Prepared By:

Richard U Ricardo
 BLACK MARKET
 THE BINONDO CENTRAL BANK
 EXCHANGE RATE POLICY
 FEAR OF LDC’S ABOUT FLOATING
EXCHANCE RATE
 PHILIPPINE EXPERIENCE WITH
FLOATING EXCHANGE RATE
 BLACK MARKET

 Economic activity that takes place

outside government-sanctioned
channels.
 Usually occurs “under the table” to
let participants avoid government
price control or taxes.
 Binondo Cental Bank(BCD)
 Group of major currency traders that was
secretly organized in 1983 to provide dollars to
importers. Traders and large corporations need
to buy raw materials and services from abroad
 Established to allow the government to narrow
the rate gap by directly intervening in black
market.
 Organized by the Philippine Government under
then Trade Secretary Roberto Ongpin.
 BCD Issues

 P51-billion from the estate of the late Ferdinand

Marcos and his cronies for damages over alleged ill-
gotten wealth.

 The Presidential Commission on Good Government

(PCGG) had filed a complaint on July 23, 1987 against
the Marcoses and his cronies for alleged connivance
to acquire ill-gotten wealth through behest loans.
 Bsp’s exchange rate policy

 BSP supports a freely floating,

market determined exchange rate
system.
 BSP allows scope for occasional
intervention to maintain order and
stability in the FX market.
 WHAT IS EXCHANGE RATE?

 IT IS A PRICE OF A UNIT OF FOREIGN

CURRENCY IN TERMS OF THE
DOMESTIC CURRENCY
 IMPORTANCE OF EXCHANGE RATE

 BASIC LINK BETWEEN THE LOCAL AND THE

OVERSEAS MARKET FOR VARIOUS GOODS, SERVICES
AND FINANCIAL ASSETS.
 AFFECT ACTUAL INFLATION AS WELL AS
EXPECTATIONS ABOUT FUTURE PRICE MOVEMENTS.
 COUNTRY’S EXTERNAL SECTOR THROUGH ITS
IMPACT ON FOREIGN TRADE.
 AFFECTS THE COST OF SERVICING (PRINCIPAL AND
INTEREST PAYMENTS) ON THE COUNTRY’S FOREIGN
DEBT.
TYPES OF EXCHANGE RATE SYSTEM

 FLOATING EXCHANGE RATE – system

where the value of currency in relation
to others is allowed to freely fluctuate
subject to market forces
 FIXED EXCHANGE RATE

 sometimes called a pegged exchange

rate, a type of exchange rate regime
wherein a currency’s value is matched
to the value of another single currency
or to a basket of other currencies, or to
another measure of value, such as gold
PEGGED FLOAT EXCHANGE RATE

 currency system that fixes an exchange

rate around a certain value, but still
allows fluctuations, usually within
certain values, to occur.
 FLOATING VS.
FIXED EXCHANGE RATES
 FLOATING EXCHANGE RATES
Currency value set by market forces

• Currency supply and demand drive the external value of

currency

No intervention by the central bank

• Central bank allows the currency to find own level

No target for the exchange rate

• External value of currency is not a target of macroeconomics

policy
 Fixed exchange rates
Government/Central bank fixes the currency value
• External value is pegged to one or more
currencies

Pegged exchange rate becomes official rate

• Trade normally takes place at this rate
• There might be some unofficial trades in black
markets

Adjustable peg
• Occasional realignment of the currecny may be
needed
 Exchange rates

FLOATING FIXED
 THE VALUE OF A  THE GOVERNMENT
COUNTRY’S MANIPULATES THE
CURRENCY CHANGES VALUE OF A
BASED ON MARKET COUNTRY’S
FORCES CURRENCY
 FLOATING CURRENCY

 REDUCES THE NEED FOR FOREIGN CURRENCY

RESERVES
 FREEDOM TO SET POLICY INTEREST RATES TO
MEET DOMESTIC OBJECTIVES
 MAY HELP TO PREVENT IMPORTED INFLATION
 LESS RISK OF SPECULATIVE ATTACK
 FIXED RATES MAY CONFLICT WITH OTHER
MACRO OBJECTIVES
 FIXED CURRENCY

 CERTAINTY OF CURRENCY VALUE GIVES CONFIDENT

FOR INWARD INVESTMENT
 REDUCED COSTS OF CURRENCY HEDGING FOR
BUSINESSES
 CAN LEAD TO LOWER BORROWING COSTS (LOWER
YIELDS ON BONDS)
 IMPOSES REPONSIBILITY ON GOVERNMENT POLICIES
 LESS SPECULATION IF THE FIXED EXCHANGE RATE IS
CREDIBLE
General tools to operationalize the
exchange rate policy

 1) participation in the foreign exchange market

 2) monetary policy measures
 3) foreign exchange regulations
 The Experience with different
Exchange Regimes

 1.) Fixed Exchange Regime : 1970-84

 Detrimental impact of policy imbalance
was greatly compounded by a
combination of adverse external shocks
prompted by the second oil crisis.
Fixed Exchange Regime : 1970-84

 June 1983 – Philippines opted for an economic

strategy centered around an explicit and rigid
exchange rate peg to the U.S. dollar
 October 1983 - Philippines announced a debt service
moratoruim
Fixed Exchange Regime : 1970-84

 October 1984 – the exchange rate was allowed to

float, base money target were adopted as the new
nominal anchor, and the recently imposed exchange
rate restrictions were reversed.
 B. Flexible Exchange Regime

 Facilitated adjustment to the major uncertainties in

the balance of payments.
 Allowed the exchange rate to settle at a competitive
level that would clear the foreign exchange market
and would revitalize external performance.
BSP adopt Floating Rate System

 Was adopted in 1970 because the

government considered that occasional,
large fluctuations typical of the fixed
exchange rate system are more costly,
destabilizing and disruptive to the
economy than the more frequent but more
gradual changes that may occur in a free
float.
BSP adopt Floating Rate System

 The floating rate system is consistent with the current

regime's national strategy of achieving external
competitiveness through efficiency, which is also a
central theme of the foreign exchange liberalization
efforts. In terms of exchange rate policy, such
efficiency is injected into the economy by basically
leaving exchange rate determination to the market
forces of supply and demand.