How much int'l reserve is enough?

The Bangko Sentral had just announced that our foreign exchange reserve is now $76.28 billion, up $200 million from the previous month and $7.28 billion higher from the same period in 2011. The $200 million month-on-month increase in reserves was due to foreign exchange inflows including BSP’s income from investments as well as foreign currency deposits by authorized agent banks. The increase is also a result of the revaluation gains on gold holdings.

Our ample reserves should be good news in the sense that it provides us additional margin of safety in these economically perilous times. On the other hand, it also brings to mind questions on what the optimum level should be.

The BSP said the current GIR level can cover 11.2 months worth of imports of goods and payments of services. It is also about 10.3 times of the short-term external debt based on original maturity and six times based on residual maturity.

A country’s foreign exchange reserve is normally used to repay foreign debt and to determine its credit rating. It is also used to intervene in foreign exchange markets. In our case, it is often used to keep the value of the peso stable against the dollar. While the BSP officially respects the role of the market in determining the peso’s value, it does what it can to keep it within certain limits, bearing in mind the impact of a strong peso on OFW families and exporters.

There are many economists who think a country must maintain enough foreign reserves to pay for 3-6 months of imports. Now that our reserves can pay for almost a year of imports, the question arises: isn’t this too much?

This wasn’t the first time BSP Governor Say Tetangco had been asked this question. So that when I posed the question to him, he quickly e-mailed back that it is difficult to set an optimum level. I can understand that specially because anyone in his position will want as much ammunition as he can have to meet unforeseen events specially given the financial crisis gripping Europe and the US these days.

“There have been several studies conducted by market analysts and the IMF on optimal levels of fx reserves that countries should have. Unfortunately all these models are assumption-dependent. And the range of what is optimal varies,” Gov. Tetangco wrote back.

He continued: “At the moment, we have more than enough to meet the country’s immediate import and debt service requirements. During normal times, for a going concern, this should be fine... But we operate in a rather volatile environment. As we have learned during the 1997 crisis, ‘enough’ is a relative term.”

It is also a question often asked of China because in their case, they have over $3 trillion in foreign reserves. While this is probably a source of national pride it also is a giant headache. Given the magnitude of this reserve, every change in interest rate earned or return on investments of that trillion dollar hoard must have a significant impact.

So, how does China manage its reserves? A briefing paper prepared by the UCLA Asian American Studies Center states that China’s State Administration for Foreign Exchange (SAFE) has been parking about 70 percent of its reserves in government-backed securities – primarily US Treasury bills – with the rest in Euros and Japanese Yen.

There had been efforts to diversify in recent years to get better return. But as The Economist puts it, “China’s central bank has a lot of money but not a lot of imagination. It keeps a big chunk of its reserves in boring American government securities. That means it can count on getting its dollars back. But it frets about how much those dollars will be worth should America succumb to inflation or depreciation.”

The UCLA paper also noted that “the Chinese people are starting to ask why their government is financing another country’s spending spree instead of using some of the large reserves to address the country’s domestic needs… This massive ‘loan’ from China has effectively helped the US government to do everything from waging wars in Iraq and Afghanistan, to paying congressional salaries (including those of politicians criticizing China), to rebuilding roads in New Orleans, and writing Social Security and Medicare checks. In turn, China has had a safe place to park its excess dollars.”

 How about in our case? According to Gov. Say, “what we continue to do and as is consistent with our Charter and Monetary Board approved guidelines, we manage our reserves taking into consideration the liquidity requirements of the country and invest the rest in a diversified portfolio of assets based on a conservative benchmark.

“Our Charter does not provide us the same flexibility that China has in managing their reserves.  I understand that they can invest in real estate, among others.”

But it is not easy to explain to our people, a large number of whom are rather poor and hungry, that we have all these wealth in the country’s GIR and it is being used to buy US Treasuries and thus financing the world’s only superpower’s fiscal profligacy. There has to be some way some of that money can be used to help domestic development at the same time it is acting as a buffer for international financial eventualities.

I am glad BSP Governor Tetangco thinks we should do better. “We have repeatedly said we need to increase the domestic absorptive capacity. This end can be served by increasing NG/private sector investments in domestic infrastructure that will help sustain an upward growth trajectory. The foreign exchange requirements for such investments can be secured from the country’s foreign exchange resources including the GIR.”

We can probably have a sovereign wealth fund like Singapore’s Temasek with its portfolio of about S$200 billion delivering a sustained long term return of 17% compounded annually since inception. But we don’t have a good record in managing even lesser portfolios. Remember how Winston Garcia managed GSIS funds during Ate Glue’s term and burned a lot of money that poor government employees could have used for urgent personal needs.

China has a number of agencies that function like sovereign wealth funds but the operations have been rather opaque and no one really knows how much they are making or losing or how they decide where to invest. And I guess China can afford to make some mistakes here but that is something we cannot afford.

I guess for the moment it is enough for us to know we have a good cushion for eventualities in our very healthy GIR. It is also good to know that the folks at BSP who have the responsibility for safeguarding it has thus far proven themselves worthy of our trust.

Mining

Hopefully, the new EO on Mining will start a more rational national dialogue on the future of mining. Responsible mining is not an oxymoron. It is possible but we are understandably skeptical given past experience. The EO sounds reasonable and provides an important role for Congress to provide its input on the matter of revenues for the government.

It is good to hear that the Chamber of Mines has said it respects the government’s decision to close certain areas to mining. All environmentally critical and protected areas are and should always be preserved for future generations.

It is also good that Albay Gov Joey Salceda who was earlier reported to be critical of the EO has become more receptive after a series of dialogues. But Gov Joey observed, “RA 7492 otherwise known as the Mining Law of the Philippines preempts the kind of reforms that could justify our fundamental opposition to mining in the current sociopolitical context.”

Garments

I received this e-mail last Friday from Bernadine Siy before DTI and representatives of the garments industry had their planning session.

Thank you for writing about the labor issues we talked about in the FEF dinner.  This early, it has yielded some fruit already. The various association representatives of the garment and textile industry are meeting this weekend for a planning session.  

The coordinator, who works under the DTI, just emailed the final agenda, and number one on their list of industry issues is labor policy. They sent a draft last week and labor was further down the list.

Furthermore, DOLE is also sending a representative, director Cynthia Cruz, of the Institute of Labor Studies. I am eager to find out how open our discussions will be, and how open-minded our approach to the matter will be.

Thank you again.

Women power

 Here’s something I received by email that’s worth thinking.

 If women rule the world, there will be no wars.

Just a bunch of jealous countries not talking to each other.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco