Peso hits seven-year low

Investor concerns on the Duterte administration’s war on drugs coupled with external developments causing uncertainty globally pulled the peso to a seven-year low on Monday.

The peso closed at 48.25:$1 Monday, the weakest level since the close of 48.335:$1 on Sept. 15, 2009. At the Philippine Dealing System, the domestic currency reached an intraday low of 48.26:$1 after opening at 48.07:$1, weaker than last Friday’s close of 47.99:$1, a nine-month low.

The total volume traded rose to $758.5 million from $590.5 million as the end of last week.

“The peso movement reflected the continuing uncertainty about the US Fed’s next policy action, just like otter regional currencies,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said in a text message to reporters. The US Federal Reserve kept policy rate steady during its meeting last week, such that markets are betting it could eventually push through with a rate hike in December, soon after the presidential elections in November.

Tetangco also attributed the weaker peso to “strong foreign exchange demand for fixing and corporate requirements.”

Finance Secretary Carlos G. Dominguez III told reporters that the peso was not the lone loser among currencies globally. “You know that when Yellen says we might raise the rate, that will affect us,” referring to US Federal Reserve Chair Janet Yellen.

“It’s not only our situation,” Dominguez pointed out.

Joey Cuyegkeng, senior economist at ING Bank Manila, noted that the Philippine peso “continued to underperform other Asian currencies.”

External factors, including economic developments in China, the European Union and Japan, as well as expectations of a lower current account surplus are exacerbating the peso’s weakness, Cuyegkeng said.

“Some analysts think the current account would post a deficit this year or in the coming years—if this materializes, then we would be back to a twin deficit environment that plagued the economy early last decade,” he noted.

But Cuyegkeng said other domestic factors weakening the peso “have to do with market perception  about Philippine valuations (and its outlook relative to other Asian markets) and other concerns, including non-economic concerns.”

“In sum, economic fundamentals remain favorable but there are emerging stresses on the economy and could be exacerbated by non-economic factors. Investors have priced in a lot of positives about the economy and are now on the lookout for risks that could disappoint expectations,” according to Cuyegkeng.

In a research note, Papa Securities said that foreign funds may be almost done selling.

“The pace of the net outflows in the past two months has been faster than other periods historically, averaging above a billion pesos a day. There is still some debate if the cause of which is profit-taking, uncertainty over the Fed hike, or concerns on domestic stability. It’s likely an unknowable mix of all three–though one thing is for certain, this sell-off is certainly not regional,” the local stock brokerage said.

“We suspect that President Duterte’s often-quoted statements merely aggravate foreign selling in a relatively ‘fragile’ market,” the brokerage said.

Since peaking in August, Papa Securities noted that investors had been net sellers to the tune of around 0.75 percent of the total market cap of the PSEi.

“The only other country to experience anywhere near this level of outflows is Vietnam, and theirs is only at -0.35 percent of their peak at the start of the year,” the local stock brokerage said.

On the other hand, Papa Securities said it remained bullish for 2017, sharing the BSP’s assessment that the country’s economic fundamentals were solid and the list of catalysts we expect to emerge starting in the fourth quarter were numerous.

This developed as some analysts have turned critical over how Mr. Duterte was waging a war on drugs alongside some foreign policy jitters.

Global debt watcher S&P Global Ratings last week said Mr. Duterte’s law and order thrust “could undermine respect for the rule of law and human rights, through the direct challenges it presents to the legitimacy of the judiciary, media and other democratic institutions.”

READ: S&P flags ‘rising uncertainties’ in PH amid ‘diminished’ policy stability

S&P had taken note of numerous instances of extrajudicial killings under the new President.

“When combined with the President’s policy pronouncements elsewhere on foreign policy and national security, we believe that the stability and predictability of policymaking has diminished somewhat,” S&P said.

Bank of the Philippine Islands (BPI) economist Emilio Neri Jr. said while most Asian markets have not been spared from market reversals resulting from earlier US Fed jitters, he noted that Philippine markets–including bonds, stocks and currency–had underperformed regional peers.

“Most of the investors who have raised their concerns with us find the uncertainty about Philippine foreign policy and diplomacy to be most unsettling,” Neri said.

But in a statement, Finance Assistant Secretary Paola A. Alvarez noted of “positive developments reflecting the bullish outlook of investors, international institutions and foreign governments on the Philippine economy are telling marks that beyond the political noise, confidence remains high on the capability of the Duterte administration to deliver on its commitment of inclusive growth through its ‘transformative’ 10-point socioeconomic agenda,” citing for instance the sale of P100-billion worth of retail treasury bonds to small investors this month.

“If one were to ignore the political noise generated by certain groups, one could clearly hear the voices of continued optimism over President Duterte’s commitment to bring real change through the implementation of transformative reforms not only in the economy but on the peace and order front as well,” said Alvarez, who is the Department of Finance’s spokesperson.

In a separate research note, BPI associate economist Nicholas Antonio T. Mapa said he expects the BSP leadership to smoothen the forex volatility.

“Tetangco officially began his term with $21 billion worth of gross international reserves (GIR) tucked away to help defend the peso. This represented roughly 4.9 months of import cover, higher than ‘international’ convention for having three-months worth of imports. Over the course of his stewardship, GIR grew at an unprecedented pace, due in large part to the flow of remittances, to hit $85 billion as of August or 10 months of cover.  Of course there are several camps out there estimating the ‘optimal’ level of GIR but what we have noticed is that with increased levels of buffer stock, Tetangco has become more confident to help stem excessive forex pressure on both sides of the pair,” Mapa said.

Beginning November 2010, we’ve seen the peso move within a very tight band as Tetangco attempted to keep the Peso in the comfortable middle. In times of excessive peso appreciation (such as in 2012), Tetangco held the deluge of foreign funds to help defend the 40:$1 handle.  Throughout the last few years we’ve witnessed the same narrative of BSP defending on both the top side and the bottom to build on GIR in good times and to flood the market with forex liquidity to calm depreciation swoons,” Mapa added.

“Now that the peso has strayed, expect Tetangco to be the good shepherd once more and look to stem the stark weakening trend of the peso to help guide it back to his comfortable middle. His virtue of building the defenses early on will pay dividends now that winter is here. Expect Tetangco to resort to heavy forex presence in the next few weeks to keep the peso from straying too far from the proverbial middle of the regional pack,” according to Mapa. JE