*ADDITIONAL INFO ABOUT INTERNATIONAL RESERVES*

*ADDITIONAL INFO ABOUT INTERNATIONAL RESERVES*

What are “international reserves”, and how did the Philippines end up with $77billion worth of them?

International reserves are external assets that represent the gross claims of the central bank on non-residents of the Philippines. They generally include the country’s gold bullion holdings, foreign currency deposits, securities in which the central bank has invested (such as other countries’ bonds), IMF special drawing rights (SDRs), and its reserve deposits with the IMF. Except for the gold – about 165 tons in all, worth around $8.2 billion at current prices – and a relatively small amount of actual foreign currency deposited at the BSP, most of the reserve assets do not physically exist, and a part, perhaps even most, of the gold reserves are not actually in the Philippines.

The reserves accumulate over time, mostly through foreign currency exchange. When banks trade their foreign currency deposits for pesos at the BSP, a small percentage is retained by the central bank in much the same way the rate you are given for trading your dollars, yen, or euros at the local currency exchange allows the money changer to make a little bit for the trouble. In addition, the foreign currency actually deposited with the BSP by banks as part of their required reserve deposits can be counted as international reserves.

The country has chronic budget deficits and still has a huge foreign debt. Can’t the government use its reserves to make up these shortfalls?

No, because it would create even more disastrous economic problems. The main uses for the reserves are to pay foreign obligations of the government, to back the value of the peso, and to back the reserve deposits of the banks and other government institutions, and all these functions must be carefully balanced. If, for example, the BSP transferred several billion dollars’ worth of the reserves to the Treasury for use in the national budget, the value of the peso would drop sharply, i.e., the number of pesos that could be exchanged for a dollar would increase. Since the country imports significantly more than it exports, inflation would increase; also, the cost of paying the country’s foreign debt would increase dramatically.

What’s an SDR?

An SDR is a sort of voucher used by the IMF and its members (188 countries, including the Philippines, are members of the IMF) as a medium of exchange; it is not exactly a currency, but can be used much like a form of currency in transactions between IMF members. The value of the SDR is calculated from a formula based on the value of the US dollar, the Euro, the Japanese yen, and the Pound sterling, and fluctuates daily; as of June 28, one SDR was worth $1.51.

By the IMF’s own definition, an SDR represents a potential claim against the freely useable currency of a member state. For example, when the Philippines uses an SDR as payment of a foreign debt, it is handing the creditor nation an IOU for an equivalent amount in “freely useable currency,” which usually means dollars, yen, euros, or pounds, unless another agreement between the two countries is made. The $1 billion the government has pledged to “loan” the IMF is denominated in SDRs, and so is worth about 662.3 million SDRs; or if you prefer, 662.3 million IOUs against the country’s foreign currency reserves.

Why does the Philippines have to be part of the IMF? Can’t we do without it?

Realistically, no. The IMF is arguably a deeply-flawed concept and there are good reasons to debate the value of its existence, but at this point bailing out of it would be a very bad idea. The Philippines’ ability to access credit would be severely restricted; even if the country is not borrowing from the IMF, its reserve position in the IMF serves as collateral, or at least a credit reference, for the loans it takes from other countries. Dropping out of the IMF would also complicate transactions with countries whose currencies are not freely-exchangeable with the peso (that is, most of the world).

Well, okay, so we’re stuck with it. Is there any benefit to “loaning” the IMF $1 billion?

In practical terms, virtually none at all. The proposed European bailout package is worth $430 billion, so the Philippines is contributing 0.23% of that. That is not really even worth pogi points, because the Philippines has a 0.43% membership stake in the IMF; from a certain perspective, the country is actually slacking off in doing its fair share. The assertion by the Administration that it will be a positive signal to investors is likewise a weak attempt to blow sunshine up everyone’s skirt. There is nothing about the IMF contribution that indicates positive fundamentals that investors look for: sound business and physical infrastructures, competitive labor availability, and access to markets – the very sorts of things, in other words, that encouraged Ford Motor Company to yank the plug on the Philippines and spend over $1 billion on new factories in Thailand and China.

So what’s the downside?

Again, not much. The drop in international reserves as a result of transferring $1 billion off the books will lower the value of the peso a bit; some analysts have lately said it might reach 45 to $1 by year’s end, and that might be a reasonable estimate. On the other hand, the BSP – which is obsessive about controlling the peso’s value – is probably aware of the implications and will probably do something about them, so I would expect the peso to land somewhere in the mid-43’s. Provided, of course, that any of the other hundreds of sometimes nebulous factors that affect the value of the currency do not happen, which would be a rather unrealistic assumption.

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SO THE BOTTOM LINE IS…?

If you find the $1 billion “loan” to the IMF upsetting, you should build a bridge and get over it. If there’s anything to be upset about, it’s that N/A has, once again, heralded an irrelevant action as doing something progressive. It’s not necessarily a bad move, but it’s not helping to improve this country, either. Waste enough time, and pretty soon there will be no more time left.