Peso to start recovery in October – Guinigundo

BSP reactivates FX hedging facility

The expected inflows in October plus the reactivation of a foreign exchange (FX) hedging facility will prop up the local currency vis-à-vis the US dollar in the next weeks, according to a central bank official.

"By October, we should be seeing more inflows and therefore strengthening of the peso so those who bought dollars earlier and did not need them immediately may have to start unloading some of them,” said BSP Deputy Governor Diwa C. Guinigundo.

“This is one of the lessons we learned in our previous experience in implementing CRPP (Currency Risk Protection Program),” he added.

The BSP on September 7 announced that it has reactivated the non-deliverable forward (NDF) hedging facility or the CRPP to soothe demand pressures in the FX spot market from borrowers looking to hedge against future exposures and protection from further peso depreciation.

In a statement over the weekend, the BSP said the Monetary Board has approved last week an “enhanced” and updated CRPP guidelines.

BSP Governor Nestor A. Espenilla Jr. has said that they are studying more FX reforms but the timing is crucial amid a volatile exchange rate market. He also said that after reactivation of the CRPP, they are preparing “other tools” to discourage FX speculation which leads to excessive exchange rate volatility.

An unrestrained FX movement is one of the recognized potential price pressures by the BSP and they have been closely monitoring the continued weakening of the peso and its impact on inflation expectations which have remained elevated.

But, since the peso remains flexible and marketdetermined, Espenilla said this has allowed them to conduct independent monetary policy focused on domestic conditions.

The BSP will issue separate guidelines on the terms, conditions and the reporting requirements of the CRPP facility.

The BSP said obligations eligible under the CRPP facility are the unhedged foreign currency obligations in amounts of not less than $50,000 that are current and outstanding as of the date of application. These include: Short-term trade-related loans; medium/long-term trade-related foreign currency deposit unit/regular banking loans with payments maturing within 90 days; short-term trade-related borrowings of oil companies from offshore banking units; and US dollar trust receipts.

“To facilitate the transactions under the CRPP facility, the BSP provides various regulatory relief,” said the BSP. For example, exposures under the CRPP facility will not have NDF position limits.

“Moreover, reduced market risk capital charges will be applied for net open positions for NDFs under this facility. Universal banks/commercial banks also do not need additional derivatives authority since transactions under the CRPP are considered generally authorized de-

rivatives activities,” the BSP explained.

In other words, the CRPP should calm panicking corporate borrowers with substantial FX exposures since the hedging facility will lessen or eliminate FX risks. In an NDF contract, only the net difference between the contracted forward rate and the spot rate will be settled in pesos upon maturity of the contract. The maximum tenor is 90 days with option to re-avail.

The peso fell to a 13-year low last week past 154:$1. It still hovered at that level, closing at 153.97 on Friday. Since January this year, the peso’s monthly average has depreciated from 150.50 to 152.06 by March, 153 by June and 153.43 by August, based on BSP data.

Guinigundo said once capital starts flowing — sustained and in large volumes — they could expect improved market sentiment on the peso. Traditionally, inflows stream faster at the tail end of the third quarter into the fourth quarter. These are seasonal inflows, like the higher remittances from overseas Filipino workers (OFWs) to their loved ones during the Christmas holidays, and tourism receipts.

The CRPP will be available to eligible borrowers via the banks. The BSP first implemented the facility in 1997 until 2009 and it has gone through several revisions. Theoretically, the central bank never really deactivated the CRPP but that it was not in use because the peso was stable with an upward bias, said Guinigundo.