Peso only currency to weaken in region

The peso was the only currency in the region that depreciated against the dollar year-to-date, Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo said Friday.

The Philippine currency weakened against the greenback by 6.05 percent year-on-year in the first half, mainly an effect of the US Federal Reserve’s moves to raise interest rates, BSP data showed.

In a recent e-mail, Guinigundo said the peso averaged 49.92:$1 in the first six months, depreciating from the average of 46.9 a year ago.

The peso also weakened by 3.69 percent relative to the average of 48.08:$1 in the second half of last year.

“The depreciation of the peso in the first half was due mainly to US Fed rate hikes in March and June and expectations of at least one more rate hike before the end of 2017,” Guinigundo explained.

Whenever the peso strengthened against the dollar during the six-month period, Guinigundo said the domestic currency appreciated “due to expectation of strong Philippine growth prospects for the first quarter of 2017 and continued optimism about the government’s tax reform efforts.”

The gross domestic product (GDP) grew 6.4 percent during the first three months, below expectations but still among the fastest in the region.

The peso nonetheless fell to almost 11-year lows toward the end of the first half as Guinigundo noted that the close of 50.47:$1 on June 30 was 1.49-percent weaker year-on-year, “in contrast with the strengthening of most Asian currencies during the same period.”

Guinigundo nonetheless expressed optimism that solid macro fundamentals—“the sustained inflows of foreign exchange from overseas Filipino remittances, foreign direct investments, business process outsourcing and tourism receipts as well as the ample level of the country’s gross international reserves and the country’s robust economic growth”—would continue to provide support to the peso.

In terms of currency volatility, or magnitude of fluctuation against the US dollar, the Philippine peso’s 0.56 percent was relatively lower than most other currencies in the region save for the Indonesian rupiah’s 0.26 percent and the Chinese yuan’s 0.53 percent.

The volatility of the Singaporean dollar was a higher 1.19 percent; 1.49 percent for the Thai baht; 1.64 percent for the Malaysian ringgit; 1.77 percent for the Japanese yen, and 1.9 percent for the South Korean won.

“During the first half of 2017, the US Fed’s normalization process has led, in part, to episodes of increased volatility in most emerging economies’ foreign exchange markets,” Guinigundo noted.

The BSP official pointed out that the peso’s depreciation was beneficial in terms of trade.

“As the depreciating trend continued, the peso gained external price competitiveness against its trading partners. This was seen in the decline in the peso’s real effective exchange rate (REER) index against the basket of currencies of all trading partners (TPI), trading partners in advanced (TPI-A) and developing (TPI-D) countries,” Guinigundo said.

Moving forward, Guingundo said the peso “is expected to be broadly stable” in the near-term.

“The expected growth in foreign exchange inflows from overseas Filipino remittances and BPO revenues in 2017 by 4 percent and 10 percent, respectively, and the recent Fitch Ratings’ affirmation of the Philippines’ investment grade score of ‘BBB-’, are expected to support to the peso,” Guinigundo said.

“Likewise, the sustained inflows from foreign direct investments, tourism receipts as well as the ample level of the country’s gross international reserves and the country’s robust economic growth, could continue to provide stability to the peso. The credit-rating upgrades that have been earned over the last few years are expected to sustain market confidence toward the Philippine financial markets,” Guinigundo added.

However, Guinigundo said the medium-term outlook for the peso might be impacted by external development that could affect domestic market sentiments, including an aggressive rollback in financial regulations in the US; faster credit growth in China; faster-than-expected rise in US policy rates; non-economic factors such as geopolitical tensions specifically in the Korean peninsula and Syria; the shift toward protectionism, as well as weak demand, low inflation and weak balance sheet in advanced economies. —BEN O. DE VERA