Peso depreciation of 5.35% in ’16 at par with regional currencies

Despite sliding to eight-year lows in the last few months of 2016, the peso’s full-year depreciation was at par with most of its regional peers and was less volatile than most currencies, a ranking official of the Bangko Sentral ng Pilipinas (BSP) said.

“It is important to stress that the recent weakness of the peso was clearly more sentiment driven than fundamentally driven. It is difficult to find reasons on the ground to justify a weak peso because the fundamentals remain sound and stable. Now that the drivers of negative market sentiment appear to be receding, the peso is now showing signs of recovery,” BSP Deputy Governor Diwa C. Guinigundo told the Inquirer.

The end-2016 peso-dollar closing rate of 49.72 to $1 was weaker than end-2015 level of 47.06. As such, the peso depreciated by 5.35 percent in 2016, which Guinigundo nonetheless noted was close to the depreciation of 4.97 percent in 2015.

“This is clearly part of the regional trend, the peso depreciating along with most Asian currencies such as the Chinese yuan, Malaysian ringgit, Indian rupee, Korean won and Singaporean dollar,” Guinigundo added.

The BSP official blamed the peso’s weakness last year to the US Federal Reserve rate increase in December and the three more and faster rate increases projected this year; investor sentiment related to the local elections last May; the United Kingdom’s “Brexit” vote to leave the European Union; the referendum in Italy, and Donald Trump’s win in the US presidential election.

“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. This would have some repercussions on capital flows and exchange rate of emerging markets, including the Philippines,” Guinigundo explained.

The uncertainties brought by the US Fed’s so-called policy normalization also “led, in part, to episodes of increased volatility in most emerging economies’ foreign exchange markets,” Guinigundo added.

The peso’s volatility, or the magnitude of fluctuation against the dollar, hence rose to 2.35 percent at end-2016, which Guinigundo said was still relatively lower among regional currencies save for the Chinese yuan’s 2.01 percent, the Indonesian rupiah’s 1.85 percent and the Thai baht’s 1.25 percent.

Guinigundo said the weaker peso gave it an external price advantage against its trading partners, as its real effective exchange rate (REER) index against the basket of other currencies also declined. A lower REER meant that the peso gained external price competitiveness. He said that in 2016, the average of the REER index declined against the basket of currencies of all trading partners by 3.32 index points (3.6 percent) to 88.90 index points from 92.22 index points a year ago.

“The REER index likewise averaged lower by 6.04 index points (6.69 percent) against the trading partners in advanced countries and by 1.52 index points (1.29 percent) against the trading partners in developing countries,” Guinigundo added.

“The weakness of the peso brought some price competitiveness to our exports as well as BPO (business process outsourcing) and remittance earnings. On the other side of the ledger, we also see some negative effects on domestic prices, external debt servicing and imports of key commodities. The challenge is to continue making the economy more competitive and resilient such that no matter what the external sector brings to the domestic borders shall be addressed appropriately without negative collateral impact on the economy and the people’s welfare,” the BSP official said.

Moving forward, Guinigundo said that “while market sentiment stemming from external developments continue to affect the foreign exchange market, 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 prudent fiscal position.”