Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Shift Reserves Away from US Treasuries

Posted by butalidnl on 8 August 2011

The Bangko Sentral ng Pilipinas (BSP) has said that it was considering shifting some of the Philippines’ Gross International Reserves (GIR) from US Treasuries. I think it should. It is high time that the Philippines stops relying on the US dollar as the sole reservoir for our hard-earned money.

HSBC objects to the BSP plan, and advises the BSP to stick to using US Treasuries exclusively. It says that US Treasuries are the most liquid. But the question that we should ask is: How liquid should the Philippines’ reserves be? If we shift from US Treasuries to German bonds, will we then be holding instruments that we can’t sell right away? I doubt that – German, Dutch, Norwegen, Australian bonds (which all have AAA status, unlike US Treasuries) are liquid enough. We can sell them in a matter of days and at a good price – there are enough of those bonds going around for that. Perhaps not ‘instantaneously” like US Treasuries. But we don’t need instruments to be THAT liquid.

One other thing about liquidity is that it is a function of how much a country borrows. Because the US, Japan and Italy are the world’s biggest borrowers, that is why their bonds are the most plentiful, and thus the most liquid. But they are not necessarily the best places to put our money.

Reserve Value
Reserves should be able to keep their value with time, or even appreciate.  It would be prudent, even imperative, to keep our money out of instruments that we expect to lose value.

US Treasuries, like all bonds,  lose value as their interest rates rise. Now, the interest rate on Treasuries are at a very low point – 10 Year Treasuries are at 2.3%.  If the interest rate were to rise – as it should – the Philippines would lose money holding them.

And then we also need to consider the deteriorating value of the US Dollar. The Philippine peso is now trading at 42:1 to the dollar. A couple of years ago, it was 44:1.  We lose money by keeping dollars in our reserves. But if we had stored the reserves in Yen or in Euro, the value would have remained the same (in terms of pesos) or even appreciated.  The dollar is bound to lose value in the future, and we would be throwing away our money if we were to put all of our reserves into it.

Major Trading Partners
One of the principles in keeping international reserves is to keep them roughly based on a country’s trading partners.  On this basis, the Philippines should indeed diversify away from US treasuries.  If we look at the Philippines’ trading partners for 2010 we can see that China is our number one trading partner (17.3%), followed by Japan at 14.6% of trade. The US is only our third trading partner, at 12.3%.   Based on this, it would be logical to keep more Yuan and Yen in our reserves than dollars.

The Department of Finance seems to be saying that it has diversified our Gross International Reserves away from US dollars. But they do not say what percentage of the GIR remains in US Treasuries. If they truly have diversified, the GIR should be less than 50% in US dollars by now.

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