The peso has always been vulnerable to past crises.
During the Asian Financial Crisis in the late ‘90s, the peso depreciated to 56 from around 26 against the dollar. During the 2008 Global Financial Crisis, it weakened by around 14 percent.
Today though, the peso remains relatively stable, trading at the 50 to 51 per dollar range despite the new coronavirus disease (COVID-19) crisis. Other Asian and emerging market currencies are depreciating sharply, making the peso one of the best performing currencies this year.
The peso’s surprising stability begs the question: What has changed? Compared to the past, one of the major changes responsible for the peso’s strength is the government’s much lower debt obligation relative to the gross domestic product (GDP).
Although the absolute amount of our government’s debts has been going up, it is equivalent to only 41.5 percent of GDP as of the end of last year from a peak of 71.4 percent of GDP in 2003.
The Philippines’ debt-to-GDP ratio also compares favorably to those of other countries in Asia like Singapore (126 percent), Vietnam (57.5 percent), Malaysia (51.8 percent) and China (50.5 percent). In fact, even if we are just a developing country, our ratio is better compared to those of many developed countries including Japan (238 percent), the US (107 percent) and the UK (80.8 percent).
Our government was able to reduce its debt-to-GDP ratio by increasing tax revenues and limiting deficit spending. For example, in 2006, the government increased the value-added tax rate to 12 percent from 10 percent despite it being a highly unpopular move. Moreover, since 2011, the government has kept its budget deficit below 3 percent of GDP.
Another important change over the years that helped prop up the peso is the significant decline of our government’s dependence on foreign debts. From a peak of more than 70 percent in the early 2000s, the Philippines’ external debt-to-GDP ratio has fallen to 23.3 percent by end-2019.
Our country’s gross international reserves (GIR) or dollar holdings have also increased to very comfortable levels. As of end-March this year, our GIR was $88.9 billion. This is enough to cover 7.9 months’ worth of imports and more than three times the amount of our country’s external debt obligations in the next 12 months.
The Philippines’ healthy GIR is largely attributable to the strong growth of the business process outsourcing (BPO) sector and remittances from overseas Filipino workers (OFWs).
Note that revenues of the BPO sector have increased dramatically to around $26 billion last year from only $1.3 billion in 2004. In contrast, there were hardly any BPOs during the 1990s.
Meanwhile, the value of OFW remittances has grown tremendously to around $30.1 billion in 2019 from around only $5 to 6 billion during the latter part of the 1990s.
The strong growth of the BPO sector and OFW remittances has allowed the Philippines to consistently post a current account surplus for several years beginning in 2003 as we finally earned more dollars than we needed.
Given the Philippines’ improving finances, it is no wonder then that the government was able to raise $2.35 billion last month by selling 10-year and 25-year bonds yielding only 2.457 percent and 2.95 percent, respectively. The bonds were more than 4.5 times oversubscribed.
Still, the peso also faces some risks in the near term.
OFW remittances, which is one of our major sources of dollars, could fall this year given the significant decline in oil prices and the negative economic outlook for the global economy.
Just recently, the Bangko Sentral ng Pilipinas (BSP) said it expected OFW remittances to fall by 0.2-0.8 percent.
The World Bank is even more pessimistic as it expects OFW remittances to contract by 13 percent in 2020.
The government also said it would resume the “Build, Build, Build” program once the economy reopens to stimulate economic growth. In fact, spending on the country’s banner infrastructure program could be much bigger in the next few years as lawmakers are proposing to give President Duterte special powers to expedite the completion of high-value projects.
While a more aggressive infrastructure spending program is good for economic growth, it will also lead to more importations.
Coupled with the expected decline in OFW remittances and the inevitable drop in tourism and export receipts, the risk of booking a current account deficit increases.
Recall that in 2018, the peso weakened by as much as 9 percent as the government began spending aggressively on infrastructure projects, leading to a current account deficit.
Finally, our government’s finances will inevitably deteriorate because of the ongoing crisis.
Because of the significant decline in economic growth and the planned increase in government spending in the next few years, the budget deficit is projected to exceed 3 percent this year and even reach 7 percent next year. This will push our country’s debt-to-GDP ratio higher, making the peso less attractive to own, at least in the short term.
Despite the risks, I think the best scenario is for the peso to depreciate slowly over the next few years. That way, inflation can stay benign as the price of imports increases at a graduated pace.
Businesses will also be in a better position to make plans despite a weaker currency.
A weaker peso will also be good for Filipinos who are dependent on OFW remittances as the peso value of their remittances increases. It will also make the Philippines more attractive to foreign investors and will hopefully help the country attract more foreign direct investments. INQ