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"We don’t expect the BSP to intervene indefinitely (in the foreign exchange market)," said Frederic Neumann, HSBC economist. "The central bank has stepped in and tried to slow down the appreciation of the peso by buying dollars, but we think the peso will continue to appreciate for two reasons — remittances will continue to pour into the country and second, the ability of the (BSP) to buy dollars is limited … its not like the Chinese central bank who has imposed capital controls with a massive ability to buy any dollars that will come in."

Neumann, who spoke yesterday at the International CEO Conference of the Management Association of the Philippines at Makati Shangri-La Hotel in Makati City, expects the peso will continue to appreciate to end at P44: $ 1 this year and P41 by the end of 2008. The peso is rising because of demand from remittances, which as of July has reached $ 8.3 billion. "The appreciation of the peso has been quite remarkable in the last few years the peso has done quite well," he added.

At the moment, the BSP is losing income due to its dollar buying, or from foreign exchange fluctuations. For the seven-month to July the central bank incurred an income loss of P39.2 billion and P49.86 billion from peso-dollar exchange fluctuations, completely wiping out gains of P27.34 billion from lower interest expenses.

"The (BSP) does not have the tool (similar with China’s capital controls) at its disposal because whenever it intervenes in the market it creates domestic liquidity by buying dollars —- they were adding peso in the money supply and there’s too much money already in the economy," said Neumann.

The BSP however has been siphoning off excess money supply via its special deposit accounts (SDAs) to take it out of circulation. "But this is costly for the central bank which pay interest rates on the SDAs … it is so costly in fact that we don’t expect the BSP to intervene indefinitely and I expect they will be content to allow the peso to appreciate so long as it’s not too volatile and that it will happen gradually."

In the meantime the BSP said they have a strong dollar reserves and that they have long dollar positions. "What we do is to make sure dollar reserves are adequate," BSP Governor Amando M. Tetangco Jr. said in a previous interview. As of July the country’s gross international reserves totaled $ 30 billion while the balance of payments surplus is an alltime high of $ 6.75 billion.

Also as of July BSP’s net worth was P219.19 billion, lower than the same period last year of P265.45 billion. Total assets, on the other hand, amounted to P1.812 trillion, higher than last year’s P1.380 trillion while total liabilities amounted to P1.593 trillion from P1.155 trillion a year ago.

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency.

Under the New Central Bank Act, the BSP performs the following functions as a central monetary authority: liquidity management, currency issue, lender of last resort, financial supervision, management of foreign currency reserves, and implementing the exchange rate policy.

Since the BSP determines the exchange rate policy, it adheres to a market-oriented foreign exchange rate policy. "The role of the BSP is principally to ensure orderly conditions in the market," said Tetangco. "Basically we allow market forces to determine the peso-dollar rate and we’re there only to smoothen the exchange rate fluctuation."