Strong peso helps keep inflation low, says BSP

The peso’s appreciation against the US dollar amid the economic woes brought about by the coronavirus is an indication that the Philippine economy is fundamentally sound, according to the central bank.

More importantly, Bangko Sentral ng Pilipinas Gov. Benjamin Diokno said the 4-percent rise in the value of the local currency since the start of the year had also helped keep inflation in check, since importers now required fewer pesos to pay for the same amount of goods from overseas.

“The peso’s strength can be attributed to sound macroeconomic fundamentals characterized by a benign inflation environment, a strong and resilient banking system, prudent fiscal position and a sufficient level of international reserve buffer,” he said.

During the same period, the peso also performed better compared to other Asian currencies and appreciated vis-à-vis the US dollar along with the Chinese yuan, Taiwanese dollar and the Japanese yen.

Market watchers have pointed out that the drop in importation brought about by the economic slowdown in the first half—in particular, the second quarter showing the sharpest contraction in the country’s recorded history—has also contributed to the peso’s strength.

The county’s favorable ranking among peer emerging economies in terms of debt management and foreign exchange reserves has likewise supported investor sentiment on the currency, the central bank said.

The country’s debt-to-gross domestic product ratio of 39.6 percent as of December 2019 was lower than those of neighboring emerging economies, while the country’s gross international reserves reached an all-time high of $98 billion at end-July this year. These dollar reserves are equivalent to 8.9 months’ worth of imports of goods and services and payments of primary income.

Moreover, the government’s timely and decisive macroeconomic responses to mitigate the adverse impact of the pandemic also contributed to the relative strength of the domestic currency.

“The stability of the currency has helped temper inflationary pressures arising from increases in international prices of commodities, particularly crude oil, as well as agricultural food commodities,” Diokno said. “The prevailing benign inflation environment, in turn, allows continued policy space to support economic activity as needed.” Going forward, the central bank chief said the peso will likely remain “broadly stable” in line with the supply and demand conditions in the foreign exchange market as well as the continued soundness in the country’s macroeconomic fundamentals.

Furthermore, it is also expected to benefit from the gradual reopening of the economy amid ample policy support coming from the fiscal and monetary authorities.

“The BSP continues to adhere to a freely floating exchange rate in line with its mandate to promote price stability and consistent with the BSP’s inflation targeting framework for monetary policy,” he said.