By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) faces a tougher job as persistent global headwinds complicate its efforts to smooth out peso swings while managing its reserves, economists said.
Mounting external pressures and rising global bond yields could narrow the central bank’s room to contain foreign exchange market volatility while the peso continues to take hits from global economic and geopolitical woes, they said.
“While the BSP still has some room to smooth out sharp forex (foreign exchange) swings with its reserves, the macro backdrop may make this more difficult,” University of Asia and the Pacific Economist Marco Antonio C. Agonia told BusinessWorld in an e-mail.
“Narrowing policy rate differentials with advanced economies, oil price uncertainty, and an expected swing in agricultural goods prices will likely put pressure on the peso-dollar rate,” he added.
Since the start of the year, the peso has closed at record lows for a total of 38 trading days.
It breached the P64-a-dollar handle for the first time ever on Tuesday, plunging to a new low of P64.17 versus the greenback.
This came even as the central bank tightened its monetary policy for a fourth straight meeting on Oct. 22 with a larger-than-expected 50-basis-point (bp) increase to 5.5%.
Higher key interest rates, in theory, should boost the peso against the dollar by making peso-denominated assets more attractive to investors.
BSP Governor Eli M. Remolona, Jr. last week said they do not tighten to support the peso, with their foreign market intervention focused on smoothening out sharp inflationary swings rather than defending a specific exchange rate.
Leonardo A. Lanzona, Jr., an economics professor at the Ateneo de Manila University, said the peso’s continued depreciation remains largely driven by global headwinds.
“The peso’s weakness reflects deeper pressures: the trade gap, portfolio outflows, and the interest rate differential with the United States,” he told BusinessWorld in a Viber message.
This means using the BSP’s already dwindling gross international reserves (GIR) to defend a specific level for the local currency may be pointless, according to Mr. Lanzona.
“The BSP’s room is narrower now that reserves have fallen to a three-year low, and the peso hit a record low even after the hike,” he noted. “(Mr.) Remolona said the BSP intervenes only to avoid swings that tend to be inflationary, which is the right limit. Spending reserves to defend a level would be costly and probably futile.”
Earlier this year, the central bank chief noted that they are also minimizing their intervention in the foreign exchange market to prevent depleting their dollar reserves, especially as the greenback has strained other currencies as well.
The latest BSP data showed foreign reserves fell year on year for a seventh month in a row to $99.997 billion as of September, down by 8.31% from $109.06 billion in the same period last year.
This was the lowest GIR level in three years or since the $98.116 billion logged in September 2023.
International reserves are the central bank’s foreign assets held mostly as investments in foreign-issued securities, foreign exchange and monetary gold, among others.
These are supplemented by claims to the International Monetary Fund in the form of reserve position in the fund and special drawing rights.
The BSP uses the country’s GIR by releasing US dollar liquidity when intervening in the foreign exchange market amid episodes of peso depreciation.
“The BSP can intervene in the foreign-exchange market to reduce abrupt and destabilizing currency movements, particularly when these threaten to intensify imported inflation,” Marites M. Tiongco, a professor at the De La Salle University Carlos L. Tiu School of Economics, told BusinessWorld via Viber.
“However, sustained intervention to maintain a specific exchange rate level would be costly and could eventually undermine policy credibility,” she added.
BUFFERS, HEADWINDS
Meanwhile, Alain Jomarie G. Santos, chairman of the University of Santo Tomas Department of Economics, noted that the BSP still has the capacity to manage foreign exchange swings despite tighter and volatile global conditions.
“Think of the peso’s value like a boat on choppy seas, the Bangko Sentral isn’t trying to stop the waves, it’s just keeping the boat steady,” he said via Facebook Messenger.
Despite rising global bond yields and the dollar reserves plunging to a three-year low, the BSP remains well-equipped to shield the country from market volatility and ensure that it can pay its debts in case of an economic downturn, Mr. Santos noted.
At $99.997 billion, the country’s GIR is equivalent to 6.3 months’ worth of imports of goods and payments of services and primary income. It can also cover about 3.2 times the country’s short-term external debt based on residual maturity, according to the central bank.
“Instead of wasting billions burning through dollars to fight global market trends, the BSP lets the peso adjust naturally while using behind-the-scenes financial rules to prevent currency speculation, keep dollar liquidity flowing to local banks, and ensure market volatility doesn’t cause sudden spikes in daily grocery prices,” Mr. Santos added.
However, Ms. Tiongco said growing external pressures and rising global bond yields are making the peso’s recovery increasingly difficult.
“The Asian Development Bank’s bond market data show that Philippine 10-year government bond yields were approximately 8.04% on Oct. 22,” she noted. “Higher yields raise financing costs for the government and private sector, particularly if tighter global financial conditions persist.”
Ms. Tiongco said the prevailing backdrop calls for targeted intervention in line with the BSP’s primary mandate of price stability.
“Foreign exchange intervention should remain targeted and consistent with the inflation objective,” she said. “A weaker peso is not necessarily harmful to all sectors: exporters earning dollars may benefit, although those gains depend on imported input exposure and domestic value creation.”
The peso’s vulnerability likewise shows that the economy must boost its dollar inflows to address the structural issues weighing on the currency, Ms. Tiongco noted.
“The Philippines must strengthen the underlying sources of foreign exchange earnings through competitive exports, services, investment, and higher domestic value added,” she said. “Exchange rate intervention can manage volatility, but it cannot eliminate structural external imbalances.”
