‘BSP has $30 billion more to defend peso’

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has another $30 billion in foreign exchange buffer that it can spend to calm the volatility in the market, according to ANZ Research.

In its latest foreign exchange insight titled “Phl: Line in the Sand at 60,” ANZ head of Asia Research Khoon Goh said “the BSP still has the capacity to spend another $30 billion before it starts running into reserve adequacy issues.”

Goh said the Philippines has already spent $12 billion year-to-date to defend the peso against speculative attacks.

The BSP has been very active in the foreign exchange market, helping the peso bounce back to the 57 to $1 level when it closed at 57.97 last Friday after depreciating by as much as 15.7 percent to hit a new all-time low of 59 to $1 several times this month.

The depreciation was due to the aggressive rate hikes by the US Federal Reserve as well as the strong demand for dollars as the Philippine economy reopens further.

“Intervention has been entirely conducted in the spot market, unlike other regional centrals banks, which undertake intervention through both spot and forwards,” Goh said.

Despite the drop in the reserves, Goh said the Philippines still has the best reserve adequacy metric in the region, based on the preferred measure of multilateral lender International Monetary Fund (IMF).

Aside from the intervention in the foreign exchange market, ANZ said the BSP has the option to intervene in the forwards market, which will not immediately impact on headline reserves.

The research arm said the BSP has ample capacity to prevent the peso from weakening past the 60 to $1, as mentioned by Finance Secretary and former BSP governor Benjamin Diokno.

“We believe there is a good chance that peso weakness can be contained through a combination of ongoing forex intervention, a seasonal increase in remittances flows into year-end, and further aggressive rate hikes by BSP to maintain the interest rate spread against the US,” Goh said.

The country’s gross international reserves (GIR) level, used as buffer to smoothen excess volatility in the foreign exchange market, narrowed further for the seventh straight month to a two-year low of $93 billion in end-September from $97.4 billion in end-August.

The GIR represents a more than adequate external liquidity buffer equivalent to 7.4 months’ worth of imports of goods and payments of services and primary income, and is about 6.6 times the country’s short-term external debt based on original maturity.

The country’s foreign exchange buffer is now $17.12 billion or 15.5 percent lower than the record high $110.12 billion recorded in December 2020. The GIR level has been declining since February this year and has remained below $100 billion for the past three consecutive months.

To stabilize the peso and tame inflation, the BSP has so far raised key policy rates by 225 basis points, bringing the benchmark rate to 4.25 percent from an all-time low of two percent and wiping out the cumulative 200-basis-point cut done in 2020 as part of its COVID-19 response measures.

BSP Governor Felipe Medalla earlier said the country’s foreign exchange buffer remains more than adequate.

“We’re confident that we have sufficient capacity and we’re not foolish enough to waste our reserves if it (peso) cannot be defended. When we use our reserves is because we think it works,” he said.