervention prevented the domestic interest rate from adjusting (especially downward), it would have limited effects on capital flows driven by interest differentials.

This meant that intervention would fail to alleviate upward pressure on the currency. In addition, intervention aimed at building reserves would not necessarily signal future policy changes and hence might not be expected to exert any effect on the exchange rate.

Nevertheless, the IMF said that while its findings suggested limited evidence of effectiveness, the fact that the monetary authorities have actively intervened suggests that they believe the intervention has been effective.