BSP told to develop sound forex management policy

CEBU, Philippines - Although market movements largely dictate the value of the peso against the US dollar, the Bangko Sentral ng Pilipinas must come up with a sound alternative to manage the movement of foreign exchange.

Economist Nicholas Kwan, the head for research-East of Standard Chartered Bank’s Global Research Department, suggested that sound management of the foreign exchange could save struggling economies, and Philippines should manage its foreign exchange well.

He said the Philippines does not need to appreciate the peso too much, and the market forces’ unpredictable and abrupt fluctuations could disrupt businesses, especially the export sector.

The BSP which follows a system that gives freedom to the peso value versus the US dollar based on the market forces, could in other way manipulate the up and down swings, other ways such as controlling the management of equity market, and bank inflows.

In some economies, like Australia, New Zealand, including the Chinese Central Banks, they were able to control the movement of their foreign exchange, in order to minimize the fluctuations and protect businesses, and the economy as a whole.

“There are ways to manage the foreign exchange effectively. The exchange rate fluctuation should be given a serious attention by Central Banks in the region,” he said.

He said although BSP is following different policies as other countries, “it does not mean they can’t manipulate the movement of the peso.”

Standard Chartered Bank’s conservation outlook is for the peso to settle within the average exchange of P44.50 to a US dollar, this year, and this would further strengthen in 2011 with projected exchange rate of P41.50 to a dollar.

The focus of the BSP is to give extra attention to managing the capital inflow, as big wave of this is seen to come in.

In order to minimize the impact of the big wave of inflows, banks should also encourage a capital outflow regime, allowing companies to borrow overseas to their subsidiaries to balance the system.

He said the Philippines is seen to see a big wave of capital inflows in the next few months, as the recovery is profound, in fact it has shown an uptrend development within the region in the first quarter of 2010.

The Philippines which has been a special performer in the region in terms of protecting itself from being affected by the global recession, is seen to achieve a real recovery soon enough.

While “recovery is real” Kwan suggested that the country’s central bank should carefully strengthen its system to manage the foreign exchange well, otherwise if the market forces will be given its total free-hand strong appreciation of the peso is inevitable.

Too much appreciation of the Philippine peso, he said is not good for the Philippines.

Kwan, together with other regional officers of the Standard Chartered Bank was in Cebu recently to give the regional and local outlook of the economy, and to formally introduce the bank’s newest product called “Premium Currency Investment” or PCI.