Forex reserves thin to $79 billion in May, lowest in over 3 years

MANILA, Philippines — The country’s foreign exchange buffer thinned for the second straight month in May, slumping to its lowest level in more than three years and below the full year projection of $80 billion, the Bangko Sentral ng Pilipinas (BSP) reported yesterday.

BSP Governor Nestor Espenilla Jr. said gross international reserves (GIR) reached $78.97 billion as of end May, $641 million lower than the revised April level of $79.61 billion.

This was the lowest since hitting $78.68 billion in November 2014. The buffer has been dwindling for the past two months since reaching $80.51 billion last March.

Espenilla said the marginal decline last month was due mainly to outflows arising from the central bank’s foreign exchange operations, payment made by the national government for its maturing foreign exchange obligations, and the revaluation adjustment of the BSP’s gold holdings.

The BSP chief said the strong outflows were partially tempered by the national government’s net foreign currency deposits as well as the BSP’s income from investments abroad.

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

Data showed the value of the BSP’s gold holdings declined to $8.19 billion in May from $8.25 billion in April.

The BSP buys or sells dollars from the foreign exchange market if it deems necessary to prevent sharp depreciation or appreciation of the peso. It has allowed the moderate and gradual depreciation of the peso against the US dollar as part of its mandate to smoothen the volatility in the foreign exchange market and to support the expanding economy.

Funds continued to flow out from emerging markets, including the Philippines, in search of higher yield as the US Federal Reserve continued to raise interest rates as it takes the normalization path.

The local currency has depreciated to its weakest level in almost 12 years and is nearing the 53 to $1 level.

Last May 10, the BSP’s Monetary Board lifted rates for the first time in more than three years as latest forecasts indicate inflation pressures could become more broad-based over the policy horizon.

The 25-basis point rate hike was aimed at arresting potential second round effects from the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law by tempering the buildup in inflation expectations.

Around P190 billion in additional liquidity were released into the financial system after the BSP reduced the ultra-high reserve requirement ratio by two percentage points – one percentage point last March 2 and another percentage point last June 1.

 “Nonetheless, the end-May 2018 level of GIR serves as an ample external liquidity buffer,” Espenilla said, adding the amount is enough to cover 7.7 months’ worth of import of goods and payments of services and primary income.

Likewise, the buffer is also equivalent to 5.4 times the country’s short-term external debt based on original maturity and 3.9 times based on residual maturity.

The BSP expects the GIR level thinning to $80 billion this year, equivalent to 7.5 month’s worth of imports of goods and payments of services and primary income.