March 26, 2013

THE BANGKO SENTRAL: Exchange Rate Indices Changed

THE BANGKO SENTRAL ng Pilipinas (BSP) yesterday released three new exchange rate indices to better reflect the peso’s movement against the currencies of the country’s major trading partners.

  “The new indices would enable the BSP to gauge more effectively the overall movements in the exchange rate of the peso across currencies,” said Francisco G. Dakila, Jr., director of the central bank’s Center for Monetary & Financial Policy, in a briefing.

They will replace the BSP’s current nominal effective exchange rate (NEER) and real effective exchange rate (REER) indices -- the Majors index, which consists of currencies of advanced countries such as the United States, Japan, the euro area and the United Kingdom; the Broad competing countries index, which includes currencies such as the Singapore dollar, South Korean won and the Thai baht; and the Narrow competing countries index, which consists of the currencies of Indonesia, Malaysia, and Thailand -- next year.

To be adopted are the overall Trading Partners Index (TPI), which will measure the average NEER and REER across a basket of 14 currencies; the Trading Partners Index-Advanced Countries (TPI-A), which will track movements against currencies of trading partners in advanced economies -- the US, Japan, the euro area and Australia; and the Trading Partners Index-Developing Countries (TPI-D), which will measure effective exchange rates across the currencies of partner developing countries China, Singapore, South Korea, Hong Kong, Malaysia, Taiwan, Indonesia, Saudi Arabia, the United Arab Emirates and Thailand.

The NEER is a weighted average of bilateral exchange rates with currencies of trading partners. The REER, meanwhile, is a weighted average of exchange rates that is adjusted to inflation.

An increase means an overall appreciation of the peso plus a loss in the country’s external price competitiveness. A decrease indicates otherwise.

“The major trading partners are defined as those countries which accounted for at least 1% share of the total merchandise exports and imports of the Philippines from 2007-2011,” Mr. Dakila explained.

“The TPI-A provides information on the value of the peso against currencies in highly industrialized economies,” he added, while “the TPI-D measures the value of the peso relative to the currencies of developing countries.”

The computation of the indices was also tweaked, revised from arithmetic to geometric average formulation and from base year to chained.

The current indices are computed using the weighted arithmetic average of changes in bilateral exchange rates relative to a base period, which is December 1980. The weights are the respective trading partner’s share of total Philippine trade.

“An inherent weakness of the arithmetic mean is that it gives more weight to depreciating currencies,” Mr. Dakila noted.

The shift to a geometric methodology, he said, takes into account year-on-year changes in bilateral exchange rates. -- B. F. V. Roc