BSP revives hedge scheme vs forex swings

The Bangko Sentral ng Pilipinas (BSP) is reviving the hedging facility for eligible companies with foreign exchange obligations, which was launched at the height of the Asian financial crisis more than two decades ago to calm the foreign exchange market.

After announcing it would dig deeper into its toolbox to defend the peso, BSP Governor Nestor Espenilla Jr. said the central bank is reactivating the currency rate risk protection program (CRPP) facility for “eligible corporates with foreign exchange obligations based on more liberalized rules.”

Espenilla said the central bank is taking strong immediate action using the full range of instruments in its toolkit in order to respond to the emerging threats to inflation and inflation expectations.

“The follow-through actions will also address other threats to higher inflation such as excessive exchange rate volatility not consistent with underlying macroeconomic fundamentals in order to ensure that inflation returns to its two to four percent target over the policy horizon,” he said.

The CRPP facility is a non-deliverable forward contract between the BSP and big banks with the foreign exchange obligations of bank clients as the underlying transaction.

Under the facility, the parties agree that on the maturity of the forward contract, only the net difference between the contracted forward rate and the market rate would be settled and paid in pesos.

The last availment for the CRPP facility was in 2009.

The peso continued to weaken amid the economy’s strong demand for dollars, shedding more than six percent since the start of the year. On Thursday, the peso sank to its lowest level in almost 13 years to close at 53.80 to $1.

At yesterday trading at the Bankers Association of the Philippines, the peso managed to improve by seven centavos to close at 53.73 to $1 from Thursday’s 53.8 to $1, ending a four-day losing streak. It opened weaker at 53.85 and strengthened momentarily to hit an intraday high of 53.61 and an intraday low of 53.975. Traders said the BSP was active to

smoothen the volatility in the market as volume increased to $956.9 million from $911.5 million last Thursday.

By reducing the risk of sharp movements in the prices of foreign currencies, foreign exchange hedging reduces cash flow uncertainties, improves financial decisionmaking and facilitates cash conservation and planning for capital needs.

Espenilla also issued a strong warning against speculators.

“In addition, the BSP will take all actions necessary to deal with speculative activity by market participants,” he said.

BSP Deputy Governor Diwa Guinigundo said the reactivation of the CRPP would address the fear of corporates and even the banks about future exchange rate movements.

“That should help stabilize the peso against the dollar,” Guinigundo said.

Meanwhile at the Philippine Stock Exchange (PSE), the main composite index pared down losses from previous sessions, but still ended in the red for a third consecutive day behind prevailing trade tariffs and emerging markets concerns.

Coming from a two-day beating in which it lost more than 100 points, the benchmark Philippine Stock Exchange index (PSEi) dropped 40.07 points, or 0.52 percent, to close at 7,598.64.

The broader All Shares index, meanwhile, retreated 5.24 points or 0.11 percent to settle at 4,656.42.

“Local shares dropped as China fell into bear market territory, US employment report came in weaker, and Japan was perceived to be the next target of trade tension. All eyes were on the impending US tariffs of $200 billion as China says it will retaliate,” said Luis Limlingan, Regina Capital Development Corp. business development head.

Jose Gabriel Perez of Papa Securities said foreign funds continued to exit the PSEi as net foreign selling amounted to P1.4 billion, the highest since the P1.5 billion recorded on Aug. 14.

Perez said it was also the third consecutive day that foreign selling surpassed the P1 billion mark.