The peso dropped anew to its lowest level in almost 13 years as investors fled to dollar assets, spooked by the country’s record high inflation for August and aggravated by a broad emerging markets selldown around the world.
From the previous day’s close of P53.55, the local currency ended Thursday’s trading session at P53.80— its lowest level since December 2005. This was also the steepest single-day drop for the peso since June 13, 2008.
The peso was also the biggest loser in the region, amid weaker currencies across the board.
At the same time, the local stock barometer slipped to the 7,600 level on Thursday as investors braced for further local monetary tightening amid rising inflation while jitters over emerging markets escalated.
The main-share Philippine Stock Exchange index (PSEi) lost 113.56 points or 1.47 percent to close at 7,638.71. Another P1.02 billion worth of foreign funds flowed out of the market.
BDO Unibank chief strategist Jonathan Ravelas said the currency’s weakness “stems from a series of unfortunate events such as importers’ demand for the US currency, rising inflation, and fears of contagion from an emerging market rout.”
“Ladies and gentlemen, the captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence,” he said.
Meanwhile, the Philippines may have to sacrifice economic growth in the short-term by moving faster to cool down inflation in order to buy a sustainably high growth for the long haul, a top Credit Suisse economist said.
This year, Credit Suisse sees the Bangko Sentral ng Pilipinas (BSP) hiking interest rates by another 50 basis points to temper the upsurge in consumer prices and tame inflation expectations. But by the middle of next year, the inflation rate may ease back to the BSP’s targeted level of 2-4 percent.
“Philippine growth has been good—it has been one of the best in Asia—but it’s now beginning to come at a cost,” Credit Suisse managing director and chief economist for Asia-Pacific Ray Farris said in a roundtable briefing on Thursday. “We’ve argued for a while that monetary policy has been a bit too easy, credit growth has been a bit too strong.”
While the accommodative monetary policy has supported the 6-percent gross domestic product (GDP) growth in the second quarter, Farris noted that this had likewise caused inflation to rise to 6.4 percent year-on-year in August.
The economist noted that another consequence of the strong growth was the deterioration in the trade balance, referring to the increased demand for imported capital and consumer goods to support economic growth, in turn casting pressure on the peso.
“So we think what’s going to have to happen is that BSP will have to raise interest rate structure a bit further, now probably more than many in the market thought two days ago,” Farris said.
The BSP has raised its key interest rates so far this year by 100 basis points, the last of which was a 50-basis point hike last month.
Credit Suisse’s economic growth forecast for the Philippines for 2019 is 6.5 percent but Farris said this was now at risk due to the need to cool down inflation. However, he said the Philippines could still achieve a growth of close to 6 percent over time.
A total of $911.5 million changed hands on the foreign exchange trading platform of the Bankers Association of the Philippines, with most local banks selling their pesos and the central bank seen intervening to modulate the volatility.