Managing External Risk by Maintaining Adequate International ...
Transcript of Managing External Risk by Maintaining Adequate International ...
Pananalaping Matatag, Bansang Panatag
Managing External Risk by Maintaining Adequate International Reserves
December 9, 2010
Mr. Alphew T. ChengOfficer-in-Charge
Treasury Department
Pananalaping Matatag, Bansang Panatag
Outline
I. Introduction
II. The Purpose of Maintaining International Reserves
III. Reserve Adequacy
IV. Conclusion
Pananalaping Matatag, Bansang Panatag
R.A. 7653: The New Central Bank Act (1)
Section 65: International Reserves — In order tomaintain the international stability and convertibility ofthe Philippine peso, the Bangko Sentral shall maintaininternational reserves adequate to meet anyforeseeable net demands on the Bangko Sentral forforeign currencies.
In judging the adequacy of the international reserves,the Monetary Board shall be guided by the prospectivereceipts and payments of foreign exchange by thePhilippines…
Introduction / Purpose / Adequacy / Conclusion
Pananalaping Matatag, Bansang Panatag
R.A. 7653: The New Central Bank Act (2)
Section 66: Composition of the International Reserves – The international reserves of the Bangko Sentral may include but shall not be limited to the following assets.
(a) gold; and(b) Assets in foreign currencies in the form of: documents and
instruments customarily employed for the international transfer of funds; demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins.
The Monetary Board shall endeavor to hold the foreign exchange resources of the Bangko Sentral in freely convertible currencies…
Introduction / Purpose / Adequacy / Conclusion
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IMF Definition
Reserve assets are external assets that are readily available to and controlled by monetary authorities
• Does not include: • Claims from residents
• Illiquid investments
• Non-convertible currencies
Introduction / Purpose / Adequacy / Conclusion
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Reserve Composition
67%
18%
12%3%
Foreign Securities
Cash and Deposits
Gold
Others
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Transaction Motive of Holding Reserves
• R.A. 7653
– To meet any foreseeable net demands on the Bangko Sentral for foreign currencies
• FX obligations
• FX transactions
• NG requirements
Introduction / Purpose / Adequacy / Conclusion
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Insurance Motive of Holding Reserves
• R.A. 7653
– To maintain the international stability and convertibility of the Philippine peso
• IMF
– For direct financing of payments imbalances
– For indirectly regulating the magnitudes of such imbalances through intervention in exchange markets to affect the currency exchange rate
Introduction / Purpose / Adequacy / Conclusion
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Asian Crisis of 1997
-4
-2
0
2
4
6
8
10
12
14
16
1992 1993 1994 1995 1996 1997 1998 1999
GIR
Level (in $ b) Change
-40%
-30%
-20%
-10%
0%
10%
20%
0
5
10
15
20
25
30
35
40
45
19921993199419951996199719981999
USD/PHP
Level % Change
Introduction / Purpose / Adequacy / Conclusion
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Subprime Crisis of 2008
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009 2010
GIR Forwards
GIR & Forwards(in billion USD)
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
36
38
40
42
44
46
48
50
2006 2007 2008 2009 2010
P/$ % Change
USD/PHP
Introduction / Purpose / Adequacy / Conclusion
Pananalaping Matatag, Bansang Panatag
Precautionary Motive of Holding Reserves
• IMF WP/01/143: “Reserves in various ratios with other economic variables have turned out to be a useful crisis predictor”
• IMF SPR Departmental Paper dated 6/15/10: “External sector indicators perform the best in predicting past crises”
Introduction / Purpose / Adequacy / Conclusion
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Overall Vulnerability Index of the IMF
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Credit Ratings
• S&P: Reserves/(Imports + Interest Payments)
• Moody’s: Reserves/Short-term external debt
• Fitch: Liquid external assets/Liquid external liabilities
Introduction / Purpose / Adequacy / Conclusion
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Recent Upgrades in PHL Credit Ratings
• Moody’s 7/23/09 (B1 to Ba3):– “The upgrade was prompted by the relatively high
degree of resiliency exhibited by both the country’s financial system and external payments position in the face of the global financial and economic crisis.”
• S&P 11/12/10 (BB- to BB): – “We have upgraded the Philippines based on its
steadily improving external liquidity profile and underlying strengths of its external accounts.”
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Pananalaping Matatag, Bansang Panatag
Gross International Reserves
0
10
20
30
40
50
60
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
(in billion USD, as of end-October 2010)
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Balance of Payments
-4000
-2000
0
2000
4000
6000
8000
10000
12000
BOP(in million USD)
Current Account
Capital & Fin'l Account
Balance of Payments
Jan - Sept
2009 2010
Remittances 12,789 13,782
Growth rate (yoy) 4.2 7.8
Exports 27,649 38,298
Growth rate (yoy) (28.9) 38.5
Remittances & ExportsValue in US$ million; Growth rates in %
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Commonly-used Reserve Adequacy Measures
• Reserves equal to short-term external debt (Greenspan-Guidotti rule)
• Reserves equal to three or four months of imports
• Reserves equal to roughly 5-20 percent of M2
Source: US Department of Treasury, “The Adequacy of Foreign Exchange Reserves.”
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PHL GIR Ratios
GIR Ratio Benchmark end 1996 end 2007 Latest
ST Debt 1 1.6 3.0 5.6
Imports 3 to 4 mos. 4 7 12
M2 5% to 20% 35% 44% 60%
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Pananalaping Matatag, Bansang Panatag
GIR vs. External Debt(in billion USD, as of end-June 2010)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GIR External Debt
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Diminishing Marginal Utility of ReservesIMF SPR Departmental Paper dated 6/15/10:
Introduction / Purpose / Adequacy / Conclusion
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Costs of Holding Reserves
• Macroeconomic costs
– Opportunity Cost
– Inflation
• Financial Costs
– Sterilization Cost
– Exchange Rate Losses
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Chiang Mai Initiative Multilateralization (CMIM)
• Multilateral agreement among ASEAN+3 members totaling USD120 billion
• Took effect on 24 March 2010
• FX swap vs. local currency
• Up to USD11.38 billion available for the Philippines
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Regional ComparisonCountry GIR
(US$ Bio)GIR/GDP
GIR /ST Debt
Import Cover
GIR/M2
Philippines 57 23% 5.6 12 60%
Indonesia 92 11% 2.2 8 34%
Malaysia 105 48 % 3.1 8 31%
Thailand 171 50% 3.1 12 45%
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YTD FX Movements
Currency Volatility (SD/Ave)
Appreciation
PHP 2.45 5.60
IDR 1.58 4.74
MYR 3.29 9.28
THB 3.51 11.06
(as of 06 December 2010, in %)
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Conclusion
• Reserve accumulation is an important strategy to manage external risk
• The recent growth in the reserves will provide increased flexibility for the BSP to achieve its objectives
• The cost of holding reserves will be balanced against its benefits, as well as merits of other strategies
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Thank You