BSP ready to smoothen peso volatility

MANILA, Philippines -  The Bangko Sentral ng Pilipinas (BSP) is ready to smoothen excessive volatility in the foreign exchange market amid the threat of war between US President Donald Trump and North Korea President Kim Jong-un, according to BSP Governor Nestor Espenilla Jr.

“The peso is market determined. We don’t expect it to do a free fall because our economic fundamentals now, unlike before, are very solid and very strong,” he said.

The BSP chief issued a statement amid fears about the continued weakening of the peso against the dollar, which flirted anew with the 51 to $1 level last Friday before closing at its lowest level in almost 11 years at 50.98 to $1.

“The peso is capable of correcting itself as the market calms down and digests the relevant information. Moreover, BSP will always be there strategically if volatility is considered excessive. We have a huge pile of foreign exchange reserves to play an effective stabilizing role,” he said.

Latest data placed the country’s gross international reserves (GIR) at $80.78 billion in July, enough to cover 8.6 months’ worth of imports of goods and payments of services and income. It is also equivalent to 5.5 times the country’s short-term external debt based on original maturity and 3.7 times based on residual maturity.

The GIR is the sum of all foreign exchange flowing into the country. The reserves serve as buffer to ensure the Philippines would not run out of foreign exchange that it could use to pay for imported goods and services, or maturing obligations in case of external shocks.

If it deems necessary, the BSP buys dollars from the foreign exchange market to prevent sharp depreciation of the peso. It can also sell to avoid sharp appreciation of the local currency.

Espenilla pointed out the country’s sound macroeconomic fundamentals are reflected in the sovereign credit rating including a notch above minimum investment grade rating from S&P Global Ratings and Moody’s Investor Service as well as minimum investment grade on a positive outlook from Fitch Ratings.

“This is reflected in our investment grade rating,” he said.

The Philippines emerged as the fastest growing economy in Asia with a 6.9  percent gross domestic product (GDP) growth last year from 5.9 percent in 2015.

The expansion eased to 6.4 percent in the first quarter from 6.6 percent in the fourth quarter of last year due to weak private consumption.

“The Philippines is an emerging market economy that wants to grow. To be sustainable, it needs to catch up on high quality investments especially infrastructure,” Espenilla said.

The launch of the Build Build Build program by the Duterte administration in its bid to boost infrastructure spending is expected higher imports, putting more pressure on the country’s current account (CA) position.

The BSP expects the country to incurs its first current account deficit in 14 years with a shortfall of $600 million instead of a surplus of $800 million this year due to the ballooning trade deficit resulting from higher imports.

“Nonetheless, the BSP stands vigilant. Lets calm down. We’re on the right track,” Espenilla said.