MANILA -- Some people have questioned the market-determined exchange rate policy of the Bangko Sentral ng Pilipinas (BSP), especially now that the local unit has been posting weakness against the US dollar.
However, monetary officials have repeatedly said that the current exchange rate policy of the central bank is the way to go since it only shows the resiliency of the local unit.
After Monday’s trading, the peso ended at 53.38 to the greenback, slightly better than its 53.425 close Friday last week.
Monetary and fiscal officials said the peso’s depreciation is not a sign of weakness. Instead, it shows how the local currency is coping with the volatilities as a result of developments here and abroad.
This year, the peso has lost over five percent to a dollar, due mainly to impact of external developments such as the expected additional hikes in the Federal Reserve rates and trade tensions between major economies.
BSP Governor Nestor A. Espenilla Jr. said the central bank deliberately keeps a flexible exchange rate policy to protect the economy and sustain its resiliency.
He said pegging the peso to a certain level like PHP50 to a dollar is not a good idea.
“That's a very dangerous path for a small open economy like the Philippines that is constantly being tossed and buffeted by the heavy winds of global developments,” he stressed.
The central bank chief explained that “if we commit to something stubbornly against very strong pressures then we will end up losing our reserves.”
“We'll end up borrowing more to protect a certain lifestyle,” he said.
BSP data show that as of end-July 2018 the country’s gross international reserves (GIR) amounts to USD76.89 billion.
This level of foreign exchange reserves is equivalent to 7.4 months’ worth of imports of goods, and payments of services and primary income. It is more than the ideally accepted level of foreign reserves, which is the equivalent of three months’ worth of imports of goods and payments of services.
Espenilla said that for businesses, a fixed exchange rate will encourage investors to borrow more abroad “because interest rates seem to be low.”
However, the central bank chief said this practice “creates a path of over-indebtedness.”
“For import, we want to consume imported because it looks very cheap but in the end it creates deficits,” he said.
Espenilla said Filipino exporters will also have a hard time.
“Our exporters will be going to have a difficult time growing their businesses if exchange rates are not able to adjust to shifting prices for example,” he said.
“So for many good reasons, we allow the peso to move in flexible manner. And that is one of the reasons why we continue to be in stable and resilient position today,” he added. (PNA)
