BSP ‘in control’ of peso exchange rate

Espenilla assures

The central bank has a firm “control” of the exchange rate market and the peso at R51:$1 will gradually adjust to market conditions which are mostly global issues, Bangko Sentral ng Pilipinas (BSP) Nestor A. Espenilla Jr. assured yesterday.

“We allow the peso to adjust moderately and gradually but I assure you, the BSP has a firm control of the exchange rate,” Espenilla told a media forum by the Economic Journalists Association of the Philippines. “We continue to gain some of the price competitiveness we have lost in recent years.”

At P51 level, Espenilla said the peso is backed by strong fundamentals and that the BSP has adequate reserves to lend support to the exchange rate.

The BSP chief said he remains confident that there is no free fall situation here, that macro fundamentals as indicated by the inflation path is firmly under control, the economy grows robustly, the dollar reserves are ample, public sector deficit is contained, external debt position is very low or just 24 percent of GDP from a peak of 60 percent in 2005.

Espenilla said that the condition today is vastly different from that of 2005, about the time the peso was in the same range. He also stressed that then, the Philippines’ sovereign issues are considered junk bonds whereas now it is investment grade – “and definitely we are not in a foreign exchange crisis.”

Espenilla is still not overly worried about speculative attacks on the peso as these are all part of a freely-floating exchange rate market and helps banks, corporates and traders plan for their least-cost borrowing agenda.

“In any healthy financial markets … and part of price discovery mechanism … it’s a constant battle to be able to maintain orderly situation,” said Espenilla. However the market-determined exchange market is better than a fixed peso rate as it leads to more complications if the market thinks the exchange rate is permanent. The banking system is more than capable of addressing the corporates’ peso requirements, he said.

“Some volatility is healthy,” Espenilla added, that it is part of the element of foreign exchange risk, along with interest rate risk.