Worries on peso decline ‘overdone’

Recent market jitters over the peso’s depreciation against the dollar are unwarranted given the country’s strong underlying fundamentals that will likely keep the local currency “broadly stable” over the medium term.

This was the assessment of Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr., who also affirmed in an economic forum organized by Security Bank that the domestic economy was nowhere close to overheating and that the central bank was ready to deploy a full array of monetary tool kit to address volatility arising from interest rate increases in the United States and other western countries.

“Recently, the depreciation of the peso has been a cause of some market worries. Such concern is overdone,” Espenilla said.

As of yesterday, the peso closed at 50.74 against the dollar, down from 49.73 since the start of the year.

The BSP chief said the peso’s “moderate and controlled depreciation” was reflective of an expanding economy, rising import demand, residents’ increasing direct and portfolio investments abroad for expansion and business diversification as well as public and private sector debt prepayments to manage foreign exchange risks.

“There’s also outflow of hot money. We see this as healthy adjustment,” Espenilla said.

He added that the peso was expected to be “broadly stable over the medium term,” backed by strong underlying economic fundamentals, market access and robust international reserves alongside additional liquidity buffer from overseas Filipino remittances, business process outsourcing (BPO) receipts and a strong recovery in exports.

As of end-October, the BSP’s gross international reserves (GIR) stood at $80 billion, covering 8.4 months’ worth of imports of goods as well as payments of primary income and services. The foreign reserves were also equivalent to 5.4 times the short-term external debt based on original maturity and 3.6 times based on residual maturity. The BSP defines short-term debt based on residual maturity as outstanding foreign debt whose original maturity is a year or less, plus principal payments on medium- and long-term loans of the government as well as the private sector that were due within the next 12 months.

Espenilla said the BSP would further liberalize the foreign exchange regime in the country. For instance, the BSP is set to issue rules on easing the foreign currency borrowing of the private sector to move away from BSP approval and tedious documentary requirements.