Peso Remains Very Strong, Says DOF

The Philippine peso remains “very strong” in real terms and the current movement of the local currency will actually help improve the competitiveness of our exports and the value of our dollar remittances, which benefits around 40 percent of the domestic economy, according to the Department of Finance (DOF).

DOF undersecretary and concurrent chief economist Karl Kendrick Chua said the Philippine peso is expected to remain “broadly stable” over the medium term as it is propped up by solid macroeconomic fundamentals along with the steady stream of remittances from overseas Filipino workers (OFWs) and dollar receipts from the Business Process Outsourcing (BPO) sector.

More importantly, said Chua, “while the peso has moderately depreciated in nominal terms in recent weeks, the peso in real terms is still very strong, which deters competitiveness.”

“This means that the depreciation in recent weeks is welcomed as it will help improve export competitiveness and value of remittances, which benefits around 40 percent of the economy,” he added.

Another finance undersecretary, Gil Beltran, said “the peso is just seeking its appropriate value, given that it has appreciated significantly in previous years.”

“The GIR (gross international reserves) at $85.6 billion, which is equivalent to 10.5 months of imports, is higher relative to ASEAN (Association of Southeast Asian Nations) and should not be a cause for alarm,” Beltran said.

Chua said the movement of the peso is in line with the global currency market, as our currency’s depreciation of about 2 percent was even lower than the fall in the value of the Malaysian ringgit (3.5 percent), British pound (2.7 percent), Australian dollar (2.2 percent) and Japanese yen (2 percent).

“Compared to these currencies for the same period, the peso is broadly in line with the market,” said Chua in reaction to the peso’s depreciation by 2 percent against the greenback from the $1:P47.0 rate last July 1.

But Chua said “we should be prudent to ensure that volatilities are managed.”

Bangko Sentral ng Pilipinas (BSP) data over the January 2010-August 2016 period showed, meanwhile, that “the real effective exchange rate, which shows the purchasing power of the peso, appreciated by 1 percent against developing-country trading partners and by 17.7 percent against advanced-country trading partners.”

In a report, the BSP said that “emerging market economies like the Philippines could experience bouts of volatility in asset prices, including exchange rate, amid uncertainties on the timing and potential impact of further US rate hike, slowdown in China, seesaw of oil prices and, more recently, the unfolding of BREXIT (British exit from the European Union).”

“Nonetheless, the peso is expected to remain broadly stable over the medium term, supported by the country’s solid macro fundamentals as well as by the steady the stream of remittances from overseas Filipinos and dollar receipts from the BPO sector,” it said.

The BSP said the temporary depreciation of the local currency is likely to have “minimal” impact on macroeconomic conditions also over the medium term, as it takes a permanent drop of P1 in the peso’s value against the dollar to raise inflation by about 0.15 to 0.20 percentage points over a two-year period.

Thus, it said, “This limited impact on the price level gives flexibility for monetary policy to refrain from reacting aggressively on such movements of the peso.”

The BSP pointed out that as a result of the depreciation trend, “the peso gained external price competitiveness against its trading partners.”

This is reflected, it said, in “the recent decline of the peso’s Real Effective Exchange Rate (REER) index against the basket of currencies of all trading partners (TPI), trading partners in advanced (TPI-A) and developing (TPI-D) countries.”

For the period Jan. 1 to Sept. 20, the central bank said the year-to-date average of the REER index fell against the basket of currencies in the TPI by 3.01 index points (3.2 percent) to 89.97 index points from 92.98 index points a year ago.

The REER index likewise averaged lower by 6.11 index points (6.7 percent) against the TPI-A and by 0.78 index point (0.7 percent) against the TPI-A.

“A decrease in the REER indices suggests that the peso gains external price competitiveness while an increase indicates otherwise,” the BSP said. (DOF)