PH needs to continue growing GIR, research says

DESPITE the increases in the country’s foreign exchange reserves in the past several years, the current level and the recent rate of growth may not still be good enough in the “new normal” global economy that requires an aggressive buildup of war chest against the volatility of foreign capital flows, a research from Bank of the Philippine Islands suggested.

A macro economic research paper written by a BPI team, lead by economist Emilio Neri Jr., raised concern that while the country’s gross international reserves (GIR) had been hitting new highs, the pace of growth had “almost unexplainably” slowed to about 6 percent last year, pulling back sharply from the momentum in the last two years. This allowed the peso to appreciate at a more dramatic pace. In 2010, the GIR surged by 41 percent and in 2011, by 25 percent.

The apparent change in tack by the BSP—slowing down its purchases of US dollars and allowing a rapid appreciation of the peso last year—could be in reaction to some harsh criticisms that the central bank was accumulating “too much dollars” at a huge cost, the research said.

An enlarged stock of US dollars also results in huge foreign exchange losses as the greenback has been depreciating vis-à-vis the peso.

“The Philippines needs to review the growth path and recent experience of its neighboring economies before it decides on the course it should take on its GIR policy,” the paper stated.

As of the end of January, the country’s GIR has reached $85.8 billion, equivalent to 12.3 months worth of imports of goods and payments of services and income. It was also equiva- lent to 10.7 times the country’s short-term external debt based on original maturity and 5.8 times based on residual maturity. BPI expects the GRI level to breach $100 billion this year.

“With the impending deluge of foreign funds which may threaten to swamp our financial markets and in line with our belief that the exchange rate will remain above the 40:$1 by the end of the year, we believe the BSP will take this opportunity to ramp up its efforts to shore up our GIR further,” it added.

The research said that a cursory glance of the GIR figures might imply the current level was adequate. It, however, noted that the current tally of external debt did not capture off-book or contingent liabilities such as derivatives, which could surprise markets.

When measuring the GIR as a ratio of gross domestic product, the research said the Philippine ratio remained a far cry from the those of Hong Kong and Singapore.

The BPI research sees a 6-percent GIR growth being sustained this year on the back of consumption and government spending. But to achieve a more inclusive and higher growth trajectory, it said substantial investments in sectors other than property and mall development must be made in the coming months.

“In doing so, the level of infrastructure will develop and job creation will be more directed toward sectors such as manufacturing and agriculture, rounding-out the Philippines growth picture, which presently revolves around the services sector,” the research said.

The BPI research said the Philippines would want to avoid the current predicament this Southeast Asian peer was facing today.