BSP eyes changes in banks’ net FX position

The Bangko Sentral ng Pilipinas (BSP) is reviewing banks’ allowable open foreign exchange (FX) position that will impact on their net overbought/oversold transactions of FX purchases.

BSP Governor Nestor A. Espenilla Jr. said when to do this – any revisions to the current limit on net FX position – would have to be carefully considered. These changes could mean removing the limit of banks’ overbought/oversold FX position.

“We’re studying that as part of reforms but this one (banks’ net FX position) we also have to time,” Espenilla said Friday.

Espenilla remarked that all things considered – with the exchange rate volatility and further reviews to FX policy liberalizaton – tweaking banks’ allowable open FX position may encounter much opposition from the market.

“We need timing (to effect changes),” he added. The peso has depreciated by six percent based on the 2017 average of 150.39 to the US dollar versus the current average of 153.44 as of July 27.

Banks' allowable open FX position – either overbought or oversold – is 20 percent of their unimpaired capital or $50 million, whichever is lower. This has been in place since 2007.

There has not been any change to the limit and the BSP may be studying market-changing measures such as lifting the cap in the net FX position.

Espenilla said they are studying more FX reforms but the timing is crucial amid a volatile exchange rate market. Higher US interest rates which are draining liquidity from emerging markets such as the Philippines is another consideration, as well as its effect on domestic liquidity and inflation.

In 2010, when the peso was at the 142- 143 level, way below the 145-146 assumptions of the BSP, the central bank thought of raising banks’ dollar trading limit to $100 million from $50 million, which will lead to the peso depreciation.

At the time, raising the overbought and oversold limit will effectively expand the FX market. The overbought limit refers to the amount of dollars that banks can buy for their own account that they can trade.

With the peso closing in on the 154level, the BSP has been increasingly concerned on the potential price pressures of excessive exchange rate volatility.

During last week’s first BSP byinvitation only chat with market and financial analysts, Espenilla said that while economic fundamentals are “solid and healthy” they are closely watching out for excessive FX volatility.

“We recognize that sustained pressures on the peso could adversely affect inflation expectations. Further, some demand side pressures may already be feeding into inflation considering the sustained strong economic growth. These warrant a firm and timely monetary response. We are therefore considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August,” he said.