BSP seen allowing peso to fall further

By the end of the year, the peso is expected to depreciate to between 51.50 and 52.50 against the US dollar. —AP

The Bangko Sentral ng Pilipinas is expected to tolerate further weakening of the peso—now trading at its lowest against the US dollar in 11 years—to prevent the erosion of foreign reserves, a buffer for financial and monetary stability.

Emilio Neri Jr., lead economist at Bank of the Philippine Islands, said in an investors briefing conducted by BPI Securities that the peso should be allowed to depreciate to avoid the dwindling of reserves.
By the end of this year, BPI expects the peso to depreciate to between 51.50 and 52.50 against the US dollar. This assumes that the US Federal Reserve will hike interest rates twice this year.

“If something goes wrong with Europe or the US, we could—before the end of the year —hit 54,” Neri said. “I’m not saying we could end at 54 but we could hit 54:$1,” Neri said.

To date, Neri said the Philippines’ import cover had shrunk considerably to less than 11 months from 18 months.

As of Friday’c close of 50.36 to $1, the peso is trading at its lowest level against the greenback since September 2006.

The BSP’s gross international reserves (GIR) ended February at $81.1 billion, down from $81.4 billion in January.

Sparing GIR from weakness implies accommodating weaker peso, said Citi Philippines economist Jun Trinidad in a research note dated March 8.

“We sense the BSP prefers to allow a weaker peso to accommodate strong onshore foreign exchange demand, particularly involving private transactions. We still expect the BSP to tactically intervene in the market [as net seller] and use GIR if there’s a need to, during key event risk such as FOMC (US Federal Open Market Committee) meeting. However one-off private transactions that may involve hefty import payments, debt service, dividend/profit repatriation, as noted in the past would likely be absorbed by a weaker peso and local liquidity,” Trinidad said.

Citi also sees interest rate hikes as an option when evidence of a weaker peso accelerates upside inflation risk in the second half of 2017.

Trindad said public and private foreign debt maturity would sustain onshore demand for US dollars amid a weak current account, in turn posing a drag to GIR. However, he sees the GIR staying resilient in the $80 billion range.

In the last five years, BPI’s Neri said the country had accumulated reserves equivalent to 1 to 1.1 times the country’s total foreign debt stock.

“That will be very difficult to sustain in the future in the face of the US raising interest rates in the next two to four years,” Neri said. “Whoever takes the reins of the BSP in July will be very much challenged by the ability to sustain this impressive performance of the central bank.”

The BPI said it was becoming more difficult to further beef up the country’s foreign reserves when the US Federal Reserve was hiking interest rates. “The next BSP governor will have a tougher time ahead,” he said.

Neri said the country’s trade deficit had more than doubled in the past year even before the construction projects of the new administration were completed. The difference between remittances and trade deficit has dropped to $2 billion compared from $10 billion in the previous years.

It was possible, he said, that the trade gap could grow larger than the total remittances these days. Not even business process outsourcing (BPO) revenue can compensate, he said, as $20-billion in gross revenue from the BPO industry would translate to only $5-10 billion in net revenue.

Across the region, all countries are suffering from declining exports in the last 12 months. On import bills, he said the Philippines stood out as an exception, bucking the decline in imports largely due to Filipinos’ propensity to buy cars. The proposed excise taxes on vehicles can slow down car purchases in the near term but Neri said growth would continue over the medium term.

“If we don’t manage this well, we can bring the deficit-to- GDP (gross domestic product) ratio back to 1997 level,” he said, referring to the Asian currency crisis period when central banks were forced to devalue currencies amid capital flights that gnawed on foreign reserves in the region.

Neri sees the selection of the next BSP chief as a potential “black swan” for the Philippines. His personal bias is for either of the two deputy governors—Diwa Guinigundo or Nestor Espenilla Jr.—to become the next steward, adding he would feel “more secure, more confident” than if an outsider would be named to the post.