Angelo Taningco
Economist, Treasury Group
Philippines’ gross international reserves (GIR) fell for the second-consecutive month in February, settling at $80.6 billion by month-end compared to the previous month’s $81.2 billion. GIR’s monthly decline was a result of the BSP’s foreign exchange operations—part of which were aimed at tempering USD/PHP volatility—as well as the price of gold in the world market moving downward. Similarly, net international reserves (NIR) amounted to $80.6 billion at end-February, likewise incurring a $0.6 billion month-on-month (mom) drop.
Despite foreign reserves being down last month, both import cover and short-term external debt cover were steady at 8.2 months and 586.4%, respectively. We still find the stock of foreign reserves to be more than adequate in terms of meeting the country’s import requirements and debt obligations as they are above internationally-accepted benchmarks of 3 months for imports and the Greenspan-Guidotti rule of 100% for short-term external debt. We do not think the GIR will continually fall to below $80 billion as the USD/PHP market volatility appears to have been mitigated and the international gold price is on the rise, thus far. We reiterate our end-2018 GIR forecast of $81 billion.
However, the fall in foreign reserves during February tells us that the country’s balance of payments (BOP) will probably register a deficit position for the month. In fact, we calculated February’s BOP deficit at $413 million. Such news, which is expected to come out on 19 March, could lead the market to exert depreciation pressure on the Philippine peso. We think the BOP deficit has contributed to peso depreciation last month.
Our estimate of the cumulative BOP deficit spanning the first two months of the year is $944 million; this is already close to the central bank’s 2018 BOP deficit projection of $1 billion and our full-year forecast of $1.2 billion. We think the widening of the cumulative BOP deficit position was partly the reason for the peso to incur the sharpest depreciation year-to-date among Asian currencies. We, however, maintain our 2018 BOP deficit forecast—which we projected to be equivalent to −0.3% of GDP—on the view that future peso depreciation pressures will be cushioned by foreign investments, overseas Filipinos’ remittances, and export proceeds of business process outsourcing, manufacturing, and tourism sectors. Against this backdrop, we still keep our end-2018 USD/PHP forecast of 52.00.
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