IN recent days, we’ve seen the Philippine peso depreciating against the US dollar. As of this writing, the exchange rate is P49.81 per US dollar. It looks like the prediction made by the Bank of the Philippine Islands (BPI) in June of this year is coming to fruition.
As forecast by the bank’s economist Emilio Neri Jr., the peso will slide, while the US Federal Reserve (the Fed) could take a potential rate hike, “creating a perfect storm for expats and foreigners living in the Philippines.”
His prediction rides on reports that show a higher-than-normal infrastructure spending within the country, compounded by the US Fed raising interest rates. He says the peso is likely to hit 50, and this forecast could easily run through 2017.
With the announced intention of US President-elect Donald J. Trump to reshape the central bank monetary policy, the Fed is poised to gradually become more belligerent on inflation and interest rates. Trump has indicated that he will be appointing economists who believe borrowing costs should be higher.
Trump vowed during the election campaign that he would replace Fed Chairman Janet Yellen when her term expires at the end of January 2018. He lashed at her easy money policies and accused Yellen of being “very political” by holding rates near zero to help Democratic President Barack Obama. This development may well affect global markets.
While some believe that a weaker peso may be good for the Philippine economy in general, it has its downside on some sectors, particularly those in the import business.
Exporters, the business-process outsourcing sector and other dollar earners, of course, welcome this development. The peso slide means stronger purchasing power for families reliant on overseas Filipino workers (OFWs). They get more value from dollar transmittals, enhancing the economy through public spending.
The downside is that the Philippines imports nearly all of its fuel, most of its transportation apparatuses, and a very large quantity of the raw materials and transitional goods required for industries. These sectors would need more pesos to bring their raw materials into the country.
From where I sit, a stronger peso is akin to a restrictive monetary policy. It alleviates inflation, but, in the same token, depresses lending, since it effectually increases interest rates.
On the other hand, a weak peso, given our import dependence, exacerbates inflation. As the peso falls, importers pass on the added cost to consumers to ensure their steady margins.
I believe, however, that not only does a strong peso lessen the country’s debt burden, a strong and stable peso also attracts foreign investment. With a strong currency, the Philippines has to cough up fewer pesos to service its debt in dollars.
Is the peso susceptible to political developments? To some extent, yes; but the exchange rate has always been market-driven, and its unpredictability makes everything ambiguous.
We are a small country, but we strictly adhere to an open economy. The Bangko Sentral ng Pilipinas (BSP) does not interfere, unless extremely necessary, and allows market forces to dictate the exchange rate. And this makes all these volatilities affect us.
The devaluation of China’s yuan—for one—has made “collateral impact on the Philippine peso and other regional currencies,” according to the BSP. It said global markets, including the Philippines, have been falling since China cut the value of its currency, highlighting anxieties on its weakening economy. Because China is a giant economic player, what happens there affects the global economy. I dread the continuation of these external factors: It could mean bracing ourselves against darker days ahead.
These uncertainties, to some extent, spook the market, but we can find comfort in the stability of our monetary policy amid these external factors.
This is why business welcomes President Duterte’s reappointment of BSP Governor Amando M. Tetangco Jr. The Makati Business Club (MBC) has, in fact, urged our lawmakers of the 17th Congress to amend Section 6 of the New Central Bank Act of 1993, which limits the term of the BSP governor to one reappointment.
The MBC recognizes Tetangco’s work as BSP head: “Under his leadership, the BSP has been effectively executing and fulfilling its mandate of keeping inflation manageable, conducting sound monetary policy, and supervising financial institutions under its jurisdiction.”
Since the exchange rate is directly linked to economic stability, the BSP closely monitors the forex market so it can take suitable action, if and when needed, to maintain the country’s economic health. Business sees Tetangco’s leadership more than adequate to fulfill this mandate.
For comments and suggestions, e-mail me at mvala.v@gmail.com