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The level of the Philippine peso exchange rate is determined on the basis of supply and demand. The Bangko Sentral keeps a close eye on the market and intervenes on a selective basis when it needs to maintain orderly conditions or to keep the peso rate in line with its policy objectives.
The normal measured daily market turnover of the Philippine peso is approximately US$35 million, with prices varying depending on market liquidity. During local hours, a spread of Ps0.05-Ps0.10 is usual for deals of US$1 million-US$2 million. Liquidity outside the local centre trading hours is thin.
Overseas banks may buy the peso without restriction; however, commercial details may be required when selling. Despite foreign exchange deregulation, outward remittances are subject to constraints and scrutiny by the central bank.
Since October 1993, local sellers of foreign exchange have been liable for stamp duty on transactions. Usually the local bank will pay the documentary stamp tax on behalf of its overseas counterparties, subtracting the cost from the rate exchange quoted. The Philippine money market lacks depth especially beyond the one month, thus hindering the development of a forward market.
Recent trends
The Philippine peso is heavily pegged to the US dollar. Political turmoil weakened the peso substantially during the 1980s, but 1994 produced a sharp reversal of the trend. The peso appreciated sharply in the latter part of the year with a strong export performance and higher investment flows, despite the central bank's attempts to limit the move.
Progressive foreign exchange liberalization subsequent to 1992 increased the access of foreign counterparties to the local forward market and during 1994 resulted in a significant increase in speculative inflows of US dollars.
Foreign counterparties were attracted to the market by high treasury bill yields, which when combined with peso appreciation, further fuelled the rate of appreciation. Overseas repatriation by Filipino workers also contributed to the peso's ascent.
However, in July 1994, the central bank tried to halt the speculative flows and subsequent volatility of the peso by announcing the reintroduction of foreign exchange controls on forward transactions. Under the new controls, the central bank once again insists that all forward sales of pesos...