The Philippine peso has slid nearly 8% against the dollar this year, hitting a new low of 64.200 to a dollar on Tuesday, making it Asia’s worst performer so far in October. Elevated energy prices weigh on the nation, which relies heavily on imports for fuel supplies. The Philippines has taken steps to cushion the impact of the Middle East crisis, including a surprise 50-basis-point hike this month to rein in inflation.
Authorities may consider reducing the amount of greenback banks can hold in excess of their dollar liabilities to increase the supply of US currency in the market. “It’s a possibility,” said Paul Favila, Citigroup Inc.’s country officer in the Philippines. Such a move would help curb speculation. However, “the real issue lies in the fact that we are overly reliant on imports while actual commodity prices have gone up.” BSP securities are monetary instruments issued by the central bank to influence the amount of money circulating in the financial system.
Issuing larger volumes of its own debt securities and other short-term tools such as term-deposit facility allows the central bank to absorb more cash. The BSP may intervene more in the spot market by selling dollars out of the country’s foreign exchange reserves. The nation has already deployed some of its foreign reserves to limit the peso’s decline.
Alongside spot intervention, it could actively use derivatives to help shape expectations about future exchange rates, particularly if pressure is concentrated in the forward market. The central bank can signal more strongly that it considers the exchange-rate moves excessive and that it stands ready to intervene. Monetary authorities have resorted to this measure several times under previous administrations.
This eliminates the need to actually dip into the dollar reserves. President Ferdinand Marcos Jr. on Wednesday pledged to defend the peso “as hard as we possibly can.” Monetary authorities can push for fiscal measures to improve market sentiment. If the Department of Finance, headed by Frederick Go who also sits as a member of the central bank’s Monetary Board, can show that fiscal gap and debt will be contained, it can potentially ease pressure on the BSP to raise rates aggressively. “The government needs to contain the fallout from the weakening peso and pursue both monetary and non-monetary measures to restore investor confidence,” said Jonathan Ravelas, a senior adviser at Reyes Tacandong & Co. in Manila.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing