By LEE CHIPONGIAN
There are two easy ways to determine the value of our local currency: The exchange rate and the reserves held by the central bank.
The exchange rate in the Philippines is expressed as the value of the 1-Piso against the US Dollar. In June, based on Bangko Sentral ng Pilipinas (BSP) data, the exchange rate averaged at P51.80:$1 (the spot market peaked at P52.88 mid-March). The peso has been appreciating since June 20, the day the BSP’s Monetary Board decided to pause on its easing mode after cutting benchmark rates by 25 basis points (bps) on May 9, and followed it up with a 200 bps reduction in banks’ reserve requirement ratio, releasing almost P200 billion of fresh liquidity into the financial system. Part of this liquidity was used to purchase US Dollars, thus affecting its supply and demand, leading to a stronger currency.
The exchange rate is the “price of a unit of foreign currency in terms of the domestic currency” and it is used to compare prices of goods, services, and assets in different currencies. It affects price movements since, as explained by the BSP, the exchange rate tends to directly affect domestic prices of imported goods and services.
Inflation and the exchange rate matter when we’re talking about the purchasing power of the peso (PPP) as it relates to price stability, which is the BSP’s prime mandate. For the month of May, the PPP or the real value of the 1-Piso has dropped to 0.83 compared to 0.86 same time in 2018. The inflation rate has been declining since September-October 2018 when it reached a peak of 6.7 percent. Monetary and non-monetary measures helped bring price pressures down and by February this year, inflation was back to below five percent but still on the high side of the 2-4 percent government target band. By May, the inflation year-to-date average was at 3.6 percent.
The BSP has a US dollar stock in the amount of$85 billion as of end-May. It is the highest reserves in history. As a factor to determine the value of the 1-Piso, the record-level buffer makes the 1-Piso well-protected against speculative attacks. The BSP uses the gross international reserves to keep the peso where it wants it to be and has power to intervene in the free-flowing and market-determined exchange market if the peso is under fire by selling US dollars to temper its volatility.
Foreign exchange inflows from remittances, foreign direct investments, receipts from the business process outsourcing and exports’ sectors, as well as stable US dollar reserves, provide support for the local currency.
For now, the value of the peso as it relates to the foreign foreign exchange buffers, which remain large, is stable, particularly if one takes into consideration that the external debt ratio to GDP is low. And, based on other indicators, both the government and private sector have enough foreign exchange to pay for their obligations.