Liquidity in the Foreign Exchange Market has Improved

by PNG Business News - July 26, 2021

Photo Credit: Michael Bilotta

FX market liquidity improved in the second quarter of 2021, with FX market turnover increasing by 19.7%.

FX market liquidity increased in the June Quarter 2021, according to the BSP Pacific Economic & Market Insights Quarter 2 Report, with market turnover reaching 23.9 per cent in June and 19.7 per cent in the June Quarter 2021.

“FX inflows for the 1st half of 2021 were up 1.8% from one year ago. Reduced foreign currency supplied to the market from Barrick was offset by firmer copper and palm oil prices, combined with increased project-specific and donor foreign currency inflows,” BSP Group General Manager - Treasury Rohan George commented.

The Kina is expected to stay constant versus the US dollar, while the Kina/Australian dollar cross rate will benefit from a stable Australian dollar.

George predicted that FX market turnover will decline in the September quarter, compared to the high levels observed in the middle of the year.

“Outstanding FX orders reduced by 60% over the June quarter, due to strong foreign currency inflows, however as FX inflows taper in July, August outstanding FX orders build up again,” he added. 



Loop (21 July 2021). “FX Liquidity Improves”.

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PNG Business News - November 08, 2021

FX Liquidity Increases In Q3, According To BSP

According to Bank South Pacific Financial Group Ltd, foreign exchange (FX) liquidity has increased since the second quarter of the year, owing to robust commodities prices mixed with project-specific and donor foreign currency inflows (BSP). The PNG Kina has stayed constant versus the US dollar for the third consecutive quarter, according to the bank's Pacific Economic and Market Insights Q3 2021 Report, although FX reserves at the end of June increased by 7% quarter on quarter, owing to favourable inflow. According to the report, overall foreign exchange reserves were US$2.49 billion (about K8.5 billion) as of June 30.  In June, reserve balances rose 7% quarter over quarter, with positive inflows overcoming the Central Bank's monthly intervention of $50 million (about K171.6 million). While FX liquidity increased by 17% in September, BSP Group general manager for treasury Rohan George noted FX turnover increased by 18% during the previous six months, owing to robust commodity prices, particularly for oil, copper, palm oil, and coffee. “Firmer commodity prices, combined with increased project-specific and donor foreign currency inflows offset the lost FX market inflows from the closure of the Porgera gold mine,” he said. “Momentum in FX market turnover is likely to increase into year’s end. Outstanding FX orders have increased from low levels seen in June, and this is expected to continue in October and November with pre-Christmas import orders. “We expect large foreign currency inflows in late November and December to satisfy any foreign currency backlog. “And to manage reduced FX liquidity, businesses should place FX orders (with correct documentation), as soon as possible, ensure orders are cash-backed whilst awaiting execution, tax clearance certificates are current and reflect the expected FX order execution time,” George added. “It was also reported that the kina has been stable and unchanged against the US dollar for the past 11 months; however, the pullback in the AUD/USD (Australian dollars/US dollars), amid Coronavirus (Covid-19) related weakness in the Australian economy, strengthened the Kina/AUD, and the Australian dollar is expected to outperform into year’s end as the Australian economy opens up.”   Reference: The National (1 November 2021> “FX liquidity rising in Q3: BSP”


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The supply and demand for foreign money dictate how the foreign exchange market operates. Governor Loi Bakani stated in the Central Bank's Monetary Policy Statement that PNG's foreign exchange supply is mostly derived from export receipts, government external loans, grants, and foreign direct investments. Foreign exchange is needed primarily for the import of goods and services, the payment of external debt, dividend and income repatriation, and other transfers. Physical products other than non-goods (service, dividends, transfers, and capital related-flows) normally have a payment time of up to two months before final remittances. Because the foreign exchange orders are inside this window, they should not be confused with outstanding orders. Bakani explained that following the kina's flotation in 1994, the currency fell against the USD and AUD until 2003, after which it remained relatively steady. “The country did not take advantage of this opportunity to develop a robust non-mineral sector where the bulk of the population is engaged in, for employment, exports and revenue generation.  “The Government’s focus then, however, was mainly on the enclave extractive sector.  With the special concessions allowed under the various PDAs, export proceeds of mineral companies are kept in their foreign currency accounts (FCAs) abroad.”  As a result, he noted, the economy did not reap the full benefits of persistent foreign cash inflows. With the establishment of the PNG LNG Project in 2012, a substantial structural shift occurred. “This contributed to the huge current account surpluses, but without corresponding flows into the foreign exchange market. This has undermined the proper functioning of the foreign exchange market and its exchange rate setting role.  “Given the development in the FX market and the exchange rate, a number of external researchers have suggested that the kina is overvalued and not convertible.”  To achieve external balance and support non-mineral private sector activity, a significant depreciation in the exchange rate is required, particularly for exports and import substitution. However, a large depreciation may not necessarily result in the desired supply response in the non-mineral private sector due to structural impediments, according to the Central Bank's own internal assessment. “It also shows that activity in the non-mineral private sector is driven by international commodity prices, domestic prices and Government spending relative to the impact of kina depreciation.  “Since the floating, the kina has depreciated by around 73.0 percent in nominal terms, while the impact on the supply response on agriculture production has been minimal.  “The large depreciation would also have a minimal impact on inflows by the mineral sector, and portfolio inflows.”  Bakani also pointed out that because PNG is an import-dependent economy, a significant devaluation would raise import costs and local inflation, negatively impacting people's well-being. “For instance, a proposed 20.0 percent depreciation of the nominal exchange rate would lead to an increase in inflation of around 8.0 – 10.0 percent, and a further 13.0 percent depreciation will lead to inflation increasing further by around 6.0 – 8.0 percent.  “This would give a 14.0 – 18.0 percent increase over a three-year period. If other determinants of inflation are taken into consideration, inflation would be much higher.” Furthermore, Bakani emphasized that exchange rate movement is a reflection of the economy's current structural problems and should not be viewed as a solution to the external imbalance. While the Bank has made steps to strengthen the foreign exchange market's functioning, the Government must also adopt coordinated policy measures to expand and diversify the export base and stimulate import replacements.   Reference: Loop (4 November 2021). “BPNG Explains Importance Of Forex”.

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