At last, some sen$e!

Monetary officials have finally learnt how to deal with the rising peso–something I have been advocating they do since late last year.

When I flagged the problem of an appreciating peso back in November 2010 (see What Should be Done About the Rising Peso?) and suggested some ideas on how to remedy the situation (setting up a sovereign wealth fund), I was met with more than a little bit of skepticism by readers. At that time, our foreign reserves climbed to $44 billion from $33 billion a mere eighteen months earlier.

In January this year, I pointed out the strategies of similarly situated Latin American central banks and finance ministries (see What Should be Done with a $14.4 billion BoP Surplus?). My advocacy for us to turn to methods outside the traditional toolkit of monetary policy seemed far-fetched as Bangko Sentral officials then were expressing satisfaction with the effectiveness of their interventions in the currency market. Again, my ideas were met with a bit of scorn by some readers.

And then in July this year, when our gross international reserves for the first time exceeded our external debt obligations, I made the following policy pitch in Crediting the Upgrade:

To prevent the peso from rising, what the government could do is coordinate with the BSP so that it could issue treasury notes and have the BSP purchase them (much in the same way the US Federal Reserve bought US treasury securities under Bernanke). This would lower the borrowing cost of the government given the BSP’s views that the country is actually of investment grade.

The proceeds of this could either go to funding the fiscal deficit, or as we reach a balanced budget over the next two to three years be used to set up two funds. The first could be called the Philippine Enterprise Innovation Fund or PEIF. The second could be called the Regional Philippine Infrastructure Fund or RPIF.

I had honed the idea from suggesting a sovereign wealth fund that would look at investment opportunities both domestic and overseas to more inward directed investment opportunities. The channel through which the fund would be created was to be through the BSP purchasing sovereign debt issued by the National Government (in effect becoming a creditor of the government). This would reduce our need to borrow from abroad, which would lower the pressure on the peso to appreciate.

With this last pitch, I thought I had a winner, although not much in terms of reader response occurred. Also, as the storm clouds seemed to gather on the horizon, I found the BSP’s response to be similar to the government’s–a wait and see strategy, which I felt needed to be more pro-active (see Bullet-proofing the Economy and A Full-Blown Economic Storm). The government was still banking on its credit upgrade and private partnerships to save the day.

The policy space just seemed sterile with worn out mantras and textbook formulas. Then today, I gained some level of comfort in discovering that our officials might have finally “seen the light” by reading Benjamin Diokno’s column. In it, he describes the offer made by Bangko Sentral Governor Armando Tetangco to loan the government dollars and be repaid in pesos as a “Win-win Move“!

What might have tipped the conservative monetary authorities over was the Philippines attaining its full-year gross reserves target of $75 billion in the middle of the year. Diokno highlights the precariousness of maintaining current fiscal and monetary policies by saying,

(F)or every peso appreciation, BSP stands to lose P75 billion. Isn’t that awful? Hence, Mr. Tetangco is not offering the government out of the goodness of his heart; he’s doing it because it’s the prudential thing to do. It’s a win-win solution to our economic woes: it helps BSP in its war against peso appreciation and, at the same time, it helps the government pay for its foreign debt without incurring serious foreign exchange risks….

In hindsight, it was not even necessary for the Philippine government to borrow from the World Bank and the Asian Development Bank to finance its conditional cash transfer (CCT) program. Floating five-year Treasury bonds would have been a better way of financing the program.

At last, even traditional economists are beginning to realize what a golden opportunity the Philippines was sitting on! Ah, yes! There are times when it just feels good to be right. And this is definitely one of them. Let us hope our finance officials are able to learn the “policy catch-up” game just as our monetary officials have finally learned to. It’s about time they gained some sense.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy ( and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag

    Our resident economist should try to explain the difference between the overnite/lending rates  set by the BSP (monetary policy) and the prices set by the regular auctions that the Treasury holds to determine the rates that the markets set for government debt paper. Foreign debt paper of the government are not sold at auctions.

    They are sold through underwriters.. Prices are determined by the markets also. Markets act as a check and balance of fiscal policy.  However when markets are manic depressive or bi-polar the State can and should step in for national interest.

    In a country that has a dysfunctional state there is a large area for mischief since most people do not understand the system. That is why I would prefer that the BSP be more reactionary than proactive as it gives them a great deal right now to steal without anyone knowing it. If they want to be proactive then they have to be more transparent in their dealings..

    Peso dollar rates however are determined at the BAP trading floor. The BSP is a major player in the BAP trading floor and it manages the peso dollar rate as a major part of its legal mandate of maintaining price stability.. (Balancing inflationary and deflationary pressures..)

    This requires thoughtful thinking which may be a problem for a few. Most especially PNoy.

  • J_ag

    “What Does Quantitative Easing
    A government monetary policy occasionally used to increase the money supply by
    buying government securities or other securities from the market. Quantitative
    easing increases the money supply by flooding financial institutions with
    capital, in an effort to promote increased lending and liquidity.” From

    This is meant to enlighten our resident economist and others. What our brilliant
    BSP governor has suggested to people managing the peoples funds that it would
    be a good idea if they pay down the foreign debt by not borrowing new money
    from abroad to pay the interest not only the external debt but also the resident
    debt in foreign currency with foreign exchange that the people already own. Many
    have suggested that the BSP use this bountiful reserve surplus to pay down the
    foreign debt. That is up the bright boys in the financé department.


    This will free up more cash in the
    budget that can be used elsewhere.


    However there will be very little
    effect on the rising value of the peso going forward. It is the hot money that
    is causing the problem. The Swiss Central Bank took the extraordinary step just
    recently of announcing a hard peg target of 1.20 swiss francs to the Euro and
    vowed to use the unlimited power to print money to prevent their franc from
    gaining any more strength. The swiss franc lost 7% of its value in one day after
    that announcement.


    The BSP has been quietly doing
    that for the past year to keep the peso within its targeted forex rate band.
    (Not peg) That is why there is so much liquidity floating out there that had
    brought short term interest rates real interest rates in the country to
    negative territory. Hence the rise of cash in the SDA at the BSP. Yes the
    country has been having paper loses on its foreign reserves for a while since
    the rate at which the BSP buys forex has gotten cheaper.  The BSP would like to see the peso get weaker
    and move towards its Php 45 to $1 band.  It
    could offer to buy billions of foreign debt paper by simply exchanging the
    dollars it owns to the national government in exchange for the new debt paper
    in pesos that it could simply tear up. The BSP after all is owned and operated
    by the State. But that may strengthen the peso even more.


    The overnite rates that the BSP charges
    are still at 4.5% while in the developed economies it is hovering close to
    zero. Hence the tidal wave of hot money remains out there looking for higher yields.


    Do not make the analogy that this
    is similar to QE. Although in extreme circumstance the Fed could fund the Federal
    Government directly, QE is actually an expanded version of the Fed’s open
    market operations in managing reserve capital. It participates in the secondary
    market trading of government securities. Local Philippine bond markets are very
    shallow for the simple reason that holders normally hold on to debt paper till maturity.


    This move by the BSP is simply to
    free up more funds to help the NG with its budget deficit to try to get some
    small benefit from the hot money flows. However the problem of a stronger peso
    still essentially remains.

    This may hard for a few out there to grasp… 

    Paying off a portion of the foreign debt would add impetus to make the peso stronger not weaker. 

    The BSP clearly is caught between keeping the wave of pesos corralled in the SDA to prevent inflation from gaining any further traction. 

    Oil, gasoline  would definitely become cheaper at a Php 30 top $ 1 rate but it could collapse the external driven growth of the economy…







  • GabbyD

    the only one who didnt like it is jag. jag is, clearly, nuts.

  • Manuelbuencamino

    “(F)or every peso appreciation, BSP stands to lose P75 billion.” On paper, di ba? It won’t be actual until you use it to buy pesos. 
    Can you walk me through this scheme you proposed? As I understand it, the BSP will buy the GOP’s dollar-denominated sovereign debts and sell it back to the GOP for pesos and so the debts will be retired/paid for and the BSP would now have reserves that are appreciating in value? 

    Pasiensya ka na pero paki-explain lang in money policy for dummies terms please.

    • Just like the Peso denominated debts papers floated in the international bond markets early this year, this would work in much the same way. Except, instead of the Philippine government protecting foreign bond holders against the peso’s appreciation, we would protect the Bangko Sentral.

      Another main difference is that we would not be adding to the flow of foreign currency into the country; rather, the dollars are already here and we are just unloading them. (The net growth of reserves in a year is roughly the size of the govt’s fiscal deficit).

      This is how I think it would work: instead of financing the fiscal deficit by renewed borrowing from abroad or domestically (and driving up the cost of borrowing), we would simply borrow from the BSP. The BSP lends in dollars to the govt. The govt then turns around and uses the dollars to pay-off maturing debts and/or the interest to foreign creditors. The pesos that would have initially been set aside to pay for such foreign debts either gets used for budgeted expenditures or used to pay back the BSP.

      • Manuelbuencamino

        What happens if the dollar makes a turnaround and starts appreciating? Won’t the GOP have problems paying back the BSP?

        • MB, it’s the other way around. The debt is denominated in pesos but discharged through paying dollars to the Philippine gov’t (that’s why I used the analogy of the peso denominated bond sold to international investors). That’s why the gov’t pays back in pesos. If the dollar rises, it won’t affect the Philippine gov’t, but the BSP would have lost money because it gets paid in a weaker currency.

    • Joe America

      haha dummy = journalist, or, in my case, marketing guy