Peso likely to continue fall as imports surge

The peso is seen to further depreciate as the surge in imports to support the government’s infrastructure buildup brought the country’s current account to a deficit, according to Washington-based Institute for International Finance (IIF).

In a report titled “Economic Views: Asia Six-Understanding Exchange Rate Policy Setting,” the IIF noted that as of Oct. 27, the Philippine peso depreciated against the US dollar by 4.1 percent year-on-year, in contrast to the appreciation of the South Korean won by 6.4 percent, Malaysian ringgit (5.5 percent), and Indian rupee (4.2 percent).

The IIF said the peso weakened “because of an import-led shift in the current account from a large surplus to a small deficit and foreign portfolio outflows.”

The current account, a component of the country’s balance of payments, was expected to swing to a deficit of $600 million this year from a $600-million surplus last year as import growth outpaced that of exports.

In the first quarter, the $318-million current account deficit reversed the surplus of $730 million a year ago.

Bangko Sentral ng Pilipinas officials had said the surge in imports of capital goods was supporting the growing economy as well as the government’s program to ramp up infrastructure investments.

In India, Thailand, South Korea and Malaysia, their respective “central banks have also continued to step in to stem upward pressures, as evident from the large increase in reserves,” it said.
“The somewhat greater intervention this year barring the Philippines was due to multiple factors, including external competitiveness concerns, curbing excessive volatility and building up reserves as self-insurance to counter unwinding of non-resident portfolio flows if the carry trade was to reverse,” the IIF said.
In the Philippines, it said there was limited intervention by the BSP as the country did not face similar appreciation pressures, and the export-driven economy enjoyed the benefits of a relatively weaker currency.

Moving forward, the IIF said the absence of the cushion of a current account surplus and less attractive pull factors might continue to result in a “depreciation bias” in the Philippines.