BSP sees no need to support peso

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Written by Jennibeth Cabrera

Monday, 06 November 2006

According to the Bangko Sentral ng Pilipinas (BSP), it is unnecessary for monetary authorities at the moment to intercede in the foreign exchange market because the instability of the Philippine peso is within acceptable levels and still comparable with movements of other currencies in the region.

BSP Governor Amando Tetangco Jr. said that their (BSP) policy is to allow the market to determine the (exchange) rate, although they can make their presence felt in the market from time to time to smoothen strong fluctuations but the peso’s volatility is still comparable with the others. He also noted that the year-to-date volatility of the peso as of Friday, October 20, stood at only 1.8 percent, lower than the 2 percent of the Indonesian rupiah and of the Thai baht. The Singaporean dollar and the Korean won hit an even lower volatility rate of 1.4 percent.

The volatility of a currency determines how aggressive it fluctuates from what is computed as the usual foreign exchange rate. It is one of the things most strictly monitored by central banks, for it deeply influences the competitiveness of a country’s business atmosphere. If a currency has high volatility, it would be difficult for businesses, especially exporters and those that import raw materials for their operations, to manage their cost and income

The peso hit 6 percent as of Friday, when the peso closed at 50.105 to the dollar thus making the rate of change at the lower end of the 5.7- to 9.9-percent range in the region while the rate of change for Thai baht was at 9.9 percent; Indonesian rupiah, 7.3 percent; Singaporean dollar, 5.9 percent and Korean won, 5.7 percent.

In September, the peso’s close of 50.21 to US dollar was far stronger than the 56.01 posted in the same month last year.

Some members of the business sector was incited to believe that the BSP should take on some market inventory to steer clear of the rapid strengthening of the local currency to the disadvantage of the exporters because of the peso’s appreciation, marked by the recent drop to the 49-to-a-dollar level. But the BSP so far does not see any sufficient reason to intervene in the market.

Tetangco said that competitiveness is dictated not largely by the currency, but by many other factors like level of infrastructure, availability of trained labor and access to credit, principally by micro, small and medium enterprises. He also admitted that there may probably be further mounting pressure of the projected increase in inflows from foreign investments.

He said that strengthening of the peso would be achieved by improving macroeconomic indicators, such as economic development, reduction of inflation and declining budget debit of the government for it would draw investment inflows to come in.

The central bank governor reiterated though that the BSP would only intercede in the movement of the exchange rate if fluctuations were deemed to have reached higher-than-average levels.