DOF: Record current account deficit could weaken peso

MANILA, Philippines — The peso could weaken amid a widening current account deficit even as it strengthened against the US dollar in the first quarter thanks to solid macro fundamentals, the Department of Finance (DOF) said Friday.

In an economic bulletin, DOF Undersecretary and chief economist Gil S. Beltran said the peso appreciated by 0.01% versus the greenback as of end-March as the domestic currency “tracked its peers in Southeast Asia in gaining strength against the US dollar.”

The Chinese yuan, Indian rupee, Indonesian rupiah, Malaysian ringgit, Singaporean dollar, Thai baht, and Vietnamese dong also gained against the US dollar year-to-date as of March 29.

On the other hand, the Hong Kong dollar, Japanese yen, New Taiwan dollar, and South Korean won were weaker than the greenback during the first three months.

The peso was also stable, as its volatility, measured by the coefficient of variation, was 0.56 percent.

A currency’s volatility refers to the magnitude of its fluctuation against the US dollar.

Moving forward, Beltran said “the outlook for the peso remains tilted towards the downside owing to a growing current account deficit, which, in turn, is on account of increased importation of capital goods.”

The current account deficit ballooned to a record $7.9 billion last year as more dollars were being spent on imports.

Economic managers had said that with the ambitious “Build, Build, Build” infrastructure program of the Duterte administration in full swing, demand for imports of mostly capital goods would remain strong in the near term.

But despite this downward pressure on the peso, Beltran said “the country’s external stance remains generally strong.”

“First, it has ample buffers against heightened external headwinds; its gross international reserves remain high at $82.9 billion, equivalent to 7.3 months of imports of goods and services,” Beltran said.

“Second, it has prudently trimmed its external debt exposure. External debt-to-GDP [gross domestic product] ratio as of end-2018 remains comfortably low at 23.9 percent in 2018, significantly down from 59.7 percent in 2005,” he added.