BSP governor rules out Philippines involvement in Asian currency war

The governor of the Central Bank of the Philippines has dismissed concerns that Asian nations such as his would be forced to devalue their currencies to ensure their export competitiveness with China, after the People’s Bank of China allowed renminbi to fall against the US dollar in August.

Asked during a Central Banking interview if a change in the terms of trade with China following its devaluation would result in competitive currency devaluations in Asia, Benjamin Diokno said: “No, no, no. We’re not going to do that.”

Renminbi fell past 7 yuan per US dollar in August this year after a breakdown in trade negotiations between US and Chinese officials. The US Treasury subsequently branded China a “currency manipulator” for permitting renminbi’s decline.

Other central banks in the Asia-Pacific region, including Bank of Thailand, the Reserve Bank of New Zealand and the Reserve Bank of India, cut their policy rates shortly after the Chinese decision.

“In the short to medium term, China resorting to currency depreciation is essentially spreading the cost of US tariffs on to all of its trading partners, which is likely to trigger a currency war through competitive devaluation,” Hui Feng, Central Banking contributory editor and ARC Future Fellow at Griffith Asia Institute, wrote at the time. “Asian economies are likely to follow China’s steps if past experiences hold. A number of countries in South-east Asia are major beneficiaries of a supply chain restructuring due to the US-China trade war and would not like to lose momentum due to currency moves.”

The Bank of Thailand said at the time of its cut that it saw more pressures to the country’s growth as US-China trade tensions escalate. “With regard to exchange rates, the committee expressed concerns over the baht appreciation against trading partner currencies, which might affect the economy to a larger degree amid intensifying trade tensions.” 

Observers say the Bank of Thailand has also frequently intervened in the FX markets due to its concerns about the strength of the baht. But Diokno stressed that the Central Bank of the Philippines had “not intervened” during his term in office, which started in February this year, adding that the BSP’s exchange rate policy is to “let the market determine the currency’s level and only smooth out the excessive daily fluctuations”.

Diokno agreed that other Asian countries may have had to cut rates as they are “very much affected by this ongoing trade war between China and the US, plus other uncertainties – geopolitical tensions, et cetera”. But he stressed easing policy rates in the Philippines are the result of domestic factors.

“The Philippines probably will be one of the most resilient,” he added. “This is because number one, because we’re not a big exporter. Number two, because we have a flexible foreign exchange rate policy. That’s our first line of defence. And we have hefty international reserves, standing at around $85.2 billion as of end July 2019 – that’s equivalent to 7.4 months of imports and payment of services.”

Indeed, Diokno believes the central bank’s reserves will “continue to be built up” due to an inflow of remittances from overseas workers, increased tourism receipts and greater foreign direct investment.

Griffith Asia Institute’s Hui said the countries most likely to be hit by China’s easing are Indonesia, South Korea, Thailand and Vietnam.