Flexible forex regime stays, says BSP

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) remains committed to maintain a flexible and market-determined exchange rate that has enabled the country to survive external and domestic shocks.

Aside from promoting resilience against external shocks, BSP Governor Nestor Espenilla Jr. said the flexible foreign exchange rate regime has allowed the central bank to conduct independent monetary policy focused on assessment of domestic conditions.

“Part of our protection and making the economy resilient is deliberately, we are keeping our exchange rate, our peso, flexibly determined by the market,” he said.

Espenilla said some are yearning for the day that the value of the peso would be fixed.

“If we say P50, its always P50. But that’s a very dangerous path for a small open economy like the Philippines that is constantly being toss and buffeted by the heavy winds of global developments. If we commit to something stubbornly against very strong pressures then we will end up losing our reserves,” he said.

With a fixed exchange rate, the BSP chief added the country would end up borrowing more to protect a certain lifestyle.

“For example for businesses, if exchange rate is guaranteed, they will borrow from abroad because interest rates seem to be low and that creates a path of over-indebtedness,” he said.

Espenilla said consumers would shift to imported items because it looks very cheap, thereby creating deficits, while exporters would have a difficult time growing their businesses if exchange rates are not able to adjust to shifting prices.

“So for many good reasons, we allow the peso to move in flexible manner. And that is one of the reasons why we continue to be in stable and resilient position today,” the BSP chief said.

The recent depreciation of the peso against the dollar is attributed to both fundamental and non-fundamental factors.

Fundamental factors include higher demand for imports of capital goods, raw materials and intermediate products in support of our growing economy as well as dollar debt repayments, prepayments, and outward investments.

On the other hand, non-fundamental factors reflect various market sentiments over domestic and external developments adding more pressure on the peso.

“We remain confident that the Philippine economy’s solid fundamentals will lend support to our flexible peso,” Espenilla said.

Amid this resilience, he said the economy is being tested by external headwinds emanating from the normalization of monetary policy by advanced economies particularly the US, the brewing trade tensions among key economies, and the ongoing financial crisis in Turkey.

These factors exert a downward pressure on the peso even as the flexible exchange rate policy continues to be a stabilizing mechanism against unsustainable imbalances.

According to Espenilla, the peso continues to reflect day-to-day market conditions and the local currency has generally maintained its external price competitiveness against baskets of currencies of all trading partners and trading partners in advanced and developing economies.