Philippines Warns Against Using Exchange Rate as a Trade Tool

“We must be mindful of the trade-offs involved”, says Purisima

Amid the biggest depreciation of the yuan in two decades, currency markets throughout the region continue to experience turbulence. Strong macroeconomic fundamentals and sound economic stewardship has continued to enable the Philippines to navigate the current volatilities and anchor it in safe harbors. However, Philippine Finance Secretary Cesar V. Purisima expressed concerns against using the exchange rate to shore up weak growth.Purisima said, “We must be mindful of the trade-offs involved in using the exchange rate as a trade tool to boost competitiveness. There are unintended consequences. For one, it may trigger competitive devaluations across the region as other currencies adopt similarly interventionist measures to reprice their currencies.”

“As currencies weaken, debt service requirements increase and imports become more expensive,” he added. The Department of Finance has consistently called for macroprudential measures to protect financial stability. It warned that gains from devaluation would eventually be weighed against costs as investors may view the weakening yuan as one-way bet and stoke fears of capital flight, resulting in further weakening of the currency.

However, Purisima projected that higher Chinese growth will be beneficial for Asia, including the Philippines. China ranked 3rdamong the Philippines’ top destinations of exports with revenues amounting to USD 3.07 billion for the period of January to June 2015. Chinese economic recovery is expected to improve export performance after exports to China suffered a 31.8% decline over the comparable level in 2014. Higher growth prospects in China will contribute to our virtuous cycle as China provides a lift to the economy towards sustained and higher growth.

Continued vigilance and pre-emptive actions will be adopted by the National Government to ensure sustained economic stability. “We continue to be proactive as virtuous cycles quickly spiralling into vicious cycles are the last thing we want to see happen. We continue to advocate for market-determined exchange rates and curbed excess volatility,” Purisima emphasized.

During the last Monetary Board (MB) meeting, the MB maintained the current monetary policy stance due to high liquidity growth (9% as of June), high loan growth (14.5% as of June), low real lending rate (4th lowest among 11 Asian countries), and low inflation rate. The weakness in the peso is broadly in line with regional peers and the Bangko Sentral has ample firepower to rein in excessive volatility.

Source: www.dof.gov.ph