Strong peso foreshadows bad economic news?

The strong peso may be a portent of bad economic news because it is being caused prima­rily by a steep drop in imports that the Philippines needs to maintain its growth trajectory, according to an economist.

At the same time, ING Bank Manila senior economist Nicholas Mapa warned that a rebound in the country’s gross domestic product next year would be aided in no small measure by the so-called base effect—the phenomenon where even a slight increase in absolute terms would reflect as a large percentage hike when coming from a low number.

“The peso remains the best performing currency in the region in 2020 but the relative strength may actually reflect a fast-fading investment boom with the econo­mic outlook turning even darker on the horizon,” he said in a note to reporters.

He explained the country’s high growth rate in recent years was attributable to the resurgence in capital formation with the economy hitting a high gear, as both corporates and households doubled down on investing in what they perceived was a bright economic future.

“Part and parcel of the investment renaissance was a resurgence of imports with raw materials and capital machinery surging to help catapult the economy to higher heights,” Mapa said.

But the 2020 coronavirus pandemic has “knocked the economy of its perch as the economy hit recession, unfortunately also resulting in a quick evaporation of the nascent investment boom.”

Consequently, import demand has dried up and so has the demand for the US dollar, translating to a relatively stronger peso, “at the expense of the vaunted investment boom of yesteryear,” he said.

According to the Bangko Sentral ng Pilipinas, a sharp decline in the amount of imports helped the Philippines earn more dollars than it spent in the first half of the year despite the flight of capital from the local economy due to the pandemic.

The favorable outturn in the second quarter balance of payments position brought the cumulative surplus for the first half of 2020 to $4.1 billion, which was lower than the $4.8-billion surplus registered in the same period last year.

The current account pos­ted a surplus, a turnaround from the previous year’s deficit, attributed mainly to the narrowing of the deficit in the trade in goods account.

This may be due to disruptions in the global demand and supply chains as countries imposed restrictions to contain the health crisis, which negatively impacted the country’s exports and imports of goods.

According to Mapa, a modest pickup in foreign direct investments coupled with a surge in foreign borrowings have also helped support the peso.

But foreign investors have pulled out $3.7 billion in capital, so far, having turned skittish after the economy fell into recession.

“A quick return of foreign money will likely hinge on the economy returning to form at the soonest,” the ING economist said. “Unfortunately, with the two major cogs in the growth engine—consumption and investment—in sick bay, we may not expect anything more than a base-effect-induced bounce next year as potential output takes a hit while the peso stands tall.” INQ