Forex reserves climb to record-high $99 billion

MANILA, Philippines — The country’s foreign exchange reserves surged to a fresh all-time high of $98.95 billion in end-August, helping cushion the domestic economy against external shocks such as the COVID-19 pandemic, according to the Bangko Sentral ng Pilipinas.

BSP Governor Benjamin Diokno said the $350-million month-on-month increase in the gross international reserves (GIR) reflected inflows mainly from the central bank’s foreign exchange operations as well as income from investments abroad.

“The end-August 2020 GIR level represents a more than adequate external liquidity buffer, which can cushion the domestic economy against external shocks,” Diokno said.

The BSP chief said the strong inflows were partially offset by the foreign currency withdrawals made by the national government to pay its foreign currency debt obligations and revaluation losses from the central bank’s gold holdings resulting from the decrease in the price of gold in the international market.

The GIR is the sum of all foreign exchange flowing into the country and serves as buffer to ensure the country will not run out of foreign exchange that it could use in case of external shocks.

Data showed the buffer in August was 0.35 percent higher than the July level of $98.6 billion and was 15 percent higher than the $86.03 billion booked in the same month last year.

The value of the BSP’s gold holdings declined by 4.4 percent to $12.04 billion in August after surging by 57 percent to $12.59 billion in July.

Diokno said the end-August GIR is equivalent to nine months’ worth of imports of goods and payments of services and primary income.

He added the buffer is also about 7.6 times the country’s short-term external debt based on original maturity and 4.8 times based on residual maturity.

The BSP chief said he is confident the buffer would breach $100 billion with the impending rebound in exports, remittances from overseas Filipino workers, and investments amid the gradual reopening of the global economy despite the global health crisis.

The BSP’s Monetary Board has decided to shift to active hold trading instead of being passive because of the change in the price dynamics of gold. The price of gold has topped $2,000 an ounce to reach new record levels.

Gold accounts for over 12 percent of the country’s foreign exchange buffer and the BSP is looking at maintaining it at 10 percent.

A survey conducted by the World Bank showed that the average allocation of gold relative to reserves should be around 9.55 percent, while the World Gold Council report showed that a portfolio with 10 percent allocation to gold had a higher risk adjusted return compared to zero or five percent allocation.

Republic Act 11256 or an act to strengthen the country’s GIR allows central bank’s gold purchases from small miners more attractive.

Like most central banks, the BSP holds international reserves to provide a standby supply of foreign exchange for instances when foreign exchange holdings of domestic commercial banks temporarily fall short of the total demand from the private sector and the national government.