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BSP Approves Package of Reforms in the Foreign Exchange Regulatory Framework

02.22.2007

The Bangko Sentral ng Pilipinas (BSP) announced today the approval by the Monetary Board of the package of reforms in the foreign exchange regulatory framework. The move is envisaged to make the regulatory environment more responsive to the needs of an expanding, more dynamic economy that has become increasingly integrated with global markets. The BSP believes that improving macroeconomic fundamentals, as well as ongoing banking, capital market and institutional reforms, provide a favorable setting for the comprehensive review and gradual reform of the existing foreign exchange regulatory framework.

The new package of reforms approved by the Monetary Board on its 22 February 2007 meeting involves changes pertaining to current account and capital account transactions as well as to prudential regulations.

First, on current account transactions, the limit on allowable foreign exchange purchases by residents from banks to cover payments to foreign beneficiaries for non-trade purposes (excluding those related to foreign loans/foreign currency loans and foreign investments) without supporting documents was increased from US$5,000 to US$10,000. Furthermore, the “no-splitting” restriction and notarization requirement for applications to purchase foreign exchange were also lifted. These measures are expected to facilitate the rising demand by residents for foreign exchange to service non-trade transactions (such as education of dependents abroad, medical care and payment of service fees) which have risen as a result of globalization. Lower transaction costs for bank clients, including retail customers, are expected as a result. While the documentary requirements are being relaxed, these transactions will continue to be covered by existing provisions under the Anti-Money Laundering regulations.

Second, on capital account transactions, the allowable outward investments by residents without prior BSP approval and registration was increased from US$6 million per investor per year to US$12 million. For purposes of purchasing foreign exchange from banks, outward investments will now include residents’ investments in foreign currency-denominated bonds issued by the National Government and other Philippine entities. The increase in the allowable limit on outward investments is expected to allow greater portfolio and risk diversification and facilitate integration with global markets.

Third, on prudential regulations, a symmetrical limit of 20 percent of unimpaired capital with an absolute limit of US$50 million will be imposed on both the overbought (OB) and oversold (OS) positions of banks. The increase in the OB limit from the current 2.5 percent of unimpaired capital to 20 percent is expected to give banks more flexibility to increase their foreign exchange holdings. This would enhance banks’ capability to service the increasing foreign exchange requirements of the corporate sector and may contribute to further reducing exchange rate volatility. Restoring the OS limit at 20 percent of unimpaired capital, on the other hand, serves as a prudential measure to discourage excessive exposure of banks to foreign exchange risks. The adjustments in both the OB and OS limits complement the BSP’s thrust towards risk-based supervision and are aligned with banks’ improved capacity to manage foreign exchange exposures relative to their capitalization levels.

The liberalization of the foreign exchange regulatory framework is part of the continuing efforts by the BSP to improve the overall economic and financial regulatory environment. In the medium term, the BSP expects the confidence-boosting effects of these measures to result in more foreign exchange flows, including and importantly foreign direct investments.  The freer flow of capital confers direct benefits in terms of providing additional resources to the domestic economy and allowing portfolio diversification by Philippine entities.  In particular, it will allow individuals and businesses with legitimate transactions to have greater access to foreign exchange.

At the same time, liberalization is expected to result in a number of important collateral benefits, including greater financial depth, technological transfer, and institutional development through better transparency and governance practices. It also promotes disciplined macroeconomic policies as increased exposure to global markets and players encourages prudent and responsible economic stewardship. The liberalization measures are also expected to lead to a shift in foreign exchange transactions from the unsupervised foreign exchange market to the banking sector. This will improve data capture and result in better statistics on foreign exchange transactions, which are critical for informed policy assessments and formulation.

With the liberalization of foreign exchange rules, banks are expected to continue to adopt safe and sound practices in undertaking their foreign exchange transactions. The BSP will remain vigilant and stands ready to act to ensure that foreign exchange transactions are consistent with the stability of the financial system.

The new regulations will be effective starting 2 April 2007. The BSP will soon be publishing the appropriate circulars containing the details of the changes in the foreign exchange regulatory framework.

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