National Currency Management 101

Many people in this country undoubtedly were surprised, even shocked, to learn that BSP (Bangko Sentral ng Pilipinas), the national monetary authority, can lose money from its operations and that a BSP operating loss can result from activities associated with changes in foreign-currency values. BoP data released recently indicated that were it not for a second-quarter foreign-assets valuation gain equivalent to P3.5 billion, the central bank would have recorded a loss of P2.5 billion in that quarter.

The data also indicated that BSP operations since 2010 have resulted in a cumulative operating loss of P224.5 billion, of which P95.4 billion was accounted for by 2012, the highest annual loss ever recorded.

The national monetary authority attributed the P3.5 billion second-quarter gain mainly to foreign-exchange market fluctuations that raised the values of the central bank’s dollar-denominated assets. The gain also was the result of the bank’s foreign-exchange trading operations. In furtherance of its statutory mandate to “maintain external monetary stability,” BSP intervenes in the foreign-exchange market, either as a seller or a buyer, as macroeconomic circumstances dictate.

There is a world of difference between the foreign-exchange trading activities of a private investor and a foreign-exchange operations of the BSP. A private participant in foreign-exchange market trading does so for purposes of personal gain, buying and selling in anticipation of profitable foreign-exchange movements. But the national monetary authority participates in foreign-exchange market trading to maintain market stability generally or to nudge the exchange-rate of the peso in a direction of the government’s economic priorities. Central bank intervention is undertaken by either sales or purchases of foreign currencies as market trends dictate: sales of dollars or other currencies when it is desired to prevent a further decline of the peso and purchases when the opposite result is desired by the nation’s economic decision-makers.

A case in point is the current trend of the exchange rate of the peso, which today is flirting with the P47 to US$1 level. In 2013-2014, the rate was in the late P40s. The peso’s current weakness is being attributed to a number of factors. Chief among these has been the decision of the US Federal Reserve Board to terminate its very-easy-money policy in the face of the US economy’s steady revival. Another factor has been the weakening of the Chinese economy. Still another factor has been the modest strengthening of Japan’s currency.

A private foreign-exchange trader will buy or sell foreign currencies only when there are profits to be made from the transactions. But the BSP, buying and selling to promote national economic policies, may—and very often does—trade in the foreign-exchange market at a loss. This explains the foreign-exchange losses that the central bank oftentimes incurs.

Since an economy is composed of competing interests—exporters vs consumers, OFWs vs resident Filipinos, foreign tourists vs Filipino travelers—the BSP has to constantly perform a balancing act in its foreign-exchange market interventions. Thus, in the current market situation, exporters, OFWs and foreign tourists want more forceful market intervention by the BSP, while importers, Filipino travelers and Filipinos generally want a peso that will be stronger as against other currencies.

The next time a news reader or listener learns about the BSP—the bank of all banks—incurring a loss, he or she will know why. The national monetary authority, in compliance with its statutory mandate, has been selling and buying foreign currencies, making profits or incurring losses in the process, in an effort to promote this country’s economic interests.


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