RP, China sign $1-billion currency swap scheme

The Philippines and China have signed a $1-billion bilateral currency swap that would enable the Philippines to avail up to 10 percent of the facility under the Chang Mai Initiative.

The Bangko Sentral ng Pilipinas (BSP) and the People’s Bank of China formally signed the agreement after months of negotiations, giving the Philippines access to draw from the facility should it need to do so.

According to BSP Governor Rafael Buenaventura, the agreement was a one-way swap where the Philippines would exchange the peso equivalent that China would convert to renminbi (its currency) and then into dollars.

The Chang Mai facility was created specifically to provide balance of payment support to members that would require it.

"So ultimately, they would give us the proceeds in dollars," Buenaventura explained. "We can actually draw from the facility in renminbi but it is more likely that we would draw the dollar equivalent because all our trades are in dollars."

Under the Chang Mai Initiative, however, the Philippines could immediately access only $100 million of the $1-billion facility unless the country goes back under the tutelage of the International Monetary Fund (IMF).

The Chang Mai bilateral swap facility uses IMF supervision as a trigger that would allow the availing country 100 percent access to the swap. This means that if the Philippines had been under the IMF, it would have been able to draw down all $1 billion from the RP-China bilateral swap.

Since the country has since exited the IMF program, Buenaventura said only $100 million would be immediately available if it needs the dollars.

The Philippine government was originally negotiating for a $3-billion bilateral swap with China on terms that would be similar to the currency swap agreement signed by the Philippines with Japan.

The swap agreements would be part of the Chang Mai Initiative where ASEAN countries together with Japan, China and Korea had agreed to forge as many bilateral agreements as possible.

The Chang Mai Initiative called for a comprehensive regional financing facility that would prevent future financial crises from spiraling out of control the way they did in 1997 while Asian countries stood back with no game plan with which to handle the aftermath.

The use of an IMF program as a trigger is under review by Chang Mai members because it made the facility inaccessible to countries that were no longer under IMF tutelage.

"There are a lot of principles involved like burden sharing and moral hazard," said Buenaventura. "There is also a question of what should Chang Mai members use as trigger if not an IMF program."

In July last year, the Philippines signed a similar agreement with Japan for a $3 billion currency swap that would give the Bangko Sentral ng Pilipinas (BSP) the flexibility to swap Philippine pesos for US dollars to meet liquidity requirements.

The agreement with Japan was effective for 90 days, renewable up to a maximum of seven times at an interest rate equivalent to the London interbank offered rate (Libor) plus 150 basis points for first drawing and first renewal. Subsequently, the premium is graduated to a maximum of 300 basis points.

The currency swap between the BSP and Japan’s Ministry of Finance was the first signed by the central bank under the Chang Mai Initiative.

The BSP said the agreement could be a forerunner of a payment system within the 10 member-nations of the Association of Southeast Asian Nations (Asean) plus Japan, China and South Korea.