RP central bank battles peso appreciation

Acknowledging that it was actively buying US dollars from the market in 2012 to temper what could have been a sharper appreciation of the Philiippine currency, the BSP said it expected the need for more action to keep the peso as stable as possible next year.

“Capital flows from a [potential] credit-rating upgrade will provide more challenge in terms of keeping the peso relatively stable and minimising its volatility,” BSP deputy governor Diwa Guinigundo said.

In 2012, the peso appreciated against the dollar by more than 6 per cent partly on account of significant inflows of foreign “hot money”. After hovering in the 43-per-dollar territory at the start of the year, the peso broke into the 40:1 level before weakening to the 41:1 band.

Market analysts say the Philippines, together with a few other emerging Asian countries, has become a preferred destination for portfolio investments given its favourable economic growth amid the general weakness of the global economy.

The BSP said foreign portfolio investments could grow further in 2013, thereby providing additional appreciation pressures on the peso.

All three major international credit-rating firms – Fitch Ratings, Standard & Poor’s and Moody’s Investors Service – now rate the Philippines a notch below investment grade after rating upgrades over the past two years.

The credit watchdogs cited the Philippine government’s declining debt burden, rising foreign-exchange reserves and robust economic growth as among the factors for the upgrade.

“Without the BSP’s participation in the foreign-exchange market, the peso could have been firmer, although we had to allow fundamentals to determine the peso-dollar rate,” Guinigundo said.

He reiterated the central bank’s exchange-rate policy of allowing the peso to appreciate specially if such movement were driven by “structural flows”, which included foreign direct investments and remittances. The BSP, however, said it would temper the rise of the peso if this was due to foreign portfolio investments, particularly those that involve speculation on the currency.

To temper the rise of the peso in 2012, the BSP engaged in heavier dollar purchases that pushed its expenditures and led to its losses. In the first three quarters of the year, the central bank had a net loss of 68.36 billion pesos (Bt50.88 billion).

The BSP likewise slapped a higher capital requirement on banks’ holdings of non-deliverable forwards (NDFs), which were supposedly hedging instruments for importers and exporters but were believed to be used to earn from currency speculation.

The BSP also reissued an old directive prohibiting banks from using money of foreigners for investment in the central bank’s special deposit accounts.

A joint research by First Metro Investment Corporation and the University of Asia and the Pacific said that after a 100-basis-point cut in key interest rates in 2012, further rate cuts by the BSP could not be ruled out in the coming year alongside other measures to manage capital flows.