Peso to remain ‘broadly stable’ due to strong economy
Despite a slide to an eight-year low last week, the peso’s depreciation against the dollar as well as its volatility remain at comfortable levels as the Bangko Sentral ng Pilipinas noted that the macroeconomic fundamentals remained solid to shield the domestic economy from external shocks.
“What we are seeing today is a normal adjustment process to the continuing volatilities and uncertainties in the global markets that await the impending US interest rate hike on top of the other sources of black noise in the market. While the peso appears to have depreciated quite significantly, it is important to bear in mind the anchors of stability in the Philippines,” BSP Deputy Governor Diwa C. Guinigundo said in an e-mail.
“At the same time, we should also recall that the exchange rate pass through to inflation has declined over the years. This means we do not expect a one-to-one translation of peso weakening to higher inflation over the next few years. The strong growth dynamics should provide us with greater resiliency to these external shocks and limit the currency fluctuations. The BSP remains attentive to all these shocks and black noise and ready to act as warranted and as necessary,” Guinigundo added.
Last week, the peso touched the 50:$1 level amid market jitters following Donald Trump’s win in the US presidential race and ahead of the anticipated Fed rate increase next month.
“The market expects that the policies to be adopted by Mr. Trump to boost spending could be inflationary and could likely lead to higher US interest rates. As a result, there has been a resurgence of capital outflows from emerging markets including the Philippines although year-to-date, we continue to show net gains in both foreign direct and portfolio investments. There is also the fear of a possible shift to tighter trade and business regime,” Guinigundo explained.
The BSP official nonetheless cited data showing that as of Nov. 24, the peso depreciated by 5.84 percent against the dollar, which he noted was broadly comparable to the peso’s year-to-date depreciation of 5.05 percent in the same period last year.
Previous lows
It was on Nov. 24 that the peso hit an intraday low of 50:$1, the first time to reach that level in 10 years, before closing at a fresh eight-year low of 49.98, the weakest level so far this year as well as since Nov. 20, 2008’s 49.999:$1, during the height of the global financial crisis.
Guinigundo noted that the peso last breached the 50:$1 limit on Nov. 15, 2006, during which it closed at 50.09:$1.
“On Nov. 24, regional currencies experienced another round of day-to-day depreciation against the strong US dollar, with the Japanese yen depreciating the most by 2.01 percent. This followed the releases of some favorable economic news from the US heralding a more certain US interest rate hike, which could adversely affect market dynamics especially those players with large external exposure,” Guinigundo explained.
On a year-to-date basis, the “comparable” depreciation of the peso compared with a year ago “was accompanied by prolonged uncertainties about the timing, magnitude, and pace of the US Fed’s rate hike which in 2015 was commonly referred to as US Fed policy normalization,” Guinigundo said.
Compared with other Asian currencies, however, the peso was among those that posted the fastest depreciation, next only to the Chinese yuan’s year-to-date weakness of 6.15 percent.
“In 2016, the US Fed’s normalization process has led, in part, to relative volatilities in most emerging economies’ financial markets. For instance, majority of Asian currencies depreciated against the US dollar (on a year-to-date basis) as of Nov. 24,” Guinigundo said.
Regional decline
The Malaysian ringgit, the Singaporean dollar and the South Korean won also depreciated against the US dollar year-to-date, while the Japanese yen, Indonesian rupiah and Thai baht strengthened against the greenback.
As for the peso’s volatility, or the magnitude of fluctuation against the US dollar, it stood at 1.82 percent as of Nov. 24, Guingundo said.
“This was relatively lower than the volatility of most currencies in the region except for the Chinese yuan (1.56 percent) and the Thai baht (1.22 percent). One can argue that the country’s sustained sound macroeconomic fundamentals continued to limit the volatility of the exchange rate of the domestic currency,” the BSP official said.
Macroeconomics
“Thus, while market sentiments stemming from external developments continue to affect the foreign exchange markets, the peso is expected to remain broadly stable on account of the country’s strong macroeconomic fundamentals—including robust GDP [gross domestic product] growth, low and stable inflation, favorable external payments position, strong and resilient banking system, and solid fiscal position,” he said.
The GDP grew 7.1 percent in the third quarter—the fastest among emerging Asian economies, bringing the nine-month average to 7 percent. The government targets GDP growth of 6-7 percent this year and 6.5-7.5 percent next year.
“Likewise, the ample level of international reserves, the sustained structural inflows of foreign exchange from overseas Filipino remittances, foreign direct investments and recovery of exports could continue to support the peso. The credit rating upgrades awarded to the Philippines are also expected to increase market confidence toward the Philippine financial markets,” according to Guinigundo.
Robust trade
Any slack from potentially unfavorable trade and labor policies elsewhere could be offset by the vibrant and steep growth trajectory of intra-Asean and intra-Asian economic integration, he said. “In addition, strong domestic consumption and investment growth could provide buffer against the adverse impact of external developments. As experienced during the global financial crisis in 2008, domestic demand has always served as a reliable source of economic resilience and uninterrupted growth (such as 71 quarters of consecutive growth),” he added.
Separately, the Department of Finance’s chief economist blamed the weaker Asian currencies to “overreaction by fund managers to the prospects of higher US Federal Reserve rates this December.”
In a statement, Finance Undersecretary Gil S. Beltran noted that “emerging economies with excess savings like the Philippines are not dependent on the regime of cheap financing resulting from the post-2008 financial crisis move by the Fed to cut rates as a monetary stimulus to ignite the United States’ economic recovery.”
“Economies like the Philippines are net lenders rather than borrowers. There is, however, an overreaction by fund managers and have lumped all economies into one category without regards to macroeconomic fundamentals,” Beltran said.
