The GIR is equivalent to more than a year’s worth of imports of goods and services, indicating that the Philippines can survive an episode of a “sudden stop” for a whole calendar year.
The country’s gross international reserves (GIR) level settled at $106.98 billion as of end-May 2021 from the end-April 2021 GIR level of $107.71 billion, data from the Bangko Sentral ng Pilipinas showed.
Benjamin Diokno, BSP Governor, said the latest GIR level represents “a more than adequate external liquidity buffer equivalent to 12.2 months’ worth of imports of goods and payments of services and primary income.
Moreover, Diokno said it is also about 7.4 times the country’s short-term external debt based on original maturity and 5.1 times based on residual maturity.
“The month-on-month decrease in the GIR level reflected outflows mainly from the foreign currency withdrawals of the National Government (NG) from its deposits with the BSP to pay its foreign currency debt obligations and various expenditures,” Diokno said.
He explained that these outflows were partly offset by the inflows from the BSP’s foreign exchange operations and income from its investments abroad, and an upward adjustment in the value of the BSP’s gold holdings due to the increase in the price of gold in the international market.
Nicholas Mapa, ING Bank Philippines senior economist, said it dipped slightly as “the currency weathered a depreciation spell linked to heavy foreign selling in the local equity market.”
“Foreign investors dumped PH shares with the PSE touching its lowest level for the year in mid-May, weighing on the currency and likely calling in the BSP to stem the sharp fluctuation in the spot market. The sell-off however was short-lived with the local equity market rebounding niftily to close out the month and continue its rally into June,” Mapa said.
The country’s GIR represents the first line of defense of monetary authorities against possible speculative attacks on the currency and measures the BSP’s ability to supply foreign currency during times of crisis, Mapa explained.
“As it stands, the current level of GIR towers over previous defenses erected in the past with the BSP strategically building up its stores of reserves over the past few years,” he said.
Mapa also noted that the GIR is also equivalent to more than a year’s worth of imports of goods and services, indicating that the Philippines can survive an episode of a “sudden stop” for a whole calendar year.
“More importantly, being the country’s 1st line of defense, the current level of GIR can cover short-term payments of external debt up to 7.4 times over, limiting the chances of a default on any of the country’s short term debt obligations,” Mapa said.
On top of the GIR cache, Mapa noted the BSP can also tap other facilities (IMF, Changmai initiative etc, ROP bond issuance) to augment foreign currency liquidity onshore during these “sudden stop” doomsday episodes
In the aftermath of the Asian financial crisis, previously proud Asian tigers lay battered by the sharp swings in the global currency market with the lessons from the AFC ringing clear and the marching orders simple: build your reserves.
Mapa said Malaysia, Thailand, Indonesia and the Philippines not only rebuilt their reserves but even erected great walls of foreign currency to ensure that currency runs and the potential destabilizing episodes of the past would never happen again.
“For the Philippines, the central bank was able to build up reserves from a low of roughly $8 billion to the level we now see today. The defense built up after the AFC proved to be useful during the series of crises that followed over the next few decades with the GFC and the Fed’s taper tantrum all testing the great walls of GIR built precisely to insulate their respective economies,” Mapa said.
Asean central banks remain wary of a potential Taper 2 sequel with investors’ focus shifting squarely on the timing and pace of the Fed’s eventual taper and the eventuality of a Fed rate hike.
“With the Fed’s Powell currently signaling that policy support will likely be around for a tad bit longer, it looks like the defenses will hold for now but we have noted how central banks like the BSP have strategically been topping up their GIR wall one brick at a time until the impending storm while managing the recovery from the pandemic,” Mapa said. — Jimmy C. Calapati
