BSP seen to become more active in forex market

British banking giant HSBC sees the Bangko Sentral ng Pilipinas (BSP) intervening more in the foreign exchange market due to the undervaluation of the peso, foreign exchange volatility as well as speculative flows.

In its Asian FX Focus: PHP titled “Competing forces,” HSBC said the peso is the only currency in Asia that has weakened against the US dollar this year, even reaching its weakest level since 2006.

The investment bank said the BSP would have a greater responsibility in managing the volatility in the peso given the deterioration in the balance of payments (BOP) position of the Philippines.

It added the peso’s notable underperformance so far this year has been driven by a widening trade deficit as the strong domestic demand and a much needed government infrastructure program have led to a surge in imports.

“The good news is the peso’s woes are caused by economic strength and not vulnerabilities. The bad news is that the factors causing the currency’s weakness are unlikely to materially change in the near term,” it said.

It said import pressure is unlikely to abate but would pick up further in the third and fourth quarters as the government intends to raise infrastructure spending to 5.8 percent of gross domestic product by 2018 from 5.3 percent this year through the Build Build Build program.

The BSP now expects the Philippines to post its first current account (CA) deficit at $600 million for the first time since 2002.

HSBC noted the local currency has been more reliant on capital flows for supports but has been affected the persistent portfolio outflows as well as lackluster foreign direct investments (FDIs).

“With the Philippines’ current account tipping into negative territory, the peso has become increasingly reliant on the financial account for support. The problem, however, is that portfolio and FDI flows are harder to come by for the peso,” it said.

HSBC said the BSP would play a more important role in managing foreign exchange volatility.

“The BSP’s FX policy has mainly focused on smoothing volatility in the exchange rate and over the last couple of years the central bank has been successful in keeping the currency’s volatility well below that of its Asia peers. However, over the last few months volatility has picked up, contrary to the fall seen in other Asian currencies,” it said.

HSBC said the $700 million spot intervention by the BSP last June appears to be relatively in line with the central bank’s practice of smoothing volatility rather than trying to alter the direction and trend of the currency.

The British banking giant said it is maintaining its year-end forecast of 51 to $1.

“The main factors, therefore, which we believe will support the peso and prevent USD-PHP ending 2017 above 51, are the BSP’s FX policy and a soft US dollar environment,” it said.

BSP Governor Nestor Espenilla Jr. earlier said the public should not “stress” over the weakness of the peso against the greenback as authorities are managing excess volatility.

“The approach of the BSP is to let the exchange rate reflect the underlying market conditions. As far as the BSP is concerned, we are there, we are managing that there is no excessive volatility,” Espenilla said.