Last year, gross international reserves (GIR) surged 25% to end the year at close to $110 billion. This is remarkable considering the unprecedented global scale and severity of the COVID-19 crisis.

While short-term capital exited emerging markets as in past crises, this time around in the Philippines, the balance of payments (BoP) remained in surplus and even ballooned to nearly $12 billion in the year to November. The latter mainly reflects collapsed imports as the economy went into recession and, as tax revenues buckled, increased government borrowings with the overall external debt estimated to have risen by around $10 billion last year.

In an interview with the editor of the country’s leading business paper last week, BSP Governor Benjamin Diokno highlighted this atypical but positive upshot of the crisis that kept depreciation pressure off the peso and allowed monetary authorities to aggressively cut policy interest rates. He added that he expects the GIR to continue growing this year, possibly reaching $120 billion.

Pre-pandemic, the Philippines already had one of the highest foreign exchange stockpiles based on the IMF’s assessment of reserve adequacy (ARA). The ratio of reserves to ARA at end-2019 was at 2, higher than the 1-1.5 ratio considered adequate and above most countries’ reported ratios. Last year, the additional reserve buildup unarguably gave economic managers more wiggle room to manage the crisis, not least by helping to anchor the sovereign’s credit rating and giving the government continuing access to international capital markets at relatively tight borrowing spreads. By the end of 2020, GIR could amply cover over 5.4x short-term debt plus principal payments on medium to long term loans due in the next 12 months, up from 3.9x at the end of 2019.

Going by this, the GIR will continue to amply cushion any external shock in the near term. Moreover, given our dimmer view of the economy’s growth prospects, we think the current account will still register a modest surplus this year with moderate import growth, while private capital outflows are unlikely to be as massive as last year, with portfolio flows starting to return in 4Q20. We note too that although GIR was in large part boosted by increased government borrowings, these consisted of long-term loans, a significant portion of which is owed to official creditors who also provided long grace periods on principal repayment. One downside risk given BSP’s (Bangko Sentral ng Pilipinas) decision last year to actively trade its gold holdings, is lower gold prices.

However, holding excess reserves is not without cost. From a consolidated public sector viewpoint, the collateral value of these highly liquid assets needs to be weighed against the negative carry associated with their low returns as well as foregone productivity-enhancing domestic public investments. As pandemic risks subside with improved health management and the promise of vaccination, one could argue that keeping such high precautionary cash is no longer warranted.

Too, with the peso having appreciated by 5% in real, trade-weighted terms last year, many in policy circles would argue for a more proactive government response to support the export sector. Realizing that the BSP could only do so much with its foreign exchange market interventions, the suggestion is for the government to perhaps forego external commercial market borrowings altogether. As the argument goes, at a time when the government is looking to pass more of the burden of spurring economic growth to the private sector, raising the purchasing power of dollar earners, particularly overseas and BPO workers, will help significantly in reviving domestic consumption which accounts for about 70% of GDP. Government may also fret less about the impact on domestic interest rates of more local borrowings considering last year’s aggressive monetary easing that injected close to P2 trillion of liquidity into the financial system, weak loan market (both demand and supply), and a two-year window to directly tap an additional P280-billion loan from the BSP.

There is thus scope for the government to nudge the GIR down this year rather than allow it to climb some more. For now, there are no signals that it intends to do so. 


Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. This column was a post to subscribers of GlobalSource Partners ( a New York-based network of independent analysts. He and Christine Tang are their Philippine partners.