Bold FX reforms aim to support a flexible and market-determined exchange rate

THE Bangko Sentral ng Pilipinas ( BSP) recognizes that a flexible exchange rate is an integral part of its policy toolkit to maintain monetary stability and to ensure the sustainability of the balance of payments. Towards this end, the BSP undertakes foreign exchange ( FX) reforms to deepen the FX market to support a flexible and market- determined exchange rate. These reforms have three core elements: liberalizing the FX administrative requirements in the banking system, strengthening oversight over the non- bank parallel market, and working closely with market participants and industry associations for clearer governance arrangements that promote fair market conduct and price transparency.

The BSP continuously reviews the FX regulatory framework to keep it attuned with prevailing market conditions and responsive to the needs of a dynamic and expanding economy. Since 2007, the BSP has undertaken various liberalization measures to streamline documentary requirements, thereby reducing the cost of doing business. At the same time, reportorial, registration and monitoring remain in place to allow the BSP to continue to capture data for analysis of developments, policy review and crafting of appropriate measures and to address or mitigate the impact of large and volatile FX flows on key macroeconomic variables.

IMPACT OF FX REFORMS

A study conducted to assess the impact of the FX liberalization reforms on the Philippine economy showed that liberalization measures have: (a) helped mobilize FX resources to finance the requirements of the domestic economy; ( b) facilitated trade in goods and services, as well as non-trade transactions; (c) improved inflows of foreign portfolio investments; and (d) contributed to the steady rise in gross international reserves.

The study recognized the importance of the BSP’s vigilance in complementing the easing of FX rules with prudential regulations and market surveillance to promote and sustain investor confidence and market discipline, considering macroeconomic risks.

FUTURE DIRECTION

Further liberalization of the FX regulatory framework and the streamlining of procedures and requirements are expected to open up the economy and promote greater ease in the use of the FX resources of the banking system for legitimate needs.

Over the medium term, the BSP shall enhance governance mechanisms to improve transparency, market conduct and price discovery towards a more organized FX market.

The BSP will continue engaging stakeholders in drafting policy reforms to ensure that the evolving market needs are accordingly addressed.