MOST analysts knew foreign capital flows to the Philippines this year were to be substantially higher than last, but have never really thought how large this was likely to be till on Wednesday when the International Monetary Fund (IMF) said the gross international reserves or GIR will likely hit $78.4 billion.
That much foreign-exchange reserves, useful as buffer for maturing foreign debt and as ready cash for critical imports as oil, capital equipment or even dairy products, represent a 25-percent jump over last year’s total haul of only $62.9 billion.
The continued expansion supports analysts’ forecasts that foreign capital from weakened developed economies will gravitate toward emerging markets in the region, the Philippines among them.
The IMF forecast is more aggressive than that earlier revealed by Bangko Sentral ng Pilipinas (BSP) Gov. Amando M. Tetangco Jr. who said the foreign-exchange reserves were to end the year at $68 billion to $70 billion.
The IMF forecast indicates sustained growth in foreign-exchange reserves by some $1.3 billion a month over a 12-month stretch, which is not very encouraging because in January this year, the reserves grew by only $500 million to $63.6 billion.
Worth noting, however, is that the forecast of fatter dollar reserves for the Philippines this year anticipates frequent forays by the BSP in the forex market by buying as much of the foreign liquidity coming in, boosting the value of the local currency, the peso, in the process.
In buying dollars, the BSP effectively supports the peso and strengthens its value. This sits well with economists at the British-owned lender HSBC, for instance, who said the exchange rate could be as strong as P35.50 per US dollar by year’s end.
“[IMF] directors underscored the need for an appropriate mix of policy tools to manage capital inflows, while facilitating productive use of these inflows.
“They supported the central bank’s policy of allowing the exchange rate to adjust to market pressures and limiting intervention to smoothing operations.
“With the exchange rate broadly in line with fundamentals and reserves comfortable, greater exchange-rate flexibility could be considered in response to additional inflows.
“Directors took note of the authorities’ intention to further liberalize foreign-exchange regulations and avoid capital controls,” the IMF said on Wednesday when it released the country’s PIN or public information notice.
The PIN results from a fiscal and monetary sector review by a visiting team of IMF economists in December last year.
An aggressive expansion in foreign exchange reserves betray a fairly high level of confidence on the part of the BSP that inflation, which could result from uncontrolled growth in peso liquidity resulting from the purchase of dollars, could remain within the target range of 3 percent to 5 percent this year the purchase of dollars notwithstanding.
One can argue on this basis that the much-anticipated adjustment in the policy rates of the BSP may not happen as early as at the next meeting of the Monetary Board early in May as Standard Chartered Bank said but later in the year, probably around the third or fourth quarter.
However, the IMF also said the following: “[IMF] directors noted that monetary policy had succeeded in keeping inflation low while fostering the recovery, and welcomed the gradual unwinding of liquidity support. Given a potential buildup of price pressures in the near term, they encouraged the authorities to stand ready to tighten the monetary stance to head off inflation risks.”
Saturday, 5 March 2011