BSP releases USD 1.22B of FX swaps

The Bangko Sentral ng Pilipinas (BSP) released USD 1.221 billion worth of foreign exchange (FX) swaps in October, latest data showed.

FX swaps stood at USD 1.719 billion in October, 41.5% or USD 1.221 billion lower than USD 2.94 billion seen in September, according to data posted on the central bank’s website.

In October 2022, the BSP only transacted USD 970 million of FX swaps in short positions.

Of the USD 1.719 billion in October this year, USD 1.269 billion were long positions in forwards and futures with residual maturity of up to one month. This is lower by 39.1% from the USD 2.085 billion recorded a month prior.    

The central bank also transacted USD 450 million of swaps with up to three months in maturities, decreasing by 47.3% from the USD 855 million seen in September.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said some market players could borrow US dollars from the BSP through FX swaps.

“Then [market players] could use the US dollars to sell/short, in the hopes of buying it back at a lower price in the future, then realizing trading gains on the difference,” Mr. Ricafort said in a Viber message.

He said the FX swaps could be used to hedge foreign exchange risks.

“Some foreign banks could lend their US dollars in the FX swap market to get pesos to finance peso loans and other peso investments in the financial markets,” Mr. Ricafort said.

“This also aids further peso appreciation during the seasonal increase in OFW (overseas Filipino workers) remittances and conversion to pesos, so any reduction in FX swap levels recently would be consistent,” he added.

In October alone, the peso closed at PHP 56.73 on Oct. 31, down by 15.5 centavos or 0.27% from its PHP 56.575 finish on Sept. 29.

The Philippine central bank uses its swap positions to release foreign currency to the financial system as a tool to intervene in the exchange market or as a defensive mechanism against speculative flows.

The central bank revived its FX swap facility in September last year after being inactive for almost two years.

FX swap transactions are also a type of financial instrument used by the central bank to manage its foreign exchange reserves. They are part of the BSP’s open market operations.   

The country’s gross international reserves (GIR) stood at USD 101.09 billion as of end-October, up by 3% from USD 98.12 billion as of end-September. This was also 7.5% higher than the dollar reserves of USD 94.03 billion as of end-October 2022.

Ample foreign exchange buffers protect the country from market volatility and ensure that it is capable of paying its debts in the event of an economic downturn.

The level of dollar reserves as of end-October is enough to cover about 5.9 times the country’s short-term external debt based on original maturity and 3.7 times based on residual maturity.

It is also equivalent to 7.5 months’ worth of imports of goods and payments of services and primary income.

The BSP is expecting a GIR of USD 99.5 billion for this year and USD 102 billion for 2024. — Keisha B. Ta-asan