BSP eyes banks' reserve tweak to temper peso rise

MANILA, Philippines - Banks’ reserve requirements may be tweaked if needed to control capital inflow pressures that have caused peso to rise, the Bangko Sentral ng Pilipinas (BSP) said.

“The RR (reserve requirement) is a potent tool available to us if any further adjustment is needed to be made,” said Francisco Dakila Jr., director of the central bank’s Center for Monetary and Financial Policy.

The tool, he said, is part of the “policy space” afforded the BSP as inflation remains benign at 3.4 percent as of February. The figure fell at the low-end of the official three- to five-percent target for the year.

“The BSP maintains a lot of policy space and if there will be need for new measures to be introduced, then the Monetary Board can, of course, put in these measures,” Dakila said.

In April last year, the BSP has rationalized banks’ reserve requirement and also lowered it by three percentage points to 18 percent to “ensure adequate liquidity in the financial system.”

However, the Philippines recently has experienced a flood of capital inflows, owing to higher interest rates and good economic backdrop. A rise in RR could tighten the flow of money in the economy.

Huge inflows have driven the peso to rise, which some economists said meant consequences. The peso, which closed at 40.69 Monday, was Asia’s second best-performer last year, having appreciated by 6.8 percent versus the dollar.

“The evidence is overwhelming that an expensive currency will be detrimental to economic growth,” University of the Philippines economist Solita Collas-Monsod said in a forum Monday.

While it has some benefits like making imports cheaper, Monsod argued a strong currency also leads to bigger trade deficits as it undermines the competitiveness of domestic industries. Among others, exports become more expensive abroad when a currency is strong.

Luis Dumlao, board director of the Philippine Economic Society, said the Philippines is at risk of “Dutch disease”— fall of domestic industries— with the rise of the peso. This is despite it being “structural” in nature.

Structural flows were characterized by current account surpluses since 2003, mainly driven by remittances from overseas Filipinos with the help from exports and business process outsourcing earnings.

“Dollar (inflows), just like anything else, is like a gun, it’s power, and just like power, it can be used for good as much as it can be used for bad,” Dumlao said.

But for Shanaka Jayanath Peiris, representative to the Philippines of the International Monetary Fund (IMF), the BSP has done its job to prevent “volatility” in the peso-dollar exchange rate.

“Without the BSP foreign exchange operations, it is likely the peso would have exhibited more volatility,” Peiris said.

Proof to this has been the “quite large increase” in foreign exchange reserves to record-levels since 2004, he said. Foreign reserves slipped to $83.818 billion in February from a record of $85.2 billion the previous month.

“The BSP leans against the wind: they buy more when the peso is rising and they sell more when it depreciates,” he said.