Peso falls through 56:$1 level

The Philippine peso broke through the 56:$1 level on July 7, closing at 56.06 against the US dollar and losing more than three pesos to the greenback in just 19 days of trading.

This was yet again the peso’s weakest in nearly 17 years or since the local currency closed trading at 56.295:$1 on Sept. 27, 2005.

This happened just as Fitch Solutions announced that they revised their forecast average exchange rate for the two currencies, in anticipation of the peso coming under added pressure to depreciate “over the coming quarters.”

Fitch Solutions now expects an average of P54.30:$1 in 2022 from P52.30:$1 previously, and P56.40:$1 in 2023 from P53.00:$1 previously.

Meanwhile, data from the Bangko Sentral ng Pilipinas (BSP) show that the country’s gross international reserves (GIR) have decreased for the fourth straight month, settling at $101.98 billion at the end of June from $107.8 billion at the end of February.

“The peso exchange rate was weaker against the US dollar for the third straight day, by 0.39 [39 centavos] or 0.7 percent after the GIR declined to new 1.5-year lows or since September 2020,” said Michael Ricafort, chief economist at the Rizal Commercial Banking Corp.

According to the BSP, the latest GIR level remained at a “more than adequate external liquidity buffer,” enough to cover 8.5 months’ worth of imports of goods and payments of services and primary income.

Also, the latest GIR level is about 7.3 times the country’s short-term external debt based on original maturity and 4.6 times based on residual maturity.

Ricafort said the GIR had declined amid net foreign debt payments, lower gold holdings amid the decline in world gold prices, and lower value of foreign investments by the government and by Philippine residents amid sell-off and bear market conditions in the US stock and bond markets.

Minimum threshold

“The decline in the GIR somewhat correlated with the weaker peso in recent months,” he said. “Nevertheless, the GIR is … still way above the minimum international threshold of three to four months and could still provide enough buffer/support [to counter] any speculations against the peso.”

Fitch Solutions said the widening of the Philippines’ current account deficit—a measurement that shows the import bill further outpacing export earnings—coupled with tightening global monetary conditions, will likely exert further downward pressure on the peso.

The research firm said that, nevertheless, the pace of peso depreciation will likely be relatively gradual in the coming months as the BSP has ample foreign reserves to intervene in the foreign exchange market if necessary to smooth downside volatility.

“On the other hand, however, the easing of foreign ownership restrictions should attract more foreign direct investments into the Philippines, which will likely provide structural support for the currency,” it added.

Earlier this year, then President Duterte signed into law several measures meant to further liberalize the economy by removing restrictions on foreign ownership of companies in the business of electricity, petroleum, water, seaports and public utility vehicles.

These laws include the amendments to the Retail Trade Liberalization Act, Foreign Investment Act and Public Service Act.