Debt payments, lower gold price bring down forex reserves

MANILA, Philippines — The country’s foreign exchange buffer declined marginally to $107.16 billion in September from $107.98 billion in August as the national government settled more maturing foreign obligations and the value of the central bank’s gold holdings declined, the Bangko Sentral ng Pilipinas (BSP) reported.

The central bank said the latest gross international reserves (GIR) level is still more than adequate as external liquidity buffer to help the country survive shocks such as the COVID-19 pandemic.

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

“The month-on-month decrease in the GIR level was attributed mainly to the debt service payment of the national government’s foreign currency debt obligations and downward adjustment in the value of the BSP’s gold holdings due to the decrease in the price of gold in the international market,” the BSP said.

Data showed the value of the central bank’s gold holdings slipped by 3.3 percent to $8.85 billion in September from $9.15 billion in August due to the decline in the price of gold.

Last August, the Philippines received 1.96 billion in special drawing rights (SDR) allocation worth $2.78 billion from the International Monetary Fund (IMF) to help boost the country’s foreign exchange buffer.

The multilateral lender launched the unprecedented $650-billion SDR allocation to provide additional liquidity to member countries, particularly as efforts are exerted to address the COVID-19 crisis.

IMF member countries can exchange their SDRs for hard currencies with other IMF members. These include the US dollar, euro, Chinese yuan, Japanese yen and the British pound.

As a result, the country’s SDR increased to $4 billion in August from $1.23 billion in July.

According to the BSP, the GIR level as of end-September is equivalent to around 10.8 months’ worth of imports of goods and payments of services and primary income. It is also about 7.6 times the country’s short-term external debt based on original maturity and 5.2 times based on residual maturity.

The Philippines has been building up its foreign exchange buffer, hitting a record $110.12 billion last December, as the government borrowed more from foreign creditors to finance its COVID-19 response measures.

The BSP usually acts to smoothen the volatility or sharp fluctuations in the foreign exchange market using the buffer. The peso has been depreciating this year as the US Federal Reserve has turned hawkish and is looking at reducing its bond buying program.

After appreciating by a little over five percent to close at 48.023 to $1 in 2020 from 50.635 to $1 in 2019, the peso has emerged as one of the weakest currencies in the region as it continues to range between 50 and 51 to $1.

Based on its official target, the BSP sees a record GIR of $114 billion instead of $115 billion this year and another all-time high of $115 billion instead of $117 billion next year.