THE peso fell to a two-month low on Wednesday after the Bangko Sentral ng Pilipinas (BSP) said the economic slowdown in the US and Europe poses risks to remittances from abroad, exports and investment.
Capital inflows are a “key headwind,” BSP Governor Amando Tetangco Jr. said in a speech to traders and fund managers on Tuesday. Policymakers may raise the charges for trading non-deliverable forwards (NDFs) to ensure they are used only for legitimate hedging purposes, he told reporters.
“Global risks remain the main concern, plus stronger pronouncements from the regulator that it won’t tolerate unnecessary gains in the currency prompted investors to cover short positions,” said Lito Mercado, head of trading at Rizal Commercial Banking Corp. A short position is a bet an asset will decline in value.
The peso dropped 0.6 percent to 43.225 per dollar at the close of trading on Wednesday, according to Tullett
Prebon Plc. It touched 43.28, the weakest level since July 1.
But an exchange rate between P43 to P45 is “more competitive” and would help boost spending by relatives of overseas workers, according to Jonathan Ravelas, chief market strategist at Banco de Oro Unibank Inc.
“One way of jump-starting the economy is slowly depreciating the peso,” Ravelas said.
The central bank will keep a market-determined exchange rate “with scope for official action to maintain orderly market conditions,” Tetangco said in the speech on Tuesday night. The BSP is urging the government to pay some of its overseas debt ahead of schedule by borrowing from the domestic market, he said.
“It has always been our position that there is a place for NDFs that cover legitimate hedging transactions,” he said. “But not for much else. Perhaps the time has come to consider if the NDF has ceased to meet the need it was intended for.”
NDFs, which are settled in US dollars and enable exchange rates to be fixed for a specific point in the future, are being reviewed even as banks agree to limit transactions, Tetangco told reporters.
The Asian Development Bank on Wednesday said inflation remains a concern and that policy-makers in the region face the threat of more volatile capital flows. The bank recommended more flexible exchange rates and temporary capital-control measures “that are conducted in a regionally coordinated manner.”
Capping NDFs is a “voluntary” move by banks, according to ING Groep NV Country Manager Zondy Garcia. The BSP is “using moral suasion and doing it through a market-determined way, allowing the market to correct itself,” Garcia said.
Making NDFs more expensive by imposing a higher capital charge may limit speculation, added Ricky Cebrero, Philippine National Bank head of treasury.
The peso climbed to a three-year high on August 1, threatening to erode the value of the nation’s exports and overseas remittances, which combined are equivalent to about 40 percent of gross domestic product.
The BSP, which kept its overnight borrowing rate unchanged at 4.5 percent for a third-straight meeting last week, has “room” to keep it steady as inflation cools and growth slows, Tetangco said.
“But we have to keep an eye on domestic liquidity as a result of capital flows,” he said.
