Forex buffer drops to $103.5 billion in May

MANILA, Philippines — The country’s foreign exchange buffer declined for the third straight month in May, hitting the lowest level in 21 months due to the drop in gold prices and the payment of more foreign obligations by the national government, according to the Bangko Sentral ng Pilipinas (BSP).

Preliminary data released by the BSP showed the gross international reserves (GIR) amounted to $103.53 billion in May, 1.8 percent lower than the revised $105.4 billion recorded in April.

This was the lowest since the $100.44 billion recorded in August 2020. The GIR is the sum of all foreign exchange flowing into the country and serves as buffer to ensure that it will not run out of foreign exchange that it can use in case of external shocks.

“The month-on-month decrease in the GIR level reflected mainly the national government’s foreign currency withdrawals from its deposits with the BSP to settle its foreign currency debt obligations and pay for its various expenditures,” the central bank said in a statement.

Further, the BSP said the downward adjustment in the value of its gold holdings due to the decrease in the price of gold in the international market contributed to the decline in the GIR.

Data showed the value of the central bank’s gold holdings decreased by 2.7 percent to $9.03 billion in end-May from $9.28 billion in end-April.

Despite the continued decline, the BSP said the latest GIR level represents a more than adequate external liquidity buffer equivalent to 9.1 months’ worth of imports of goods and payments of services and primary income.

The buffer, the central bank said, is also 6.6 times the country’s short-term external debt based on original maturity and 4.5 times based on residual maturity.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the decline in the country’s foreign exchange buffer was largely due to the 1.9 percent decline in the value of foreign investments of the Philippine government or residents to $87.9 billion amid increased volatility or sell-off in the global financial markets on the impact of the Russia-Ukraine war and the hawkish US Federal Reserve.

Ricafort also said the GIR declined amid the three percent drop in the global prices of gold.

“For the coming months, the country’s GIR could still increase and potentially post new record highs, especially after the May 2022 election month that could have temporarily slowed down some investment banking and other fund-raising activities by both the government and the private sector,” Ricafort said.

The economist also sees continued growth in the country’s structural inflows from remittances by overseas Filipino workers (OFWs), revenues from the business process outsourcing (BPO) sector, foreign tourism receipts as well as foreign direct investments (FDIs).

“Thus, still near record high GIR and still possibly reaching new record highs in the coming months could further strengthen the country’s external position, which is a key pillar for the country’s continued favorable credit ratings for the second straight year,” Ricafort said.

The BSP is expecting a smaller GIR of $108 billion this year and $109 billion for next year. The country’s foreign exchange buffer hit a record high of $110.12 billion in December 2020.