Peso weakness seen to boost economy

The peso’s recent decline may be good for the Philippine economy, which relies heavily on dollar-earning industries, according to Dutch financial giant ING.

Signals from the US Federal Reserve of a coming rate increase by September or December this year have pushed the greenback higher against most major currencies globally. The peso has moved with the trend, reaching a new five-year low Friday.

Joey Cuyegkeng, economist at ING Bank’s Manila branch, said policymakers and the business sector were unconcerned. “We do not think that the volatility would lead to an unstable Philippine financial sector and economy,” he said in a note to clients this week.

The dollar’s recent rally was being fueled by reports pointing to a recovery in the US economy, which would reduce the need for the American central bank to keep interest rates at their current record lows.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. on Thursday said that looking beyond volatile conditions in financial markets, a stronger US economy would be good for trading partners such as the Philippines.

ING’s Cuyegkeng said a weaker peso should be welcomed. “The volatility in the financial markets is healthy while a moderately weaker peso would be favorable for the economy,” he said.

The weak peso will provide a welcome boost to the Philippine economy, which grew by 5.2 percent in January to March, the slowest pace in three years. Last year, the economy expanded by 6.1 percent.

Several of the Philippine economy’s major drivers are dollar-earning industries such as tourism and business process outsourcing (BPO). Remittances from overseas Filipino workers (OFW)—the biggest source of dollar income for the economy—accounted for nearly a tenth of domestic output.

BPO revenues, meantime, are expected to reach close to $20 billion this year, while cash from migrants was seen reaching a record high of more than $25 billion.

These income streams provide fuel for consumer spending, which accounts for about two-thirds of gross domestic product. Exporters also stand to benefit as a weaker peso means more money for every dollar they earn. A weaker peso also makes them price-competitive in the international market.

In any case, the central bank had assured the public that with many policy levers available, it was ready to make adjustments if necessary to curb volatile market conditions that could lead to economic instability.

Tetangco earlier said that authorities were studying whether adjustments in monetary policy settings would be necessary. The BSP’s Monetary Board will meet in two weeks to determine policy settings.

Tetangco’s statements followed the improved outlook for the US economy by the Fed. The American central bank met earlier this week and kept its key interest rates at their current record lows.

In a statement, however, the US Fed said it continued to see more signs of strength for the American economy, bolstering expectations of a rate increase by September or December this year. This would be the first Fed rate adjustment since the 2008 global financial crisis.

“We will factor in all these during our next policy meeting to see if there is any need to make adjustments to our policy levers to address any possible financial stability risks,” Tetangco said in a statement.

“With the improvements in some of the economic indicators that the Fed is looking at, the market seems to now be shifting its focus from lift off to the speed of normalization,” Tetangco said. “We will monitor how any such shift would affect market behavior, especially as the recent relative calm in China’s financial markets may temper potential ouflows from emerging markets.”