Making use of the excess dollar reserves

I hope the Philippine Central Bank (BSP) decides to do something quick to make use of the excessive dollar reserves it now has. How about encouraging Philippine companies invest abroad in countries like Australia? What do you think?


PH dollar reserves seen as ‘excessive’


Wednesday, October 3rd, 2012

The country’s foreign exchange reserves, which recently breached the $80-billion mark, are seen to have hit an “excessive and costly” level.

According to Johanna Chua, chief economist for Asia Pacific at Citi, some indicators would show that the gross international reserves (GIR) of the Philippines are already the second-highest in the region, following China’s, particularly in terms of proportion to certain foreign liabilities of the country.

The accumulation of reserves has traditionally been viewed positively as these serve as buffer in times of external shocks, such as global recession. For instance, if a global crisis would cause emerging-market currencies to sharply depreciate, the BSP could use the reserved dollars to buy pesos and prevent significant fall of the local currency.

However, Chua said foreign-exchange accumulation entails costs, and so having more than enough is imprudent.

“The reserves are almost excessive, if not already excessive,” Chua said in a press briefing on Tuesday.

Chua said that by accumulating dollars—with the BSP shelling out pesos to buy the foreign currencies—the central bank infuses additional liquidity into the economy. Consequently, it will have to accept higher amounts of deposits from banks and spend more on interest payments, unless it will allow the additional cash in the economy to trigger faster inflation.

“Having too much [reserves] makes one suffer from high cost of sterilization,” she added. “Sterilization” refers to the act of siphoning off excess liquidity in the economy to prevent accelerated increase in consumer prices.

Dollar buying aids in the buildup of reserves on one hand, and prevents steep appreciation of the peso on the other. A sharp and sudden rise of the peso drags down competitiveness of the export sector and reduces the peso income of remittance-dependent households.

The Bangko Sentral ng Pilipinas said the act of buying dollars thus helps maintain economic stability in the country.

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