In a world order predicated on economic interdependence, the gross international reserves of a country determine how well it can keep its economy humming.
With the US dollar strengthening as the US Fed adopted a hawkish monetary policy stance in response to skyrocketing inflation for most of the year, several countries around the world have tapped into their foreign reserves to support their currencies. This is especially true for our national government, as it paid some of its debt obligations, while the Bangko Sentral ng Pilipinas (BSP) continued to defend the peso.
What are Gross International Reserves (GIR)?
Gross International Reserves (GIR) are foreign assets held by the BSP in foreign investments, gold, and foreign exchange. These are also supplemented by claims to the International Monetary Fund (IMF) as Reserve Position in the Fund and Special Drawing Rights (SDR).
The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. It is a potential claim on the freely usable currencies of IMF members and can provide a country with liquidity. Adding SDRs to a country’s international reserves makes it more resilient financially. In times of crisis, a country can dip into its GIR.
What are the uses and purposes of GIR?
Being the lender of last resort, the BSP holds international reserves for the foreign exchange requirements of the country in case the supply of foreign exchange from local commercial banks falls short of the total demand (of foreign exchange) from the local economy.
This can happen in times of economic or financial crises, calamities, wars, and other exogenous events. Investors withdraw their deposits from the country’s banks, creating a shortage of the currency. This pushes down the value of the local currency since fewer people want it. As a result, the country’s imports become more expensive, causing inflation.
Hence, the GIR is a stand-by fund or a buffer to finance any deficit that may arise from current and financial transactions. It can be likened to a large savings account that ensures that the country has the foreign currency it needs to trade with the world (i.e., pay for imports) and to pay for short-term external debt. The BSP measures what they call an “import cover”, which is defined as the number of months of imports that can be covered with foreign exchange reserves.
More importantly, Gross International Reserves are held to ensure that a central bank has backup funds if the national currency rapidly depreciates. The central bank uses reserves to stabilize the currency. One way to do this is to sell dollars to defend the currency.
This is what the BSP has been doing this year to defend the peso and manage inflation. The BSP has been active in the foreign exchange market, as it has already sold at least USD 2.2 billion since the end of September to defend the PHP 59-level. Recent data shows that GIR reached USD 95.1 billion as of end-November, up by 1.17% from the USD 94 billion in the previous month.
The BSP’s open market operations (OMO) in the spot market, involving at least USD 2.2 billion since end-September, held the line at PHP 59 per dollar.
Is there an ideal GIR level that the BSP must maintain?
According to the BSP, GIR is viewed as adequate if it can finance at least three months’ worth of the country’s imports of goods and payments of services and primary income. Another indicator of reserve adequacy is for the GIR level to cover at least 100% of the country’s payments for foreign liabilities, public and private, falling due within the next 12-month period.
A country typically accumulates forex reserves when its earnings from exporting goods and services exceed payments against imports. Think of it as the opposite of financing a deficit which depletes reserves. Just as households and firms put their excess incomes or profits into savings or investments, a country’s current account surpluses may be invested, saved, or put into reserve.
What is the currency composition of the country’s GIR?
In terms of currency composition, the country’s GIR, except for gold, is held in US dollars, Japanese yen, Euros, and other foreign currencies. Historically, the bulk of the central bank’s GIR has been consistently held in US dollars since it is the most traded currency in the world.
GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the Bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.