FOREIGN-EXCHANGE reserves—or gross international reserves (GIR), as most commonly called in the Philippines—are assets held by the Bangko Sentral ng Pilipinas (BSP) not denominated in Philippine pesos. The foreign-currency component is primarily US dollars, but it can also be other currencies.
When reporting the total GIR, most recently at a value of $80.76 billion, media and politicians—especially politicians—tend to think of it as a petty cash kept in a metal box. But $70.78 billion of the total amount are investment placements, such as ownership of other government’s debt. Gold holdings, both physical and paper, amount to $7.4 billion, and physical foreign currency is $980 million.
Foreign currency is collected by the BSP as it exchanges Philippine pesos for the foreign currency when money comes in from remittances, tourism receipts, export earnings and the like. The BSP also exchanges the foreign currency for pesos as importers pay for goods and other purposes requiring the public and private sector to use foreign currency. The GIR is also used by the BSP to buy and sell the peso to keep the foreign-exchange rate stable.
Because the BSP is a quasi-government agency, there are calls that the GIR should be used for other purposes, such as government spending. But that money does not belong to the government and must be kept away from the hands of politicians. When politicians start playing with the central bank functions, what follows are usually economic disasters, like what happened in Venezuela.
Our GIR has been steady at around $80 billion since 2012, but it was not always that way. The GIR stayed at around $40 billion from 1996 to 2006, when it started increasing. It was almost a straight-line trend until 2013.
Malaysia has had problems with maintaining the stability of its GIR since 1997. Its policy of trying to keep an artificial hold on the exchange rate of the Malaysian ringgit at the level of 3.8 to one dollar has forced the Bank Negara Malaysia to deplete GIR to support the currency. It is happening again, as Malaysia’s GIR is poised to fall below the desired level of $100 billion. By doing the same thing in 2008, it caused its reserves to fall from $90 billion to $50 billion in two years.
Any government can try to suppress free-market determined prices. But if you do this, you better have the currency ammunition to back up your actions.
Despite spending about $20 billion in currency support, Malaysia failed to arrest the ringgit’s depreciation last year, which saw the worst decrease among Southeast Asian currencies. Partly as a result, Malaysian government debt is considered more risky than either Thailand or the Philippines.
The probability of an increasingly strong US dollar in the months to come requires the complete independence of the BSP. Trying to control the currency-exchange rate is more of a political decision than an economic one. What is economically crucial is that the movement of the peso be gradual and not volatile. Unlike in Malaysia, the BSP has the situation under proper management without depleting our currency reserves.
Image credits: jimbo Albano
1 comment
But that money does not belong to the government and must be kept away from the hands of politicians.- Completely agree. The BSP is doing a great job and should remain independent from these politicians.