Forex market remains restrictive, shallow despite reform – Espenilla

The country’s foreign exchange market remains restrictive, difficult, opaque and shallow despite nine waves of liberalization measures over the past decade, according to the Bangko Sentral ng Pilipinas.

BSP Governor Nestor Espenilla Jr. said authorities are pushing for key reforms to develop the local currency debt as well as foreign exchange markets to sustain the economy’s growth momentum.

Espenilla said he would strongly advocate for the liberalization of existing rules on foreign exchange transactions to make this a more risk-based but transparent system.

“Notwithstanding the waves of liberalization that the BSP has announced in the past, we recognize that the foreign exchange market today remains restrictive, difficult, opaque, shallow,” he added.

He explained the average foreign exchange transaction at the Philippine Dealing System (PDS) has increased to more than $1 billion from about $600 million after the BSP started collecting data from the money service businesses. “This is outrageous for transactions to be happening in the unregulated parallel markets. This has got to change. It is a throwback to the time when foreign exchange was scarce and reserves were meager and market confidence was very low,” Espenilla said.

The BSP has implemented nine waves of reforms on foreign exchange transactions since 2007, primarily aimed at rationalizing and facilitating stakeholders’ access to foreign exchange resources of the banking system for legitimate needs.

The reforms involved easing and simplification of policies on foreign exchange transactions, as well as streamlining documents and procedures for greater ease in transacting with the formal banking sector.

Foreign exchange liberalization measures are adopted based on conscious and well-calibrated approach, taking into consideration the prevailing conditions in the local and global economies.

“Today, it’s an entirely different picture. To preserve those kinds of rules in a market that is rapidly growing is to impede the growth of the market itself. It simply adds to cost of doing business and just creates a bigger and bigger black market,” he added.

The BSP chief explained key reforms to develop the local currency debt market and to reshape the financial system are crucial in sustaining the country’s sustained economic growth.

“Our growth cannot be just founded on lending by banks. As bank regulator, I know how unstable that situation can

be. Banks are inherently short-funded. To be funding these long-term assets creates strategic instability that is very uncomfortable for regulators,” he said.

External developments such as the normalization path being undertaken by the US Federal Reserve through a series of interest rate hikes, the decision of the United Kingdom to leave the European Union, among others have resulted in a volatile global financial market.

The peso has been flirting with the 51 to $1 due to both external and domestic headwinds. A weak peso favors certain sectors such as exporters, the business process outsourcing industry, and beneficiaries of dollar remittances from Filipinos abroad but makes imported fuel, raw materials and other capital goods more expensive.