Peso gains competitive edge against other currencies

The peso improved its price competitiveness against other Asian currencies in the second quarter, the Bangko Sentral ng Pilipinas reported.

The local currency is said to have improved its price competitiveness when it depreciated against foreign currencies in “real” terms, with all exchange rates and differences in inflation taken into account.

Inflation and exchange rates both affect costs of goods for export. A competitive currency is thus welcomed by exporters since it makes their goods more affordable and more attractive to foreign buyers.

According to a central bank report, although the peso appreciated in real terms against the US dollar in the second quarter from a year ago—or from 43.25:$1 to 45.51:$1—it has depreciated in real terms against currencies of other exporting countries in Asia.

The peso’s real effective exchange rate against the basket of selected Asian currencies settled at -1.4 percent. This means the peso depreciated by 1.4 percent against the currencies included in the basket such as those of Singapore, South Korea, Taiwan, Thailand, Malaysia, Indonesia, and Hong Kong.

BSP Deputy Governor Diwa Guinigundo said it is important for exporters to consider the real effective exchange rate, rather than the nominal exchange rate, in assessing the competitiveness of the peso.

With the peso’s rise against the US dollar earlier this year, some exporters have urged the BSP to intervene more in the foreign exchange market by buying more dollars and deliberately weaken the peso.

The exporters said the appreciation of the peso had made Philippine-made goods more expensive for foreign buyers and, thus, less attractive.

But the BSP said that the cost of goods is affected not only by the exchange rates, but also by movements of prices of goods (inflation).

For this reason, he said, it is the real effective exchange rate that matters.

With the decline in the REER of the peso in the second quarter from that of a year ago, the BSP said the local currency had in fact become more competitive to the advantage of the export sector.

Competitiveness of the export sector has become even more crucial this year given the weak global demand from major export markets, including the United States and Europe.

The sluggish performance of Western economies has dampened demand for goods from exporting countries like the Philippines and its Asian neighbors.