Peso tumble prompts BSP to improve hedging facility  

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has implemented further enhancements to its hedging facility to counter the decline of the peso, which has returned to a rate of 56 to $1 due to apprehensions about additional US Federal Reserve rate hikes.

BSP Deputy Governor Chuchi Fonacier said the Currency Rate Risk Protection Program (CRPP) is a continuing facility that offers a non-deliverable dollar/peso forward contract (NDF) between the BSP and a big bank in response to the request of bank clients who wish to hedge their eligible foreign currency obligations.

The peso slumped to an all-time low of 59 to $1 last October in line with comparable regional peers, amid worries over aggressive interest rate hikes by the US Fed, concerns over global economic slowdown following Russia’s invasion of Ukraine as well as the imposition of tighter restrictions in China.

However, it rebounded significantly amid the aggressive rate hikes delivered by the BSP as well as its active intervention in the foreign exchange market to fight inflation and stabilize the peso.

It ended 2022 at 50.755 to $1, or 9.3 percent weaker than the end-2021 level of 50.99 to $1. It further strengthened to the 53 to $1 level last February, allowing monetary authorities to focus on taming inflation.

With the possibility of additional rate hikes by the US Fed, the peso has again depreciated and pierced the 56 to $1 handle.

“As such, due to the possibility of renewed depreciation pressure in the peso following the continued interest rate hikes by the Fed, we would like to remind all universal and commercial banks that the CRPP facility remains open,” Fonacier said.

Currency hedging is an attempt to reduce the effects of currency fluctuations on investment performance.

According to Fonacier, bank clients who wish to hedge their eligible foreign currency obligations from foreign exchange volatility through the CRPP may contact their respective banks.

The Monetary Board has issued Resolution 448 late last month to enhance the implementing guidelines of the CRPP facility.

Eligible transactions under the CRPP facility includes unhedged foreign currency obligations or transactions amounting to not less than $50,000, which is current and outstanding as of date of application.

Past due foreign currency obligations or transactions are not eligible, while the maximum tenor of the CRPP contracts is three months.

Under the facility, only the net difference between the contracted forward rate and the prevailing spot rate shall be settled in pesos at maturity of the contract.

Should the eligible transaction be denominated in a foreign currency other than the US dollar, the CRPP contract shall be denominated in the US dollar equivalent using the exchange rate indicated in the BSP Reference Exchange Rate Bulletin on deal date.

The regulator has expanded the coverage of the facility to include BSP approved private and public sector foreign currency borrowings, foreign merchandise trade transactions duly compliant with relevant provisions including documentary requirements, non-trade account and resident to resident foreign exchange transactions, as well as outward investments.