GIR dips anew, sets another 7-year low

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In January this year, the GIR registered at $81.22 billion and was enough to cover for 7.7 months of imports

The country’s foreign currency buffer, or the gross international reserves (GIR) stood at only $75.16 billion in September, the Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Gunigundo announced on Friday.

This was $5.8 billion lower compared to the same month last year while similarly down by $2.77 billion from the previous $77.93 billion reported in August. This also represents anew a seven-year low from the $71.88 billion in July 2011.

The currency reserves, a measure of the country’s capacity to pay for maturing foreign loans or finance imports such as oil or even dairy, have steadily diminished since December last year while only breaking away the pattern in August.

In January this year, the GIR registered at $81.22 billion and was enough to cover for 7.7 months of imports. But with the sustained decline, the reserves fell to cover only 6.8 months of imports.

According to the BSP, the steady deterioration of dollar reserves was mainly driven by outflows arising from its foreign exchange operations, payments made by the national government (NG) for its forex obligations as well as adjustments in the value of its gold holdings.

The central bank noted however, that the decline was partially tempered by the NG’s net foreign currency deposits.

Also, the current gold holdings of the BSP exhibited further reduction since end-March this year and settled at only $7.57 billion from August’s $7.62 billion.

APAC chief economist Rajiv Biswas at the IHS Markit commented that while the Philippines’ current GIR remains acceptable, its steady diminution should be a concern.

“While this level of FX reserves is still very prudent and well above the three months import cover considered a critical threshold, the further gradual erosion of FX reserves could become a risk,” Biswas said.

“If FX reserves drop too low, it could be perceived by global investors as a signal of external account vulnerability, particularly in an environment where many emerging markets currencies are already under pressure and there have been portfolio capital outflows out of some emerging markets,” he added.

On the other hand, Sun Life of Canada Philippines Inc. chief investment officer Michael Enriquez said that this steady decline was expected.

“I believe it’s a result of BSP defending the [peso], foreign selling of equities and lower supply of dollars from remittances,” Enriquez explained.

The BSP does not target a particular exchange rate but enters and exits the so-called foreign exchange market to buy or sell dollars as and when required. It sells via conduit banks some of its dollar holdings and by this measure effectively makes the peso expensive.

Union Bank of the Philippines chief economist Carlo Asuncion said the weakening of peso could be a driver to the decline. He noted, however, that “peso seems to have stabilized between P54.20 to P54.30” with the recent lower-than expected inflation.

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