Forex buffer hits 12-month high of $108.9 billion

MANILA, Philippines — The country’s foreign exchange buffer inched up by 1.1 percent to a 12-month high of $108.89 billion in end-December, the Bangko Sentral ng Pilipinas (BSP) said.

This was the highest gross international reserves (GIR) level since hitting an all-time high of $110.12 billion in December 2020.

However, the buffer fell below the lowered $111 billion GIR target for 2021. The Monetary Board also lowered the GIR target for 2022 to $112 billion.

BSP Governor Benjamin Diokno said the higher end-December GIR reflected mainly the national government’s net foreign currency deposits with the central bank as it continues to borrow more to fund its COVID response measures.

Diokno also cited the upward adjustment in the value of the BSP’s gold holdings due to the increase in the price of gold in the international market.

The value of the central bank’s gold holdings increased by 3.6 percent to $9.33 billion in December last year.

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

The Philippines has been borrowing heavily from both offshore and onshore creditors to finance its widening budget shortfall amid the pandemic.

In August last year, the Philippines received 1.96 billion special drawing rights (SDR) allocation worth $2.78 billion from the International Monetary Fund, helping 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 during this period as efforts are exerted to address the COVID crisis.

Diokno said the latest GIR level represents a more than adequate external liquidity buffer equivalent to 10.3 months’ worth of imports of goods and payments of services and primary income.

Moreover, Diokno said the buffer is also about 8.8 times the country’s short-term external debt based on original maturity and 5.9 times based on residual maturity.

Rizal Commercial Banking Corp. chief economist Michael Ricafort traced the increase in the GIR level last month to the three percent rise in world gold price as well as the strong inflows of dollar remittances during the Christmas holidays.

Ricafort said the GIR level was also boosted by strong earnings from the business process outsourcing sector and the entry of proceeds from fund-raising activities.

“All of these effectively overshadowed the recent widening of the country’s debt deficit to record levels amid record high imports recently, with measures to further reopen the economy and elevated prices of imported oil and other global commodities,” Ricafort said.

The RCBC economist said the near-record-high GIR level would continue to provide greater cushion or support for the peso exchange rate against any speculative attacks.

For the coming months, Ricafort said the GIR could still post new record highs amid the continued growth in the country’s structural inflows, all of which are among record highs recently and considered bright spots for the economy.